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Report: Nearly 22% of Pa.’s Municipal Pension Plans are in Distress | Tuesday Morning Coffee

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by John L. Micek, Pennsylvania Capital-Star
June 6, 2023

(*This story was updated on Tuesday, June 6, 2023 at 7:23 a.m. to clarify comments by DeFoor’s spokesperson)

Some 22% of Pennsylvania’s municipal pension plans statewide are in some form of financial distress, the state’s elected fiscal watchdog said Monday, warning local governments that they’re legally obligated to properly fund the accounts.

But the good news is that the number of distressed pension plans has dipped since 2020, thanks to a one-time injection of federal pandemic aid, state Auditor General Tim DeFoor’s office said.

The money “helped offset some of the cost for infrastructure projects and freed up monies that could be put into pension obligations,” DeFoor, a Republican, said in a statement. “But those funds were a one-time opportunity and municipalities need to plan now to protect their pension plans.”

Municipal governments were forbidden from directly spending the pandemic aid on pension costs. But the infusion of cash did give local governments flexibility in their cash flow to deal with those costs, one local government veteran told the Capital-Star.

“I feel like this is deja vu all over again,” John Brenner, the executive director of the Pennsylvania Municipal League, said Monday. “I’m glad the auditor general is reminding us that we have unfunded pension liabilities. But I really hoped that he would press the Legislature to do something.”

While ballooning pension costs for state and public school employees have grabbed most of the headlines, the spiraling costs of municipal pensions, driven mostly by retired cops and firefighters, has remained a quiet — and unsolved — public policy challenge.

As far back as 2015, a task force convened by former Democratic Gov. Tom Wolf, and then state Auditor General Eugene DePasquale, also a Democrat, warned of the underfunding crisis afflicting municipal pensions.

At the time, the unfunded liability of those plans stood at $7.7 billion, with about a third of municipal pension plans funded at less than 80%, according to a report issued by that task force.

(Getty Images)

DeFoor’s office noted Monday that municipal plans are considered distressed if they’re less than 90% funded.

A plan that is 70% to 89% funded is considered minimally distressed. A severely distressed pension plan is one that is funded at less than 50%, DeFoor’s office said.

Constrained in the way they can fund their retirement obligations, some municipal governments have resorted to monetizing public assets to honor those costs, as was the case with the city of York, according to published reports. Other municipalities, such as Allentown, turned to leases to help meet their pension obligations.

Brenner, who served as York’s mayor from 2002 to 2010, said he understands why some city governments would monetize public assets to meet their financial obligations. But that still leaves the larger issue of finding a long-term fix to the municipal pension crunch unaddressed.

“The commonwealth has to come to terms with the fact that the revenue options for cities and towns … are inadequate,” Brenner said.

In his statement, DeFoor, a former county official, appeared to recognize those challenges, but he remained silent on the prospect of a legislative solution.

“Municipal pension plans help us take care of the people who are taking care of us, like police officers, firefighters, and non-uniform employees who after a long stellar career want to retire,” DeFoor said. “It is our obligation to make sure these pension plans are in good enough shape so they can retire.”

While the fiscal watchdog usually includes recommendations for improvements in his reports, the office did not include recommendations for legislation in this instance because it is auditing the funds and providing financial assistance to them, a spokesperson said.

“We didn’t recommend [legislation] because we’re auditors,”the spokesperson, April Hutcheson, told the Capital-Star. “For us to call attention to legislation would not be objective.”

The state does offer financial assistance to municipal pension plans courtesy of a 2% tax on on fire and casualty insurance policies sold in Pennsylvania by out-of-state companies, DeFoor’s office said.

Last year, DeFoor’s office paid out $329 million in aid to 1,453 municipalities to support pension plans for police officers, paid firefighters, and non-uniform employees.

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Pennsylvania Capital-Star is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501c(3) public charity. Pennsylvania Capital-Star maintains editorial independence. Contact Editor John Micek for questions: info@penncapital-star.com. Follow Pennsylvania Capital-Star on Facebook and Twitter.