Act 47 plan slams city pensions
As Altoona negotiates with its three unions to replace contracts that expire at the end of the year, officials are trying to bring pension plans for firefighters and police into compliance with the mandates of the city’s Act 47 distress recovery plan.
That plan makes damning allegations about recent enhancements to the firefighter and police pensions – while proposing an ambitious goal for those pensions and the nonuniformed workers’ plan.
City and Act 47 officials aren’t saying much about the ambitious goal of persuading workers to accept private-sector-style defined contribution plans, so the city can reduce pension costs that the recovery plan says exceed normal municipal levels.
The recovery plan focuses on a City of Altoona issue that has tended to remain hidden from the public – as a “personnel” matter, a benefit largely funded through a special tax without cap, which has meant it has been less of a problem than the tax-capped general fund in recent decades.
Yet pensions cost taxpayers millions of dollars, and the city’s pension fund is no longer immune from running out of money, according to the recovery plan.
Still, the allegations that one enhancement violates state law and 13 enhancements conflict with city ordinances – and that City Council may never have heard how much those enhancements cost, as required by state law – may sound worse than it all really is, according to city and Act 47 officials, who have been working toward achieving compliance.
“I think it reads scarier than actually can be proven,” said former City Manager Joe Weakland, now a city consultant. “Most of what they questioned was procedural.”
In contrast to the “harsh” wording of the recovery plan, the coordinator team has been “helpful and supportive,” as the city tries to meet recovery plan requirements, said interim City Manager Omar Strohm.
Still, if switching to a defined contribution pension proves unfeasible, the city must eliminate the problematic enhancements going forward, if doing so would reduce the city’s pension obligations – even if the city proves the enhancements are legal.
And if the city can’t show the enhancements are legal, it must seek reimbursement for past overpayments to firefighters, according to the plan.
If it can’t get cooperation for this repayment, the city must reduce future payments to those firefighters to recoup the money, according to the plan.
The recovery plan also places a moratorium on all further pension enhancements.
The recovery plan orders the city to “explore the viability of prospectively replacing its pension plans with a defined contribution plan under code Section 457 for future service.”
That is a broad directive to “explore all avenues,” said coordinator team member Susan Friedman of Stevens & Lee.
Still, the city cannot unilaterally make the switch, according to Michael Foreman, local government services expert with the state Department of Community and Economic Development.
“Any municipality, when changing the terms and conditions of employment with a union group needs to collectively bargain,” Foreman said, speaking generally, based on state laws dealing with public safety and other municipal employees.
Such “terms and condition of employment” changes are “a mandatory subject of collective bargaining,” Friedman added.
The firefighters aren’t open to switching to defined contribution, either for current or yet-to-be-hired employees, according to their union president Bryson Peterman.
“Defined contribution plans come with a much higher risk of losing everything to the fat cats manipulating the stock market,” Peterman wrote in an email.
And because of the dangers of their employment, firefighters and police cannot confidently expect “we will physically be able to work the required 30-40 years to save enough monies under a defined contribution plan to retire,” he added.
Moreover, administrative fees for defined contribution plans are higher, he said.
Most of the nonuniformed workers prefer the current defined benefit pension, said local union president Scott Campanaro.
“People have a warm and fuzzy feeling about their pensions,” he said.
It would be a “hard sell” for the city to persuade them to change, even if the city offered a 25 or 30 percent wage increase as an incentive, he said.
When Campanaro worked in California, 25 to 40 percent increases were typical as incentives for employees to switch to defined contribution plans, he said.
Employers try to get away from defined benefit plans because they tend to create swelling actuarial liabilities. Defined contribution plans limit those liabilities.
The firefighter plan’s actuarial liabilities exceeded the $26 million actuarial value of assets by $13 million in early 2011, according to the recovery plan.
The police plan’s actuarial liabilities exceeded the $29 million actuarial value of assets by $7.9 million in 2011.
The nonuniformed worker plan had a $3.7 million actuarial surplus.
The fault for unfunded liabilities tends to be the municipality, according to Peterman.
“The employers/city administrators are finding loopholes to not pay the pension benefits they approved,” he wrote. “Then they’ll cry that their pension [accounts] are underfunded.”
His workers pay the maximum contributions under the law – 0.2 percent payroll tax, he said.
The City of Johnstown, which has been in Act 47 for many years, modified its defined benefit pension to reduce costs for new employees in keeping with recommendations of its recovery plan, shrinking the cost of benefits for new hires by 20 percent, according to Dave Andrews, city solicitor. But it didn’t get away from the defined benefit model, he said.
$100 subject of dispute
The enhancement that violates the Third Class City Code is a $100-a-month “supplemental payment” that the city has provided for years to firefighters, according to Weakland.
The city pays that supplement out of the general fund – rather than the pension fund – to remediate the illegality, since a state audit declared it to be an ineligible pension expense, he said.
Initially, that ineligible $100 supplement was in addition to a legal $100 “increment” – the maximum permitted by state law – so firefighters received $200 extra a month, according to Weakland.
When the state raised the legal increment to $500, the illegal $100 supplement continued, so firefighters received $600 extra a month, according to Weakland.
Based on a state pension audit, the city has been trying for years to persuade firefighters to give up the illegal supplement, but the firefighters have declined, he said.
“Since we had bargained it, we were legally required to pay,” Weakland said.
The city will try again to undo the mistake.
“The City indicated that it will attempt to eliminate the impermissible benefits during the next round of collective bargaining negotiations,” the plan states.
“I don’t know how that will be resolved,” Strohm said.
The illegal $100 supplement is one of nine firefighter pension enhancements that are problematic, because the city couldn’t verify that it had performed actuarial studies to calculate the cost of those enhancements, or shared that actuarial information with City Council, or adjusted its pension ordinances to reflect the enhancements, according to the recovery plan.
One obstacle to verification has been the dissolution of the actuarial firm that formerly handled the firefighter pension, according to Strohm.
The city has gotten in touch with the former head of that firm and requested the necessary paperwork, but it’s taking a long time, because the paperwork is in storage, he said.
The city can’t pass the necessary ordinances until it completes verification, Friedman said.
Four police pension enhancements are problematic for much the same reasons as the firefighter enhancements, according to the recovery plan.
The city has obtained the necessary documentation to satisfy the Act 47 coordinator on the police plan enhancements, according to officials.
The documentation for both plans has included sworn affidavits from Weakland and Strohm in which they stated they shared the enhancement information with City Council, both said.
Former councilman and Mayor Wayne Hippo recalls regular meetings to discuss the status of contract negotiations.
But he doesn’t remember “specifics” – like whether he heard the pension enhancement information.
Similarly, former councilman and current Mayor Bill Schirf recalls Weakland reviewing issues like health plan deductibles, sick days and vacation days, but doesn’t remember whether the updates included pension enhancement specifics.
That pension enhancement information was shared with council in executive session, when management presented the contract information, Strohm said.
Those executive sessions aren’t recorded, Schirf said.
The city has not yet introduced the ordinance adjustments for the police pension, Strohm said.
Actually, the pension enhancement ordinances may have been passed previously, although in “piecemeal” fashion, Weakland said.
“It should have been in one ordinance,” he said.
The city’s recent codification of ordinances didn’t include pension issues, according to Weakland.
The late Bob Alexander was the city solicitor during the time the city negotiated the enhancements that were flagged in the recovery plan, according to Weakland.
Alexander participated in the executive sessions during which management shared contract talk information with council, and he would remind officials about the actuarial reports, Weakland recalls.
“I think he thought, and so did we, that we met most if not all the guidelines,” Weakland said.
“We’re trying to prove we did it right,” Strohm said.
While proving the enhancements are legal would eliminate the need for the city to try to collect previously paid enhancement benefits from firefighters, it wouldn’t relieve the city of the responsibility to eliminate the enhancements “prospectively” from both the police and firefighter pensions, as stated in the recovery plan.
But the practicality of doing so is questionable, given the illegality of making changes in the “terms and conditions of employment” unilaterally.
The city provided the firefighter and police enhancements in the context of a strategy to relieve pressure on the cash-strapped general fund by moving obligations to the pension fund, which was “relatively flush” at the time, thanks to a special 0.2-percent earned income surtax paid by residents and nonresident workers, Weakland said.
The systemic problems that kept the general fund under pressure were the same problems that led to city to seek help in the Act 47 program last year.
Those included the withering tax base due to the car-inspired flight of residents and businesses to suburban areas after World War II, state caps on earned income tax and on the property tax – which became a problem as the county’s 1958 property assessments have grown out-of-date.
Management let council know of the general-fund-to-pension fund strategy, and no council members objected, Weakland said.
In keeping with that strategy, the city gave firefighters additional pension money in exchange for firefighters surrendering overtime pay for certain months each year, up to a certain number of hours per week, beyond the regular overtime threshold, Weakland said.
At the suggestion of a senior-laden union negotiating team eight or nine years ago, the city also created enhancements to incentivize top-of-the-pay-scale firefighters to retire, so bottom-of-the-pay-scale firefighters would replace them, Strohm said.
“There was a big turnover,” Strohm said.
Those same sessions also eliminated post-retirement health insurance for new hires, which aligned with the overall strategy, because the city paid those premiums from the general fund, he said.
“It’s a very high-cost item,” he said.
The city incorporated the problematic police and firefighter enhancements beginning in the late 1990s, Strohm said.
The firefighters’ pension plan comprises nine problematic enhancements, which the recovery plan orders the city to eliminate, if the city can’t transform pensions into defined contribution plans and if eliminating the enhancements will reduce the city’s pension obligations.
1. By pension ordinance, members must pay federal tax on their contributions, but the city “picks up” those contributions, so the members don’t need to pay.
2. By ordinance, members receive disability benefits only after being hurt in the line of duty, but the city provides benefits for those hurt while off work – 25 percent of eligible compensation for those with less than 10 years’ service and 50 percent for those with more – plus benefits for spouses and dependent children, if a member dies while on disability and his benefits aren’t offset from some other source.
3. By ordinance, members can receive no more than $100 a month in service increments – pay for excess years of service – but the city provides up to $500 a month in such increments.
4. No ordinance provides for supplemental payments – and the Third Class City Code prohibits them – but the city provides a supplement of $100 a month.
5. By ordinance, overtime is not counted as eligible compensation on which to base benefits, but the city counts all of it.
6. By ordinance, members must complete 25 years’ service and be age 55 to be eligible for vested or guaranteed benefits, but the city provides vested benefits after 12 years.
7. Similarly, by ordinance, members must finish 25 years and reach the age of 55 for full benefits, but the city provides full benefits after 20 years, regardless of age.
8. By ordinance, the cumulative cost-of-living increase must not exceed 50 percent of eligible compensation, which is a member’s final average salary, but the city provides annual cost-of-living increases until members are receiving 75 percent more than their average final working salary.
9. By ordinance, there’s no Deferred Retirement Option Plan, but the city provides one.
The police plan comprises four problematic enhancements, which the city must eliminate, if it’s not feasible to transform pensions into defined contribution plans and if eliminating the enhancements will reduce the city’s pension obligations.
1. By ordinance, members are eligible for retirement at age 50 and 20 years’ service, but the city provides full retirement benefits after 20 years’ service, regardless of age.
2. By ordinance, members are vested after 12 years, with benefits reduced to the proportion of a member’s years of service, compared to the years he would have needed to reach normal retirement age – but the city provides vesting after 12 years, with no benefit reduction for being short of normal retirement age.
3. By ordinance, only the first $1,200 per year in overtime is eligible to be counted as part of base compensation, but the city allows up to $7,500 a year.
4. By ordinance, members can earn only up to $100 a month in service increments, but the city allows them to earn up to $500 a month.
An actuarial consultant for the firefighters union objected to recovery plan findings, observing that state courts have warned municipalities about the need to “maintain the integrity of the of the bargaining process” and suggesting that legal action by the union is possible, in a document addressed to the city and shared with the Mirror by Peterman.
No provision in the Third Class City Code allows third class cities to replace a defined benefit plan with a defined contribution plan, the consultant said in the document.
The state constitution doesn’t allow municipalities to take away pension benefits like the $100-a-month supplement, cost-of-living adjustments and surviving spouse benefits except when the union agrees in collective bargaining, and even for future employees, they can only be removed through arbitration, according to the consultant.
At least 75 percent of members must vote in favor of a switch to the Pennsylvania Municipal Retirement System, and a requirement to track each union’s monies within a master trust and the need to create a Board of Trustees to oversee the trust would offset the efficiencies it might create, according to the consultant.
The recovery plan instructs the city to determine whether the firefighter, police or non-uniform plan is run most efficiently and then to run all three plans like that.
The recovery plan also instructs the city to combine pension assets from all three plans into one master trust and explore the feasibility of using the Pennsylvania Municipal Retirement System to administer that trust for all three pension plans.
In contrast to the firefighter and police pensions, the nonuniformed workers’ pension program is “in all significant respects … in compliance with applicable state laws, regulations, contracts, administrative procedures and local ordinances and policies,” according to the recovery plan.
While the nonuniformed workers pay the standard amounts into and receive standard benefits from Social Security, the public safety workers do neither, according to Strohm.
The city contributes an amount equal to 7.5 percent of nonuniformed worker wages to Social Security – an amount the workers themselves match, Stickel said.
City contributions to the public safety worker pensions make up for the city not having to contribute to Social Security on behalf of those public safety workers, Stickel said.
Mirror Staff Writer William Kibler is at 949-7038.