Pension reform proposed
Saying the time is ripe, given Harrisburg’s recent attention to reforming state employee and teacher pensions, a group of state representatives, municipal officials, economic consultants and business leaders are touting a proposal to reform pensions in Pennsylvania municipalities.
House Bill 1581, sponsored by Rep. Seth Grove, R-York, would create a statewide defined-contribution-style framework for newly hired police and firefighters, helping municipalities eventually to shrink unfunded liabilities for currently required defined benefit plans.
There would be no change to the pensions of current workers on defined-benefit plans.
The new “cash-balance” model would require municipalities to contribute amounts equal to 4.5 percent of base salaries. Workers would contribute 6 percent of those salaries if they’re in Social Security and 9 percent if not.
The municipalities would guarantee that interest each year matches Moody’s “nominal yield” for AA bonds at the end of the previous year, which means the municipality assumes the investment risk, a characteristic of cash-balance plans that actually helps classify them as defined benefit, according to the Internal Revenue Service.
Its proponents are calling the Grove plan a “hybrid.”
“A cash balance plan is a defined-benefit plan that defines the benefit in terms that are more characteristic of a defined-contribution plan,” wrote Richard C. Dreyfuss, a senior fellow at the Manhattan Institute’s Center for State and Local Leadership in a paper on pension reform that he recommended to the Mirror.
Under Grove’s proposal, workers would be vested for half the municipal contributions and the interest those generate after eight years and fully vested after 12.
The plan would not allow significant overtime or sick day earnings to “spike” benefits.
Within municipalities, the plan under the proposal would not be the subject of collective bargaining or binding arbitration, eliminating a problem that has led previously to problematic increases.
Individual municipalities would continue to manage their own plans, but they would be identical with one another.
The plan would not apply to nonuniformed workers, because their pensions aren’t generally in major deficit.
Workers can take their benefits as lifetime annuities.
Money earned over a “certain point” goes to defray the municipality’s “legacy costs,” according to officials.
Those unfunded liability legacy costs in municipalities other than Philadelphia – where the plan would not apply – total $1.8 billion, according to a news release.
Nebraska and Louisiana have similar plans, according to Grove.
Ultimately, the new model would pay about 42 percent of base salary for retirement, instead of the current 50 percent, said Grove on a conference call organized by the Coalition for Sustainable Communities.
That’s better than in Detroit, where workers ended up getting six cents on the dollar, he said.
“We’re trying to prevent that from happening,” he said.
“It’s not about gutting pensions,” he said. “It’s about saving the current workers’ retirements going forward.”
“We’re trying to be proactive rather than reactive,” he said.
Speaking of the current municipal situation, “promises can be made,” said Rick Gray, mayor of Lancaster. “There’s a question whether promises can be kept.”
Altoona spends about 20 percent of its budget on “legacy costs,” according to local City Councilman Bruce Kelley, who participated in the conference call.
That money goes for old obligations “before we can patch a pothole, arrest anyone or put out a fire,” Kelley said.
That flow of money to legacy costs, “rather than to services needed today” drives residents away from cities, said Brian Jensen, executive director of the Pennsylvania Economy League of Greater Pittsburgh.
The advocates are trying to deal with the problem in a “non-partisan, actuarial way,” Gray said.
The plan’s correction won’t be immediate, officials said.
“It was not a ditch dug in a day,” Gray said.
About a third of state residents live in municipalities with distressed pensions, according to the news release.
State Rep. John McGinnis, R-Altoona, doesn’t like the proposed reform.
“All the money is managed by the employer until the payouts are due,” he wrote in an email. “That means that municipalities could underfund the pensions [and probably would] and would invest the money under management in high risk assets, effectively gambling to make them solvent.”
“Conceptually, cash-balance plans are neither good nor bad,” Dreyfuss wrote.
But practically, “they are subject to the same political pressures as any other form of DB public-sector” plans, including the retroactive increase of accounts, the underfunding of plans and the inflation of return rates for political reasons, he wrote.
Like other defined-benefit plans, they can generate unfunded liabilities, he wrote.
An invitation to comment sent to the respective presidents of the state Fraternal Order of Police and the Pennsylvania Professional Fire Fighters Association and one sent to the president of the city’s firefighters’ union went unanswered.
Rick Schuettler, executive director of the Pennsylvania Municipal League, said he’s “cautiously optimistic” about the bill becoming law, especially after it received support from House Majority Leader Mike Turzai, R-Allegheny.
There’s never going to be a similar opportunity to gain the attention of lawmakers on the subject of municipal pensions, Jensen said.
“It may be many years before they take it up again,” said Tom Baldrige, CEO of the Lancaster Chamber of Commerce.