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PENSION CRISIS: Municipalities wait their turn

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While the legislative stove is heating up for 2013 and ideas for state pension reform are simmering, interest in a municipal fix has been lukewarm at best. The consensus among some lawmakers and members of the Corbett administration is that debate and, eventually, a solution to cover state pension debt already incurred and to adequately fund future benefits must come first.

The two state-level pension systems — the Public School Employees' Retirement System and State Employees' Retirement System, commonly known as PSERS and SERS — have run up more than $41 billion in unfunded liabilities.

If viable reform measures are found, that plan could be replicated or used as a template for municipal pension reform, state Budget Secretary Charles Zogby said.

"We really have not been looking at municipal pension reform," he said. "Some municipalities are in a different place. Many of them have challenges, but not all of them do."

Lingering legacy costs from pensions and other debt challenge local budgets and make higher taxes more likely. The state shifting the burden for services through cuts it must make because of increased pension debt only exacerbates the problem and hampers business development.

That's because distressed local governments are less likely to consider business-friendly options — tax incentives, for one.

"Something needs to be done. We all know the legacy costs," said Eric Montarti, senior policy analyst for the Pittsburgh-based Allegheny Institute for Public Policy. "How do we get from identifying the problem and coming up with a solution to churning through the legislative process?"

New to the debate is a proposal from the state's auditor general to consolidate municipal pension plans.

The debt

Excluding Philadelphia, Pennsylvania's roughly 1,400 municipal pension plans have a little more than $2 billion in combined unfunded liabilities, according to the state Public Employment Retirement Commission, which tracks the progress of local and state pension plans.

Pittsburgh alone accounts for about $380 million of that remaining total.

In its latest pension report in July, PERC numbers show that about 45 percent of the municipal and public authority pension plans were at least "minimally distressed."

A plan falls in that category if its assets are less than 90 percent of what is needed to pay accrued pension liability.

Central Pennsylvania plans make up about 11 percent of the municipal plans that PERC oversees. Of the 158 local plans in the July report, 69, or 44 percent, are at least minimally distressed.

The 2012 report, which looks at 2011 data, actually shows a slight improvement in municipal pension plans compared with the 2010 edition, which analyzed 2009 numbers.

But there still is a lot of work to do, and pensions are not the only issue stretching municipal finances.

Known challenges

Many municipalities are struggling to cover annual expenses and deal with other sources of debt. Harrisburg floats to the top because of its massive incinerator debt, not its pension situation.

The capital city also faces structural challenges with a high percentage — about 50 percent — of tax-exempt property.

Several municipalities have turned to Act 47, a state-assisted recovery program aimed at strengthening a municipality's short- and long-term fiscal management practices.

Shrinking tax bases, poor infrastructure and higher health care costs are common, along with pension debt. It makes the cost of doing business that much higher and heightens the level of advocacy for tax-abatement initiatives to drum up future commercial development.

Altoona was the last to file for Act 47, while Middletown has gone with the state's early-intervention program.

"I think that the issue is moving to the forefront," said Richard Schuettler, deputy executive director of the Pennsylvania Municipal League, referring to the growing number of distressed municipalities and calls for reform from local governments and business leaders. "Something has to be done."

During the summer, the state passed what has been called the Act 47 "fix." The bill set up a mechanism for evaluating arbitration awards under Act 47 and clarified language that the state Supreme Court objected to in an October ruling.

The court set union arbitration awards off limits when cities formulate financial recovery plans under Act 47.

The Coalition for Sustainable Communities, a broad coalition of business and government leaders, supported the fix, which makes negotiation a viable option again.

"Pension issues are one of our top issues right now," Schuettler said, along with addressing Act 111, a state law that governs collective bargaining for police and firefighters.

Arbitration awards often dictate much of a municipality's budget, driving future pension obligations in the process. The strain on the budget often means decreases in service or significant tax hikes to meet escalating costs.

For businesses in fiscally distressed municipalities, it becomes a quality-of-life issue, said Ellen Horan, president and CEO of the Greater Reading Chamber of Commerce and Industry, one of the coalition's founding members.

"It very much impacts a business's ability to attract and retain talent," she said. "Initially, we thought it was a city problem, but then we heard from townships and boroughs that they were in the same boat."

Reading was accepted into Act 47 ahead of Harrisburg.

The coalition is working with lawmakers to finalize reform proposals. The push is to take pensions out of the binding arbitration equation, Horan said.

"The current process has resulted in binding arbitration awards as high as 6 percent per year and generally does not consider a municipality's inability to pay," said David Black, president and CEO of the Harrisburg Regional Chamber and Capital Region Economic Development Corp. "The changes, in the coalition's opinion, merely restore balance to the collective bargaining process."

The push for reform would likely occur next year, because the current fall calendar has very few session days.

"We've had two pretty major shots in the market in 2002 and 2008 that hurt a lot of (pension) plans and earnings," Schuettler said. "That plus binding arbitration has led to pension costs that are just out of control."

Support exists, Schuettler said, for some sort of hybrid model to retirement plans that would blend the current defined-benefit plans with defined-contribution, or 401(k)-style, options.

'Huge structural issues'

Municipal leaders are hoping to piggyback on any planned reforms to PSERS and SERS.

"When you see a Middletown come forward, it tells you this is going beyond local politics," he added. "There are huge structural issues in local government."

The roughly $7 billion in unfunded liabilities quoted by PERC could easily be $10 billion, said Richard Dreyfuss, senior fellow for the right-leaning Commonwealth Foundation for Public Policy.

The assumed rate of return — often 7.5 or 8 percent — is too high, he said. Pension liabilities are predicated on that assumption.

The state Department of Community and Economic Development recognizes that changes are needed to address issues that a lot of municipalities are facing, spokesman Steven Kratz said.

"It's not just a Pennsylvania problem," he said. "We need to evaluate finances on a more global level first to understand issues (municipalities) face and what needs to be addressed and in what order."

DCED oversees the Act 47 and early-intervention programs. The latter helps keep communities out of the former.

Since 2004, 11 counties, 27 cities, 15 boroughs and seven townships have participated in the early-intervention program. Only four — Nanticoke, New Castle, Reading and Harrisburg — have entered Act 47, Kratz said.

The program provides for an analysis of a local government's historic and current fiscal position and a three- to five-year financial plan with accompanying recommendations that should help maintain fiscal stability.

Would additional Act 47 applications or even a municipal bankruptcy filing expedite the reform process?

"There is enough of a problem and evidence that we need to work carefully but quickly," said state Rep. Warren Kampf, a Chester County Republican who has proposed twin bills to move PSERS and SERS to defined-contribution plans. "I don't know whether a filing by a municipality would change the pace, but it could."

There could be some unique situation that really makes the legislature look and say, "Wow, we need to address it," Montarti added.

Harrisburg's situation with a fiscal overseer, or receiver, is definitely unique. City Council petitioned for Chapter 9 bankruptcy protection last year, but its request was thrown out by a federal judge.

"Ultimately, bankruptcy should be available, but as an absolutely last resort," Kratz said. "There is a misnomer that it's a magic bullet."

He said he would not speculate on what might speed up the reform process.

"There is recognition that it's a situation that needs to be closely evaluated," he said.

Jason Scott

Jason Scott

Jason Scott covers state government, real estate and construction, media and marketing, and Dauphin County. Have a tip or question for him? Email him at jasons@cpbj.com. Follow him on Twitter, @JScottJournal. Circle Jason Scott on .

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