Once upon a time, pensions were the gold standard for retirement benefits, ensuring retirees a guaranteed monthly income for life. Recent funding issues for Pennsylvania's largest public sector pension plans, however, have forced pensions into a critical spotlight.
That spotlight burned brighter recently with Gov. Tom Corbett's recent 2013-14 budget announcement. The budget contains major initiatives to reign in the spiraling costs of our two statewide defined benefit pension plans — the PSERS (Public School Employees' Retirement System) and the SERS (State Employees' Retirement System). These plans are severely underfunded — to the tune of $44 billion. Pension plans for municipal employees in some of Pennsylvania's larger cities are also dealing with significant shortfalls.
Because of the severe underfunding of these large public sector pension plans, all municipal plans across Pennsylvania are at times painted with the same broad brush. What isn't well publicized is that Pennsylvania municipalities (townships, boroughs and cities) must, by law, meet strict pension funding requirements, which have been in place for almost 30 years.
The reality is that many of the municipal plans in Pennsylvania are well-managed and well-funded. These municipalities are providing pensions for their employees at a reasonable cost to taxpayers.
The well-publicized large plans do not tell the whole story in Pennsylvania. Most municipalities in the commonwealth maintain well-funded defined-benefit retirement programs. Here are some facts from Pennsylvania's Public Employee Retirement Commission, based on 2011 actuarial valuations of all the public sector pension plans in the Commonwealth:
• Excluding the two big statewide plans and the six largest cities, in the aggregate the pension plans of the other 1,428 municipalities are 85 percent funded.
• Of these municipalities, 795 have plans that are at least 90 percent funded. Thus, more than 55 percent of the municipalities with defined-benefit plans have plans that are at least 90 percent funded.
• Only 146 of the more than 1,400 municipalities are less than 70 percent funded.
Given these solid statistics, disrupting hundreds of perfectly functional defined-benefit plans because a few have serious problems essentially amounts to throwing out the baby with the bathwater. Defined-benefit plans remain a reliable and fully viable means to provide retirement benefits.
While many municipalities have challenges funding their defined-benefit plans, virtually all of them continue to meet the stringent funding requirements of Pennsylvania law and are gradually paying down their unfunded liabilities.
Some have suggested that municipal pension problems could be averted by establishing a statewide system for all municipal pension plans. But the PSERS and SERS funding crisis is proof that, when it comes to managing defined-benefit plans, bigger isn't always better.
Hundreds of Pennsylvania municipalities manage their own plans successfully and provide appropriate retirement benefits for their employees. Fear over the current crisis should not force municipalities to abandon these plans unnecessarily.
Let's not mandate a one-size-fits-all approach for Pennsylvania municipalities.
Thomas L. Zimmerman, F.S.A., is a partner and consulting actuary at Harrisburg-based Conrad Siegel Actuaries. He specializes in consulting for defined-benefit pension plans for private sector clients, tax-exempt organizations and municipalities.