Special Report: Pennsylvania's Pension Crisis II

By William Ecenbarger

There's a new version of the three R's coming to Pennsylvania schools-readin', writin' and retirement.

As the first phase of the pension crisis arrives, school districts will see their retirement costs zoom up by more than 70 percent. About 45 per cent of the burden will be carried by property owners, who provide most of local school revenue through real estate taxes. The rest will come fro the state.

"It's scary," said Thomas Gentzel, executive director of the Pennsylvania School Boards Association and a member of the teacher's retirement board. "The numbers are really almost unimaginable in terms of the potential impact on taxpayers and school district budgets. It's an urgent problem."

Although not quite as severe, the State Employees' Retirement System has a similar problem. State contributions are expected to grow from $226 million this year to $1.7 billion in 2012-13.

And then there are the plans for city, borough and township employees.

Philadelphia's municipal pension fund was most recently valued at $4 billion, which is just 45 per cent of what it needs to pay future retirement benefits. Mayor Nutter's proposed budget calls for the city to increase its pension contributions from $350 million this year to $684 million by fiscal 2012-13, a 96 percent increase.  That will be the equivalent of payment of $457 for every man, woman and child in the city.

Nevertheless, Philadelphians may find some solace by looking at Pennsylvania's second largest city.

Pittsburgh's pension plans, with only about a third of the money needed to meet some $1 billion in pension obligations, were the lowest funded of 10 major U.S. cities studied by the Pew Charitable Trusts' Center on the States. The city once had twice as many residents as it does now. So, not surprisingly, there are twice as many police and firemen collecting pensions as there are paying into the fund. 

Selling assets

Mayor Luke Ravenstahl wants to combat the shortfall by selling the city's 11 parking garages for a net profit of an estimated $200 million. If the plan is successful, it will make the pension plans 50 per cent funded - and no doubt lead to higher parking costs at the current 17,000 city-subsidized spaces.  They city will somehow have to raise even more money going forward to bring the fund into balance.

Smaller cities, like Harrisburg, Reading, Erie and Scranton, are facing similar difficulties, as are tiny plans for boroughs and townships.

Under state law, any borough or township that employs three or more full-time policemen must establish a pension plan. Therefore, Pennsylvania has some 3,100 individual pension plans covering its multifarious local governments. Indeed, fully 25 per cent of all municipal pension plans in the United States are in Pennsylvania. And every year there are 30 more plans established.

The Pennsylvania Economy League estimates the total unfunded liabilities of municipal plans at $5 billion.

But Rick Dreyfuss, a Hershey actuary who writes about pension issues for the conservative Commonwealth Foundation, says this figure is much higher.

Retire at 50

"No one really knows the amount of total liability because of the significant reporting lag in municipal pensions," Dreyfuss said. "The amount of asset losses has not been reflected in the most recent financial reports. And a 2009 law allows municipalities to further defer contributions for 2009 and 2010 to these already under-funded plans."  

Many municipal pensioners are former police officers, firefighters, and prison guards who retired at age 50 with a pension equal to 90 per cent of their final year's pay. In addition, these workers have been known to rack up huge amounts of overtime in their last two or three years on the job to goose the base pay used to calculate lifetime benefits.

There are three main sources of money for pensions-1) contributions from active workers; 2) contributions from taxpayers, and 3) earnings based on the investment of money from the first two sources.

The managers of these pension funds have tended to assume they will earn an average of eight percent a year on their investments, but there are some sharp thorns in this theoretical bed of roses. Indeed, for the current decade the stock market, as measured by the Standard & Poor's 500-stock index, is actually down by about 30 percent. Over the past 10 years, Philadelphia pension systems earned only about three percent annually.

So the No. 3 source has turned out to be a negative. And the courts have ruled that the percentage of pay employees contribute can be increased only if the increase is offset by a comparable increase in benefits. Thus any attempt to ease the crisis by getting more money from active workers would be a wash.

That leaves us with money source No. 2: The taxpayers.

Part III: Government plans to cope with the pension crisis.