Pa.'s Auditor General: Other Municipalities Could Benefit From Harrisburg’s Pension Management Approach

Although Pennsylvania’s capital city is still recovering from a deep financial crisis, two of Harrisburg’s public employee pension plans are in good shape, and how they’re managed could provide an example for other Keystone State municipalities to follow, the state’s auditor said Tuesday.

One of the two plans covers Harrisburg’s firefighters. The other covers “non-uniformed” city employees, who are not included in the firefighter plan or a third city pension plan for police. Both the firefighter and non-uniformed plans are “overfunded.” The firefighters’ plan at a level of 115.8 percent and the one for non-uniformed employees at 135.8 percent.

That’s notable in a state where, as of early last year, 562 municipalities were administering “distressed” pension plans, which were underfunded by a combined total of at least $7.7 billion, according to a report Auditor General Eugene DePasquale’s office issued at that time.

The auditor general’s office considers a plan to be facing some level of distress—ranging from minimal to severe—if it is less than 90 percent funded.

On Tuesday, DePasquale’s office issued audit reports for all three of Harrisburg’s pension plans.

The city’s police plan is about 82 percent funded, according to its audit report.

In DePasquale’s view, a key factor has contributed to the strength of Harrisburg’s firefighter and non-uniformed plans: Since the 1980s, both have been managed by the Pennsylvania Municipal Retirement System, a state agency that acts as a “shared investment manager.”

According to the agency, it is the administrator of about 25 percent of Pennsylvania’s public pension plans, managing 756 non-uniformed plans, 199 police plans and 10 firefighter plans.

Last year, DePasquale chaired Gov. Tom Wolf’s Task Force on Municipal Pensions.

Among the recommendations in a report the group issued last June was that underfunded municipal pension plans in the state should be shifted to a single shared investment manager and administrator, like PMRS. The idea here is that the agency, or comparable shared investment managers, have a proven record managing pensions.

“Clearly, there is no overnight solution to the municipal pension problem,” DePasquale said in a statement on Tuesday. “But the performance of two of Harrisburg’s pension plans under PMRS management shows that our task force recommendations can be a path toward easing the financial stress on our communities.”

Along with the information about Harrisburg’s pension plans released on Tuesday, the auditor’s office highlighted funding levels for police, firefighter and non-uniformed plans in five other Pennsylvania cities. Across those categories, the plans managed by the Pennsylvania Municipal Retirement System had higher funding ratios compared to those that were not.

Unlike Harrisburg’s overfunded firefighter pension plan, funding ratios for firefighter plans in the five other cities, which were not managed by PMRS, ranged from 31.6 percent to 68.9 percent.

Along with Harrisburg, Allentown and Easton have non-uniformed PMRS-managed pension plans. Allentown’s plan is 93.6 percent funded, and Easton’s 99.7 percent. The other three cities’ plans had funding levels between 54.1 percent and 81.7 percent.

“Harrisburg, Allentown and Easton provide examples of how using PMRS and making the minimum annual payments over time can put pension plans on solid ground,” DePasquale said.

A pensions plan’s funding ratio compares the value of its assets, such as cash, stocks and bonds, to its liabilities—the obligations it will owe to retirees.

Unfunded pension liabilities measure the gap between these owed benefits and a plan’s assets. But pension liabilities do not all come due at once. They represent the amount of money needed to pay earned retirement benefits over a period of time. So just because a plan has a low funding ratio does not mean it is immediately doomed.

But as a pension system’s funding level drops, more and more of its money does go toward paying annual benefits, while less and less is available to invest and generate financial returns.

This sort of trend can gradually erode the health of a system's finances.

DePasquale’s office noted on Tuesday that Harrisburg’s minimum annual payment for its police pension fund has climbed from $275,869 in 2009 to $2.03 million in 2014. But the plan’s funding level fell by 14.3 percent between 2009 and 2013.

That plan is governed by Harrisburg's seven-member Police Pension Board. Three members of the board are appointed by the city, and three others by the collective bargaining unit that represents the police employees the plan covers. Another neutral member is then selected by the six appointees. The board is responsible for the management of the plan’s assets and the selection of investment advisors and managers.

As of Dec. 31, 2014, the plan had 139 active members, and 201 inactive members, or beneficiaries receiving benefits, according to its most recent financial statements. The plan’s total assets increased in 2014 to about $75 million, from around $73 million in 2013. Deductions from the plan for pension benefits totaled about $5.3 million in 2014, the statements also show.

Harrisburg is considered financially distressed under what’s known as Pennsylvania’s Act 47. A financial recovery plan was put in place there about two-and-a-half years ago to address the city’s money troubles. These problems were rooted in hundreds of millions of dollars in debt that the city could not afford to pay, much of it tied to a troubled trash-to-energy incinerator facility.

Previously on Route Fifty:

• Pennsylvania’s Capital Must Change Its Financial Recovery Plan, Mayor Says