LANCASTER, Pa. – Pennsylvania's pension funding problem extends well beyond Scranton and other red-flag cities and requires a comprehensive fix at the state level, according to state Auditor General Eugene DePasquale.
"There's a whole host of things that we believe need to happen, including revising the municipal aid formula to help some of the cities that are struggling more," DePasquale said in an interview following his keynote speech Wednesday at the Pennsylvania Municipal League annual summit.
"We believe there's got to be more administrative consolidation, we've got to get to more conservative rates of return to make sure that the right amount of money is being put into the system, and we also have to look at some of the money managers that aren't meeting the numbers they're supposed to be meeting, and all the fees that are going out."
Two days earlier, DePasquale released its latest
Over the next two years, Scranton's payment is projected to spike by more than $4 million to $18.7 million due to the expiration of a state law that provided six years of reduced pension payments for severely distressed municipalities.
DePasquale last year chaired a task force on local pension funding at Gov. Tom Wolf's request.
Speaking to about 200 local government officials at the Lancaster Marriott at Penn Square, DePasquale said Scranton's firefighter pension fund ratio is the state's lowest, at 17.2%.
"Mayor [Bill] Courtright came in, and they started putting the right amount of money into the system, making their minimum municipal obligation payment. The stock market had been growing and their investments had been doing well. And with that, they increased their funding ratio by 0.3% in two years.
"Now, their MMO payment is going up in the next two years by $2 million, then $4 million.
"So doing the right thing and putting the right amount of money into the system isn't helping them out of the hole, it's basically helping them tread water while the stock market is growing," DePasquale said. "And there's going to be a day when we'll have a recession. That's just going to happen."
Scranton in 2015, and for the first time in three years, met its required annual pension payment of $12.3 million on time and saw all three plans improve their funded ratio. This year, its annual pension payment went up to $14.4 million.
"Scranton is making progress in addressing its escalating pension liability, but every time they take a step forward, they get knocked back two steps," said DePasquale.
City officials expect to use some proceeds from a $96 million sale of the sewer authority to Pennsylvania American Water Co. to fund the plans. The state Public Utility Commission expects to vote on the transaction Thursday.
Scranton in June received its first rating in five years, a junk-level BB from S&P Global Ratings.
Pittsburgh, according to DePasquale, has paid beyond its MMO and is still falling behind because of demographic changes. The city's population has dropped from 700,000 in 1960 to 320,000 today.
"They have one and a half retirees for every active worker. There's simply no way for them to catch up," said DePasquale, whose office began an audit last month on Pittsburgh's pension system.
DePasquale, a former state representative from Pittsburgh and former economic development chief for the city of York, said Pennsylvania's competitiveness is "under threat if we don't fix the municipal pension issue."
Pension funding is a problem well beyond Pennsylvania's borders.
"Less than effective pension reform and the financial distress of state and local governments in the United States have created dynamic uncertainty for bondholders, workers and taxpayers," Chicago-based restructuring expert James Spiotto wrote in his book: "Municipalities in Distress? How States and Investors Deal with Local Government Financial Emergencies."
As a result, local governments are left with less ability to proceed with the traditional refinancing and are more likely to face partisan battles over who will be paid and when," he wrote.
Both Pennsylvania and its and municipalities could do more, according to Villanova School of Business professor David Fiorenza.
"The 401(k)-style plan is good but there could be other approaches that will stop the rising pension costs," said Fiorenza, a former chief financial officer of Radnor Township, Pa.
"It is time to look at more privatization and hiring freezes for all levels of municipal government. Surely the over 2,500 municipalities and 67 counties in Pennsylvania shows significant coverage of government for the taxpayers of this state."
