Eugene DePasquale stood at a podium inside Scranton's church-like, 19th century Gothic Revival City Hall and essentially said the city needs more than prayer to cope with its crushing unfunded pension liability.
"In its current financial state, the city simply cannot deal with these rising costs, making bankruptcy a clear possibility within five years," Pennsylvania's auditor general said late last month, adding that his jolt in the Electric City could be "a wakeup call for action."
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Pennsylvania is one of several pension battlegrounds nationwide. Pension obligations are in play in Detroit's bankruptcy case, and have been political lightning rods in such states as Rhode Island and Illinois.
"I think we've already had, what, 25 or 26 wakeup calls from all the communities in Act 47. Everything seems like a wakeup call," said Gary Lewis, a private-sector financial consultant who ran for Scranton mayor last year. "Every once in a while, someone will stand up and shake his fist, but until pension systems become illiquid and people stop writing checks, then nothing's going to get fixed."
Act 47 is Pennsylvania's distressed communities program, named after its enabling 1987 legislation. To no one's surprise, many of its cities bear heavy pension liabilities. Scranton, the 77,000-population seat of Lackawanna County, has labored under this program since 1992.
DePasquale's report said Scranton's non-uniformed employee pension plan's funding ratio went from 28.4% as of Jan. 1, 2009, to 23% as of Jan. 1, 2013. Meanwhile, the firemen's plan plummeted from 41.7% to 16.7% during that period, while the police plan dropped from 55.2% to 28.2%.
Washington think tank Pew Charitable Trusts considers 80% a minimum acceptable threshold.
Scranton assumes an 8% rate of return on its pension funds, which many public finance wonks consider too high. "I think you're playing with fire by keeping it at 8%," said DePasquale.
"There was no information from the auditor general's report that we were not already aware of, not that we're downplaying the acuteness of the situation," said city business administrator David Bulzoni. "We have some real difficulties with regard to our pension plans. We're probably the worst-funded pension plan in the state. The fact that the auditor general held his press conference here underlined that we've got a difficult job ahead of us."
Financial strife has dogged Scranton. Two summers ago, short on cash, it paid all its workers the federal minimum wage for a couple of weeks. It was shut out briefly from the capital markets after the City Council blocked a $1 million parking authority bond payment that it ultimately settled. Also stinging the city was an October 2011 state Supreme Court ruling that Scranton could not use its Act 47 status to lower pension benefits.
Unrated Scranton has since taken steps to regain the good graces of the capital markets. Union-owned Amalgamated Bank provided a $6.2 million loan later in 2012 and approved another $14 million in financing in 2013 to help bridge budget gaps. Scranton fully repaid both loans, according to Amalgamated.
DePasquale said that despite debt-relief efforts including a 0.75% commuter tax that new Mayor Bill Courtright signed over the summer - with proceeds going to pensions -- Scranton will still struggle to meet its obligations.
"We're looking at stress points in the plans and discussing them with interested parties," said Bulzoni, a former PNC Bank and First Niagara executive. "What's important is that we are addressing it. It's not a problem specific to Scranton, although an issue with Scranton is the level of difficulty."
Benefit payments for the three pension plans amount to nearly $13 million per year, said DePasquale, while the tax, which suburban communities are challenging in court, is expected to generate $5.1 million annually.
"DePasquale didn't reveal anything new, though it's good to keep the issue in front of people," said Richard Dreyfuss, a Hummelstown, Pa., actuary and an adjunct fellow at the Manhattan Institute for Policy Research. "I sense that what a lot of cities are looking for is more state aid, which itself poses questions because the state's pension plans are in disarray."
The state's primary employee pension funds are the Public School Employees' Retirement System and State Employees' Retirement System.
Moody's Investors Service in July and Fitch Ratings in 2013 cited pension liability in downgrading the Keystone State's general obligation bonds to Aa3 and AA, respectively, each with stable outlooks. Standard & Poor's affirmed its AA rating and negative outlook in April, but warned it could also lower Pennsylvania soon if "meaningful pension change is lacking."
Gov. Tom Corbett has proposed to lawmakers a hybrid structure that would merge traditional defined benefit plans with 401(k)-style defined contribution plans. Through such a move, Pennsylvania over 30 years could save $7.4 billion in its general fund and $15.1 billion in its total fund, state revenue Director Dan Meuser
Corbett said the state's pension liability could spike to $65 billion within three years if unchecked. Pew last month pegged Pennsylvania's unfunded liability at $47.3 billion for pensions and $17.5 billion for retiree health care.
The legislature is scheduled to reconvene in Harrisburg Sept. 15, though fall sessions are often perfunctory when state elections loom. "I don't see lawmakers viewing it as a legislative priority, especially in an election year," said Dreyfuss, who is also a senior fellow at the Harrisburg-based Commonwealth Institute for Public Policy Alternatives.
Nationally, Pew said the gap between the benefits state and local pension plans promise and the funding to meet them has widened. According to Pew, fiscal 2012 data show a $915 billion shortfall for state-run retirement systems. Including promises by local governments, the total pension debt exceeded $1 trillion.
Alan Schankel, a managing director at Janney Capital Markets in Philadelphia, said the rating agencies might scrutinize Pennsylvania's post-election landscape before considering their next move. Corbett, a one-term Republican, trails York businessman and Democratic challenger Tom Wolf 56% to 25% with nearly 20% undecided, according to a poll Robert Morris University released last month.
"Maybe the rating agencies will see if the current governor makes it though. It looks like he won't, but if he does, he might try again," said Schankel. "If it's the new guy, Tom Wolf, he might try something. So I think the rating agencies will wait."
Schankel compared state and local pension funding woes to a slow-moving train.
"It didn't just happen overnight," he said.
Pennsylvania has not fully paid its annual actuarially required contribution since 2004. That and investment losses from the recession have accelerated the liability over the last decade.
Earlier this year, DePasquale said 573 municipalities administer pension plans that are distressed and underfunded by at least $6.7 billion. This further jeopardizes local bond ratings and borrowing capacities, he said, given how rating agencies now treat such liabilities as debt-like.
Scranton's predicament skewers statewide municipal data, said Schankel. "The reality is important and it needs attention. But it's not as huge a problem as the headlines make it seem." According to Schankel, 441 local plans, or three-fourths of the total, are funded between 70% and 80%.
DePasquale, among other measures, called for an end to overtime "spiking" and lump-sum payments for accrued leave when determining pension benefits. He also wants to update age and service requirements for normal retirement eligibility to account for increased life expectancy.
He also recommended consolidating local government pension plans into a statewide system separated by employee class such as police officers, firefighters, and non-uniformed employees; and administering local government pension plans by one entity while maintaining the system of individual pension plans.
DePasquale also wants to tweak the distressed cities recovery program to provide additional aid only if municipalities meet certain requirements on funding plans.
State lawmakers are considering changes to Act 47, including a limit on how long communities stay in the program. Scranton's 22-year stay is not even the longest. Brad Koplinski, a Harrisburg councilman who ran for lieutenant governor this year, called Act 47 a "roach motel" during the height of the capital city's financial crisis in 2011.
Manhattan Institute's Dreyfuss wants to move new hires in distressed communities into a 401(k)-style plan. "A lot of what this is telling us is that defined-benefit plans are not sustainable," he said.
Pension liability also provides fodder for advocates of consolidating cities and towns, period.
"I'm a huge proponent of consolidating communities," said Lewis, the former Scranton mayoral candidate. "In the Scranton area, you have Dunmore with 6,000 people. You have Throop with 4,000. You have lots of these little trifle communities with populations of 10,000 that share Scranton's borders.
"There's not a car chase in Dunmore that does not involve the Scranton police. Neighboring communities help Scranton firefighters as well."
