Pension Crisis: PA Auditor General Warns of Tax Increases, Bankruptcy

Pension Crisis: PA Auditor General Warns of Tax Increases, Bankruptcy
February 28, 2014

Eric Boehm

Eric Boehm writes for the Pennsylvania Independent, where this column first appeared. (read full bio)

Pennsylvania's public pension nightmares are worse than they seem, and local governments face the prospect of tax increases or even bankruptcies caused by mounting levels of pension debt.

While Pennsylvania lawmakers try to find a foothold on the $47 billion unfunded liability in two state-level pension plans for public school employees and state workers, another potential pension crisis is unfolding in small towns, mid-sized boroughs and large cities across the Keystone State.

“Some pension plans are so underfunded that promised retirement commitments are at risk. If they fail, the cost will be passed onto the taxpayers. This liability can truly become every taxpayer’s nightmare,” said Eugene DePasquale, Pennsylvania’s auditor general.

All told, 573 out of the 1,218 municipalities in the state have underfunded pension plans—totaling more than $6 billion in the red.

DePasquale has called for action from state and local officials.

‘Pension Tax’ a Possibility

Municipalities with underfunded pension plans will have to increase property taxes, and some may have to create a direct “pension tax” on residents’ earned income to pay the bills, DePasquale warned.

He rattled off a list of 13 recommendations that would help, saying no single change would be enough to address the problem.

Much of the problem rests in Philadelphia and Pittsburgh. The two cities account for more than $5 billion of the total unfunded liability for municipal pension plans in the state. But that doesn’t mean other places don’t have troubles, too.

‘More Imminent at Local Level’

“The crisis is really more imminent at the local level than it is at the state level,” said Jim McAneny, executive director of the state’s Public Employee Retirement Commission, which advises the General Assembly on pension issues.

Though the state has an eye-popping $47 billion unfunded pension liability, it has more means to raise revenue and more options when it comes to dealing with those costs, he said.

Municipalities have fewer options to deal with pension costs because of state laws concerning collective bargaining rights for public employees. That means places such as Allentown ($138 million in unfunded pension debt as of 2011), Scranton ($113 million), York ($54 million), and the 12 other cities with more than $10 million in debt have few options when it comes to reducing long-term debts.

Raising revenue is really the only option, but that comes with a steep price for taxpayers.

DePasquale warned that, without changes, municipalities may be forced to follow Detroit into bankruptcy to relieve some of the pension burden.

That raises the risk of slashing public employees’ expected retirement payments, which comes with its own set of problems.

‘System Is Not Sustainable’

“The current system is not sustainable and municipal employees, including police officers and firefighters, deserve to know that the pension they are counting on will be there when they retire,” he said.

For now, the General Assembly does not seem too interested in the municipal pension issue.

But DePasquale, a Democrat from York County, received some bipartisan support from state Rep. Seth Grove (R-York).

Last year Grove touted a plan to overhaul municipal pension plans by moving all future hires into a different pension system that would reduce benefit costs. It never moved out of committee, though the bill is still alive.

“I strongly support the auditor general’s findings,” Grove said. “My legislation would reduce the financial burden on local governments while ensuring sustainable municipal worker pensions.”

Pension Consolidation Recommendation

Most of DePasquale’s recommendations have to do with restructuring Pennsylvania municipal pensions into a more consolidated form. He suggested establishing consistent member contribution levels, a uniform expected rate of return and the creation of a new pension system for new hires.

He’s not the first person to look at Pennsylvania’s 2,500 separate municipal pension plans and conclude consolidation should be a major part of any reforms. The state has roughly a quarter of all municipal pension plans in the country, and no other state has more than 500 such plans.

“It’s a longstanding recommendation from anyone who has ever looked at pensions in Pennsylvania,” said McAneny. “We’re all looking for ways to save money, so eliminating duplicative processes would be a good place to start.”

No Guarantee of Improvement

But consolidation of plans does not guarantee any serious financial reform, said Rick Dreyfuss, a pension expert with the Manhattan Institute, a conservative think tank.

“After all, they consolidated the 500 school districts into one pension plan,” said Dreyfuss, referring to the Public School Employees Retirement System, or PSERS, which has an unfunded liability of more than $30 billion.

DePasquale might have one more motivation for suggesting consolidation. The state auditor general is charged with auditing each municipal pension plan each year—so fewer plans would make his own job a little easier.

Used with permission of PAIndependent.com.

Eric Boehm

Eric Boehm writes for the Pennsylvania Independent, where this column first appeared. (read full bio)