actuarially required contributions

Pennsylvania Law Allows Scranton to Pay Fraction of Required Pension Contribution

Two Pennsylvania laws have allowed the city of Scranton to short its pension systems by about $10.9 million since 2009 – or over 22 percent of the city’s actuarially-required contributions over that time period.

Scranton used this tactic because the city needed money to plug budget shortfalls elsewhere – but now bigger payments await the financially troubled city in the future.

The laws that allow the practice are called Act 44 and Act 205. More details from the Scranton Times-Tribune:

Act 205 allowed municipalities to reduce their MMOs by employing an accounting tactic known as actuarial smoothing, which spreads out debt and stock market losses over a long period, up to 15 to 30 years.

But the breaks did not stop there.

Scranton also benefited from Act 44, which allowed municipalities with financially distressed pension plans to reduce the MMO by 25 percent for up to six years. Scranton has taken the reduction each year since 2009.

In 2014, for instance, the actuary determined the city needed to contribute $15.7 million,but the Act 44 reduction allowed it to put in just $12.1 million.

The acts were designed to provide temporary relief for municipalities hit by the stock market crash, which caused their MMO’s to skyrocket, said James McAneny, executive director of the Public Employee Retirement Commission. Scranton’s plans were particularly hard hit, losing a combined total of $21.3 million in the crash, PERC records show.

The problem, he said, is putting off the payments only compounded the pension plans’ financial woes.

“It defers the payment but it doesn’t make it go away,” Mr. McAneny said. “The obligation to make the payment is still there . . . If you are putting it off, all you are doing is facing a bigger payment later. If you can’t pay it now, what makes you think you can pay it later?”

Former Mayor Chris Doherty said he knew the city was putting in less than the actuary determined was required, but he said he felt safe doing so because the reductions were state-approved.

“It’s not like a choice I made that I’m going to deliberately underfund it,” Mr. Doherty said. “We didn’t have the money. We funded it at the rate they told us to fund it.”

A state audit earlier this year revealed that Scranton’s pension system could become broke in as soon as 3 to 5 years.

Memphis Weighs Two Pension Reform Measures

The Memphis City Council meets two times in December, and at one of those meetings they are expected to vote on the two pension reform measures that sit before them.

Details on the reform measures, from Memphis Daily News:

One version is Memphis Mayor A C Wharton Jr.’s proposal that would move new city employees and those with less than 10 years of service to a separate retirement account that equals the unvested employees’ contributions in the existing pension plan plus a multiplier.

The second version, by council member Myron Lowery, would move new city employees only to a pension plan that is the “hybrid” plan Wharton proposed in October for new hires as well as unvested city employees. The hybrid is a combination of a cash balance plan and a defined contributions plan.

The motive behind the reform measures is simple: the city is looking to save money. In particular, it is looking to cut down on its actuarially required contribution, the annual payment it pays to the pension system. From Memphis Daily News:

The city’s target in the new plan is how it affects the city’s annual required contribution toward the pension liability. Joyner estimated that by applying a new pension plan to new hires only, the city saves an average of $2 million a year over 25 years.

There would be more savings on the ARC, as it is called, if the city includes unvested employees with five years or service or up to the 10-year mark, as Wharton has proposed.

“You would have additional savings, but that savings will all be generated by taking benefits from people who are not yet vested in those benefits,” Joyner said.

City Finance Director Brian Collins said the administration is sticking by its recommendation of including unvested city employees as well as new hires.

“If you just stuck with the mayor’s plan, that’s where you get the most savings of $10 million,” he said. “If you just looked at it with five years, it is closer to $3 million or $4 million a year off the status quo ARC.”

The council will hear final readings of the two reform measures during their December 2 meeting.

Moody’s: Public Pension Liabilities Declined in Majority of States in 2013

States paid more of their actuarially required contributions to their pension systems in 2013; coupled with “strong” investment performance, 27 states saw their pension liabilities decline in fiscal year 2013, according to a new Moody’s report.

From Pensions & Investments:

In a report released Thursday, “U.S. State Pension Medians for FY 2013,” Moody’s found that pension liabilities declined in 27 states, while 21 states with lagging valuations had an average increase of 38.9%. “We believe that states should continue to show improvement in their liabilities in fiscal 2014 due to continued strong investment performance,” Moody’s said in a statement.

The median annualized returns for the period ended June 30, 2014, was 16.1%.

In measuring actuarially determined contribution levels, Moody’s found that 34 states contributed 90% or higher in fiscal 2013 and 12 contributed between 60% and 90%, while only four states contributed less. New Jersey was the lowest at only 29% of actuarial determined contributions.

In terms of pension liability as a proportion of government revenue, the median ratio dropped to 60.3% from 63.9% in fiscal 2013, but 14 states were more than 100%. The highest ratios of pension liability to revenue were in Illinois (268.3%), Connecticut (236%), Kentucky (193.2%) and New Jersey (179.7%).

States with the lowest liabilities-to-revenue ratio included Nebraska (12.6%), Wisconsin (13.8%), Tennessee (20.9%) and New York (24.2%).

The report can be read here [subscription required].

Teacher Sues Kentucky Pension System Over Funding Status, Transparency Issues

A Kentucky teacher has filed a lawsuit against the Kentucky Teachers’ Retirement System (KTRS), claiming KTRS has “failed in their fiduciary duty” by letting the system become one of the worst funded teachers’ plans in the country.

From WFPL:

A Jefferson County Public Schools teacher filed a lawsuit Monday against the Kentucky Teachers’ Retirement System, which has been called one of the worst-funded pension systems for educators in the U.S.

The plaintiff, duPont Manual High School teacher Randolph “Randy” Wieck, told WFPL that the system supporting over 140,000 teachers in Kentucky is billions of dollars in debt; also that teachers pay about 12 percent of their paychecks into the retirement system.

“We have raced to the bottom and we’re neck and neck with the worst funded teachers plan in the country,” he said.

As WFPL reported, the General Assembly during this year’s legislative session funded KTRS at around 50 percent of what the retirement system requested.

The federal Government Accounting Office and Standard & Poor say Kentucky’s pension system is being funded at an unhealthy rate.

KTRS has “failed in their fiduciary duty by not aggressively and publicly demanding the full funding they need to stay solvent,” Wieck argues in a copy of the complaint he provided to WFPL. The complaint further alleges that KTRS has not been transparent enough in the “system’s dire funding status,” and that the investments made by KTRS are not responsible.

The teacher, Randy Wieck, is giving KTRS one year to become fully funded. After that, he says he will bring the lawsuit to the steps of Kentucky’s General Assembly; for many years, lawmakers have failed to pay the state’s actuarially-required contribution to the pension system – although they did make the full payment to the teachers’ system in 2011.

TRS’ attorney commented on the suit:

“I am very optimistic that we are going to find a solution for this,” said Beau Barnes, general counsel for KTRS.

There are positive signs among members of the General Assembly to come up with a plan, he said, adding that next week, KTRS will appear before the state’s Interim Joint Committee on State Government to discuss a financing plan for the pension fund. Wieck, who was joined by “Kentucky Fried Pensions” author Chris Tobe, seemed skeptical of previous conversations that seemed to excite Barnes.

The state legislature is not poised to discuss budget issues during the 2015 legislative session, but Wieck said Kentucky is violating its duty to keep the pension system solvent.

“You don’t actually have to wait for the bus to hit you to experience danger. And that is what is happening to Kentucky Teachers’ Retirement System. It is being damaged every year,” he said.

KTRS manages $17.5 billion in assets. The system is about 51 percent funded.

New California Pension Data Now Online

California’s financial transparency website now features pension data on its state, county, and city-level pension systems.

The site includes data on assets, liabilities, funding ratios, membership statistics and actuarially required contributions, among other things.

Fact Check: Has Tom Corbett Been Shorting The Pension System?

Tom Corbett has used the campaign trail to paint himself as a pension reformer – Corbett, the incumbent governor of Pennsylvania, says the pension system needs to be overhauled and supports a plan to shift public workers into a 401(k)-style plan.

His opponent, Tom Wolf, disagrees. Wolf says the problem isn’t the current system—it’s the current governor. He says the system’s current funding problem stems from Corbett’s failure to make required payments into the system.

The issue was brought up during a debate Wednesday night. WESA reports:

Wolf argued that the pension system itself is not flawed, but that the state needs to put more money into fully funding its pension obligations.

“Governors have not adequately paid into that fund,” Wolf said. “We need to figure out a way to do that, pay that debt, because that balance keeps coming up. I plan to do something about that. I will not keep delaying payment, I will do something.”

Corbett took issue with Wolf’s assertion that his and previous administrations have not adequately paid into the system, and instead said it’s the system itself that needs to be overhauled.

“We do have to, though, bite the bullet and start reforming how we’re paying into that system, rather than continuing to say we’re just going to continue to pay at $610 million new dollars each year for the next, I think it’s 25 years,” Corbett said.

Corbett seemed to dodge the issue of failing to pay the state’s actuarially required contributions (ARC). But Wolf has a point.

Since 2008, Pennsylvania has consistently shorted its largest pension funds.

The state has gone above and beyond when it comes to making payments to the Municipal Retirement System (MRS); but that system is also much smaller than the others.

Both candidates have points here. Wolf is right that Corbett has shorted the pension system. But while making full payments would be a step in the right direction, it wouldn’t solve the system’s funding crisis on its own.