Eugene DePasquale | Pension360

562 of Pennsylvania’s Municipal Pension Funds Classified as “Distressed”

Pennsylvania Auditor General Eugene DePasquale released figures Wednesday on the debt and funding status of the state’s municipal pension systems.

The majority of the state’s 1,200 municipal pension plans were funded at 90 percent or higher, according to the Auditor General’s office.

But 562 of the plans were classified as “distressed”.

From TribLive:

Pittsburgh is one of 562 Pennsylvania municipalities with distressed pension funds, according to figures Auditor General Eugene DePasquale released Wednesday.

About 1,200 municipalities in Pennsylvania administer their own pension plans. Collectively, they were $7.7 billion underfunded through 2012, up from $6.7 billion the year before.

“It’s gone up by $1 billion with no sight of action yet by the Legislature,” DePasquale said. “There’s no way around it; we need a statewide solution.”

Most of the shortfall was in Philadelphia, where the city’s unfunded liabilities surpass $5.3 billion, according to July 2013 figures. Pittsburgh was the second-highest as of January 2013 at about $484 million.

[…]

DePasquale recommends some short-term fixes. Governments should prohibit employees from “spiking” their pensions by working extra overtime, increase age and service requirements in accordance with increased life expectancies, and ensure all plans require members to contribute.

Long term, DePasquale wants local plans consolidated into a state system with job-specific classes: police officers, firefighters and non-uniformed employees.

The state’s auditor general says he will “continue to beat this drum” until lawmakers come up with a way to make municipal pension systems more sustainable.

Photo by Paul Weaver via Flickr CC License

Pennsylvania’s Municipal Pension Debt Rising, Says Top State Auditor

Since 2012, the unfunded liabilities of Pennsylvania’s worst-funded municipal pension systems have increased by $1 billion, according to the state’s top auditor.

The increase in liabilities comes despite years of rising stock market values.

The state’s auditor general says he will “continue to beat this drum” until lawmakers come up with a way to make municipal pension systems more sustainable.

From the Associated Press:

A continued failure by state lawmakers to act is allowing a growing problem of municipal pension debt in Pennsylvania to get worse, state Auditor General Eugene DePasquale said Wednesday.

DePasquale renewed the warning he gave a year ago, saying that municipal pension debt in the billions of dollars is putting municipalities and retiree benefits on shaky ground.

DePasquale said that municipal governments with the weakest pension plans were underfunding them by $7.7 billion through 2012, an increase of $1 billion after DePasquale’s office analyzed two years of new data.

That increase took place during a time when the economy was growing and stock market values were rising, DePasquale noted. Historically, the pension plans of police and firefighters have been responsible for most of the debt.

Nearly 70 percent of that $7.7 billion debt, or $5.3 billion, belonged to Philadelphia, according to DePasquale’s office. Pittsburgh was second with $485 million. Among Pennsylvania’s cities, Scranton had the worst funding ratio at 23 percent.

DePasquale warned that, unless changes are made, rising pension debt that forces a municipality into bankruptcy could mean benefit reductions for retirees. Some municipalities will have to raise taxes or lay off police and firefighters, he said.

“Some of them may be forced to do both,” DePasquale said.

The majority of the state’s 1,200 municipal pension plans were funded at 90 percent or higher, according to the Auditor General’s office.

But some plans are so underfunded that they threaten to bankrupt the municipalities with their unfunded liabilities.

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Pennsylvania Auditor General Urges State Pensions to Pull Back From Hedge Funds, “Dramatically” Reduce Risk

Pennsylvania Auditor General Eugene DePasquale has been vocal in the past about his desire for the state’s pension systems to decrease their allocations to hedge funds.

He doubled-down and expanded on that stance Thursday, saying the state-level pension funds’ risk appetite needs to be “dramatically pulled back”.

He also called on the pension systems to reduce investment fees and change funding models.

DePasquale made these announcements after examining the pension system of Montgomery County, which uses a low-cost investment approach that includes investing heavily in passive index funds. The approach represents a stark contrast with the state-level pension systems.

Montgomery County Commissioners Josh Shapiro explains how his county’s pension fund operates:

Historically the county invested money from the pension fund with Wall Street money managers, Shapiro explained.

“What we found was that they just were simply not getting the returns our retirees needed,” Shapiro said. “We, as a pension board, worked hard at looking at different models of funding our pension system that would work better than what we historically had.”

Shapiro said the county began investing 90 percent of the fund in Vanguard two years ago and has since has seen a return of 16.23 percent while saving more than over $1 million in fees.

“We knew we were creating a template that could be used by other municipalities and maybe even by the state,” Castor said. “The obligation that we have to our retirees is to make sure the funding is there today, tomorrow and 40 years from now. The health of that plan is part of the covenant we have with the people who do the work here at Montgomery County and at the state.”

DePasquale then suggested that the state-level pension systems could learn from the successes of Montgomery County, according to the Times-Herald:

DePasquale said the state needs to emulate Montgomery County, where the pension funds are invested in a stock index fund.

“Before you get there we have to reduce our exposure into the hedge fund area,” he said.

According to DePasquale, the public school retirement system has 10 percent of its investments in hedge funds, while the state employee retirement system has approximately 6 percent of investments in hedge funds.

“That risk needs to be dramatically pulled back,” DePasquale said.

A final point DePasquale made about the state pension system is that the fees going to private equity and hedge fund managers need to be reduced.

“Pennsylvania is a large state,” he said. “We have a huge leverage tool in the amount of money that we have in our pension system. For some reason our Public School Employment Retirement System and our State Employment Retirement System refuses to use that leverage to negotiate lower fees.”

This isn’t the first time DePasquale has asked the state’s pension funds to pull back from hedge funds.

That led pension officials to defend their hedge fund investments. The chairman of the Pennsylvania’s State Employees Retirement System board of trustees said this in September:

Industry experts generally agree that while hedge funds are not for every pension system, the unique needs of each system must shape their individual asset allocation and strategic investment plans. Therefore, the actions taken by one system may not be appropriate for all systems. Investors need to consider many factors including their assets, liabilities, funding history, cash flow needs, and risk profile.

[…]

To date, the strategy has been working. As of June 30, 2014, our diversifying assets portfolio, or hedge funds, made up approximately 6.2 percent of the total $28 billion fund, or approximately $1.7 billion. In 2013, that portfolio earned 11.2 percent or $197 million, after deducting fees of $14.8 million, while dampening the volatility of the fund. That performance helped the total fund earn 13.6 percent net of fees in 2013, adding more than $1.6 billion to the fund.

Photo by Paul Weaver via Flickr CC License

Audit Coming for Pittsburgh Pensions

Pennsylvania Auditor General Eugene DePasquale and Pittsburgh Mayor Bill Peduto announced on Wednesday plans to audit the city’s municipal pension funds.

DePasquale said the audit was routine and not triggered any suspicions in particular.

Part of the audit’s purpose will be to see whether the pension systems implemented recommendations made during the city’s previous audit in 2011.

From WESA News:

In an effort to ensure the pension plans for police, firefighters and municipal employees do not become a financial liability, Pennsylvania Auditor General Eugene DePasquale has launched an audit of those plans. Peduto joined the auditor general for the announcement, saying it’s time to dig deep into Pittsburgh’s numbers.

“Get a true and accurate accounting of where we are, make it available so the public can see it, then do what we do in Pittsburgh — solve the problem,” Peduto said.

The overall goal of the audit is to determine if the pension fund is administered in compliance with applicable state laws, regulations, contracts and local ordinances and policies and to determine if municipal officials took appropriate corrective action to address the findings contained in a prior audit report. The prior audit report, covering 2010 and 2011 made several recommendations to address the underfunding of municipal pension plans.

Pittsburgh’s pension systems are among the least-funded of any city in the state. From the Pittsburgh Post-Gazette:

With assets of about $675 million and liabilities of about $1.2 billion, Pittsburgh’s funds for retired police, firefighters and other municipal employees is considered “moderately distressed” by the state Public Employee Retirement Commission.

Pittsburgh’s pension went from nearly 62 percent funded in 2013 to 58 percent in 2014, Mr. DePasquale said, partly due to market conditions and partly because of a reduced expected rate of return pushed through by outgoing Mayor Luke Ravenstahl’s administration late last year. Though lowering the rate of return may have been prudent, not budgeting money to account for the gap was not, Mr. Peduto said.

“We basically shorted our pension fund under the guise of good government,” he said.

In Pennsylvania, Pittsburgh’s unfunded liability of $485 million is second only to Philadelphia’s, which is $5.3 billion.

The audit is expected to take one to two months.

Photo by Sakeeb Sabakka via Flickr CC License