Pennsylvania Public Employee Retirement Commission

Philadelphia Pension System to Pay $62 Million Bonus to Retirees in 2015

Philadelphia’s pension system is only 47 percent funded. But that won’t stop retirees from getting a collective bonus of $62.4 million in 2015.

That’s because the system pays out a bonus when it exceeds a set investment return target.

The target in 2014 was 8.85 percent. The fund returned over 11 percent.

So, retirees will receive a bonus for the first time since 2008.

Philadelphia’s isn’t the only pension system in the United States that pegs bonuses to investment return. But the practice is rare.

Pittsburgh Pensions Prepare for Audit as Liabilities Increase

An August report by Pennsylvania’s Public Employee Retirement Commission revealed that the funding level of Pittsburgh’s pension systems have declined since 2012, from 62 percent to 58 percent funded.

That led the State Auditor this month to announce an audit of the city’s pension system. 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.

More on the system’s rising liabilities, from Watchdog.org:

It’s estimated Pittsburgh has $485 million in unfunded pension liabilities, out of the total estimated $1.2 billion pension debt. That means many of the promised obligations to current and future retirees aren’t budgeted.

Part of the blame lies with unrealistic discount rates, the assumed rate of return for investments of pension funds. By using unrealistic expected rates of return, the amount Pittsburgh needed to contribute appeared smaller, and the city contributed less.

During the 1990s, the city used a 10 percent discount rate, said James McAneny, executive director of PERC. Those high levels of expected return were never realized, and the plans lost 40 percent of their value within a decade.

Even after that, former mayor Luke Ravenstahl’s administration insisted on not using a rate below 8 percent — with the same results.

McAneny said that as Ravenstahl was leaving office, he knocked the assumed rate of return down to 7.5 percent. This created an instant increase in the unfunded liability. While this makes things more difficult for the current administration, it’s the wise thing to do, McAneny said.

Read more coverage of the coming audit here.

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