Pennsylvania Law Allows Scranton to Pay Fraction of Required Pension Contribution

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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.

Video: Pennsylvania Lawmakers Host Town Hall On Pension Reform

State Reps. Seth Grove (R-Dover Township) and Mike Tobash (R-Schuylkill/Berks) hosted a town hall meeting on state pension reform in early August.

But the video has just recently hit YouTube, and it’s worth watching if you’re interested in the various proposals currently sitting in the Pennsylvania legislature.

Tobash is a legislative appointee to the Public Employee Retirement Commission; he is also sponsoring a pension reform bill that would switch new hires into a hybrid-style 401(k) plan.

Pension360 covered Tobash’s reform proposal last week.

Pennsylvania Weighs Risks, Rewards of Pension Obligation Bonds


Pension reform has been the talk of Pennsylvania politics these last few months, and the reasons are equally political and practical: if retirement costs keep rising, the state’s fiscal handcuffs will keep tightening—and they are already uncomfortably snug. That leads eventually to budget-cutting maneuvers, many of which are sure to be politically unpalatable.

But a recent analysis from the actuaries for the state’s Public Employee Retirement Commission presents a policy tool to save the state money. The tool: pension obligation bonds (POBs), the controversial bonds that carry big risks and big rewards for the states that issue them.

The actuarial analysis stated that the state could save $24.5 billion over the next 30 years if they issued just $9 billion in POBs. The state’s PSERS system could reduce costs by $19.8 billion with POBs, according to the analysis.

More from the Pittsburg Post-Gazette:

The analysis does not account for the cost of the bonds, and the actuarial consulting firm, Cheiron, notes: “While the special funding provides a savings to the Systems, there is the potential for there to be a net cost to the Commonwealth.”

The governor’s budget office offered one analysis, from Public Financial Management, Inc., that projected borrowing $9 billion would require the state to pay $10.4 billion in interest over 30 years.

State and school district payments are scheduled to rise sharply in coming years, and policymakers face the prospect of searching for significant new revenues or exacerbating the estimated $50 billion unfunded liabilities of the retirement systems for state and public school workers.

Gov. Tom Corbett, who is touring the state to promote another pension plan, has said he does not support borrowing to pay down the state’s pension liabilities, and House Republican leadership has not embraced the approach.

But Senate Democrats back refinancing the pension debt with $9 billion in bonds, and Tom Wolf, the Democratic candidate for governor, says he would explore funding mechanisms like pension obligation bonds. Mr. Wolf’s campaign said he favors following the payment schedule set in 2010.

The risks of POBs are well-known, and not everyone is on board with even considering this policy option.

One man, who says he has worked in the bond market for 50 years, wrote into the Post-Gazette to express his displeasure with the proposal. From the letter:

Issuing bonds provides elected officials a way to pay back the banks, investment houses and attorneys for their ongoing contributions to their election campaigns. Instead of having the courage to take steps to solve the current problems they will attempt to borrow their way out of the problem. It’s analogous to amassing large debt on your credit card, borrowing at high rates to pay off the debt and then continuing to use the card for new debt.

Colin McNickle, the editorial page director at Trib Total Media, weighed in on the issue as well this week:

First off, such bonds currently are not legal in the commonwealth. The state Legislature would have to reverse course. But, second, pension obligation bonds have a horrible history of failure because of their questionable application.

Such bonds are taxable general obligation bonds sold to investors. Governments see it as a reasonable way to shore up underfunded pension plans now while off-loading the costs to the future. And if that sounds financially hinky, you’re right.

“While POBs may seem like a way to alleviate fiscal distress or reduce pension costs, they pose considerable risks,” wrote scholars at Boston College’s Center for Retirement Research in a 2010 white paper. “After the recent financial crisis, most POBs issued since 1992 are in the red.”

Just last February, a panel commissioned by the Society of Actuaries warned that public pensions should not be funded with risk or if it delays cash funding: “Plans are not funded in the broad budgetary sense when debt is issued by the plan sponsor to fund the plan.”

As the Center For Retirement Research has previously pointed out, POBs often get a bad rap because they are “issued by the wrong governments at the wrong time.” Meaning, the states that issue POBs are often in states of fiscal distress and aren’t in a position to take on the risk posed by the bonds—even if they’re in the perfect position to benefit if the bonds work out.

So the question remains: Is Pennsylvania the right state? And is the right time now?