#2 Pension Reform That Protects Workers and Our Budget

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Health, a Creative Commons Attribution (2.0) image from 401(K) 2013’s photostream

The pension crisis that rocked our city in 2010 was a defining moment. It forced City Council to band together to take quick action to prevent a sell-off of our parking assets that would have badly hurt our city. The plan we put together to prevent that sale was not perfect but it has provided us some real breathing room and a real pathway towards pension solvency. But the 2010 crisis had been brewing for a long time. In fact, Pittsburgh’s pensions have never been fully funded. During the 1970s there were even periods of time when our pension fund was at $0. The pledge of parking tax revenue to shore up the pension fund was only the first step, though. We will have to take further action both at the local and state levels to truly solve the problem. And we have to do it in a way that protects our workers and honors the promise we made to them of a safe and secure retirement.

1. Following the Plan

The pension rescue plan passed by City Council in 2010 has never been fully implemented by this administration. In my first month as mayor I will work with the Pittsburgh Parking Authority to draft a Memorandum of Understanding to finally implement the plan.  This will add an additional $10 million dollars to the pension system every year and will justify the meter increases that were a part of the plan. Right now the Parking Authority is just keeping that money for their own use.

2. Increasing the Asset

There are additional steps we need to take to infuse more money into the pension fund.  We should start by following the guidelines of the second Act 47 Recovery Plan that we drafted in 2009. I will create a facilities management plan to help us evaluate the buildings the city currently owns and prioritize selling off underutilized or vacant properties. Part of the proceeds will be dedicated to the pension fund. I will also ensure that we do not make the mistakes of past like borrowing money to increase the fund. Finally, in 2018, when our annual debt payments shrink by almost 50%, we should increase our annual pension fund contribution. Independent financial analyses have shown that by increasing the amount we pay every year starting in 2018 we can stabilize the pension fund and have it fully funded within 15 to 20 years.

3. Diversifying the Portfolio
We must begin to look for new opportunities for investment that will increase the rate of return for our pension fund.  In California and in New York City pension plans have invested in small business loans that have outperformed Wall Street.  Pittsburgh has an opportunity to use our pension funds in ways that could also help us to restore local business districts, neighborhoods, and our tax base.  We need to be much more creative with how we invest. Instead of just putting all of our funds into the market we should be creating new markets right here in our communities that need investment.

4. Setting Realistic Goals

We need to reexamine our assumptions about how well our pension fund performs in the market.  Right now we use an assumption of 8% return every year.  This is even down from the former 8.75% assumption.  However, 8% is among the highest rate of return assumption in the nation and over the past 10 years our fund has performed at an average of 6%.  We need to get real about our pension fund and putting an artificial 8% return assumption on paper doesn’t help us do that.  If we are going to solve this problem we need to know where we really stand.  I will work with the pension board and a new city finance department to change this rate of return assumption to a more realistic percentage. When we have set realistic, achievable goals we will be able to go to Harrisburg and ask for common sense statewide reforms.

5. Common Sense Reform – Act 111

I have been engaged in the statewide conversation about pensions for years as a member of the Pennsylvania Municipal League and their Core Communities in Crisis Task Force. I have also been working with the bipartisan coalition, the Coalition for Sustainable Communities, to develop common sense pension reforms that can achieve bipartisan support. For example, there is a growing consensus at the state level that we need to reform Act 111. Act 111 is an important piece of legislation in that it ensures that Police and Firefighters do not go on strike in exchange for a system of binding arbitration in contract negotiations. However, given today’s circumstances we need to update Act 111 and make some changes to how arbitration works. First we should establish statewide standards for awards. In arbitration, it is important that a municipality’s ability to pay become a consideration in awarding pension benefits.  Creating unsustainable pension systems that cities cannot afford and states will not assist, becomes an unfunded mandate, crippling pension funds and making it unlikely for them to survive long term.  Next we should open the arbitration process to the public.  People should know where their tax dollars are going and the services they are getting for them.  It should not be a mystery and they should not be left with the bill when they don’t know how it happened.  Transparency is needed in all parts of government and these common sense reforms will allow sunlight into the process.

6. Common Sense Reform – Act 205

We also need to look at reforming Act 205. This law sets the present system for reimbursement from the state to individual cities.  However, as the system is currently designed, those with legacy costs and shrinking tax bases are penalized and wealthier suburban communities with few legacy costs are rewarded.  It is critical that a new funding formula be created that is based on need.  The present system is based on number of current employees and doesn’t take into account legacy costs for retirees; legacy costs which newer suburban communities don’t have.  An unintended consequence of the current Act 205 funding formula is a subsidization of suburban sprawl core city decline as people move further out in order to escape from the higher taxes and legacy costs of 40 years ago.  Additionally, we need to require all employees to contribute to all local pensions. Statewide funds should only be used for matching funds to employee and local government contributions.  Presently, many newer communities pay nothing into their local pensions while the state covers 100% of the costs.

7. Moving to a Statewide System for Pension Administration

Right now over 25% of all municipal pension systems in the United States are located in Pennsylvania. We have seven times more pension plans than the next closest state. Other states have realized that pension plans are not a part of local governance and can be better and more equitably administered at the statewide level.  It is time for Pennsylvania to move to a system where all new hires are part of a fiscally responsible, statewide municipal pension system. Taxpayers are currently covering the cost of inefficiently administering thousands of small pension plans across the state of Pennsylvania and it’s costing us tens of millions of dollars every year. We need to take advantage of economies of scale in investment and pool our pension plans to maximize efficiency and lower taxes.