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Across the country, underfunded public pensions are a pressing issue. The problem is particularly severe in Pennsylvania, which has four times as many public employee pension plans as any other state. Furthermore, 25 percent of U.S. public pension plans are in Pennsylvania. While it will not be easy, it is crucial to the long-term health of our municipalities to address their collective $4.7 billion unfunded liability.
The Pennsylvania Economy League of Southwestern Pennsylvania is examining ways that government entities can make good on their retirement promises to employees while continuing to deliver services.
The Challenge:
Several trends have emerged from our research, among them:
- Municipal plans tend to be small – 98 percent have fewer than 100 members. Low membership means high administrative costs. If all plans operated at the per employee administrative cost of the large plans, they would collectively save $22 million annually.
- While costs have increased, employee contributions have remained the same over time.
- The problem is particularly acute for cities. The unfunded accrued liability (UAL) per active Pennsylvania city employee is nearly $113,000 (compared to the next-highest municipal group, first class townships, at $12,000). The need to address Pittsburgh’s pension problem is critical to our regional competitiveness.
The Solution:
Two approaches that could help to alleviate the problem are to create a unified police pension plan and to change the state aid formula. Neither will be easy to implement. In the case of a unified police plan, differing funding and benefit levels will prove challenging, while such an approach would likely apply only to future employees without addressing existing UALs. Changing the state aid formula will likely face resistance from other municipalities, who will fear a loss of funding.
Other options include:
- requiring employee contributions to reflect benefit levels
- restricting benefits
- removing barriers to merger, wherein the state would cover cost increases resulting from merged government functions
- restricting formation of new plans and setting minimum size requirements
- discouraging the General Assembly from passing benefit enhancement legislation
The University of Pittsburgh’s Institute of Politics (IOP) is also researching this issue and working to publish a set of recommendations. The Economy League is represented on this committee, pooling its independent research with the IOP’s to identify the best solution for the good of the Commonwealth.
Download the following PDF file to view the breadth of the municipal pension problem:
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