Proposal would have state take over city pension plan

A proposal circulating in the legislature could result in a state takeover of Philadelphia's municipal pension plan, and officials from the city and the pension board are raising alarms.

In response to the faltering economy and difficulty many municipalities expect in meeting their pension obligations, the state Public Employers Retirement Commission is recommending legislation that would move pensions with less than half the assets required to meet long-term obligations into a state-run pension plan.

"The idea of the takeover is really to stop the bleeding," said James L. McAneny, PERC's executive director. "The history is that municipalities - not all of them - don't seem to be able to resist increasing benefits in spite of the fact that they can't afford it."

PERC was created to monitor public retirement plans in the commonwealth, review proposed legislative changes in those plans, and recommend legislation on its own, according to the PERC Web site.

All pensions funded at less than 50 percent would be directed into a pool administered by the Pennsylvania Municipal Retirement System, which now manages about 800 plans, the largest with 700 members. Philadelphia has about 60,000 current and former members, according to City Controller Alan Butkovitz.

PERC's plan would freeze benefits at the current rate, and bring in new employees under a plan that pays for itself. The accounting is based on a lower rate of interest for the fund - about 7 percent compared with the city's 8.75 percent - that would allow the pension board to be more conservative in investments and the fund, therefore, to be more stable.

The Philadelphia municipal pension is on the bubble. It was funded at 53 percent at the end of May, but is projected to sink to 47 percent next June and remain below 50 percent for the next several years, according to the pension board actuary.

Members of the Board of Pensions and Retirement - including city Finance Director Rob Dubow, Butkovitz, and union representatives - questioned the proposal's financial impact.

Pension board actuary Ken Kent last week told board members that the state plan would result in much higher annual payments for the city in the long term, and a pension that was funded at lower levels than under the current city plan, which also requires state approval.

In 2008, the city paid $439 million as its minimum contribution to the fund, Kent said.

Under the PERC plan, the city would pay $762 million into its pension plan in 2014, Kent said in a presentation to the board. The city's plan, for which Mayor Nutter is seeking approval from the legislature, requires $572 million that same year - a $190 million difference, Kent said.

And the PERC plan would result in the pension's being funded at 56 percent by 2026, vs. 68 percent under Nutter's proposal and 86 percent if the plan stays as it is, Kent said.

"This would be a devastating problem for our budget in the long run," said Dubow, who chairs the pension board. "Something that looks like that, we're not in favor of."

In addition, Kent said, the PERC plan did not follow actuarial standards. McAneny said the proposal was being reviewed by municipalities across the state and would require official certification by an actuary before it could become law.

"We are opposed to it in a major way," said Bill Rubin, vice chairman of the board, who represents AFSCME District Council 33, the city's blue-collar workers. "The pension board is handling their matters in a fiscally responsible way. Our funds losses were better than most plans in the country, and we are on the road to recovery with models that say we can be there by 2026," Rubin said.

The pension fund, now at $3.4 billion, lost 17 percent over the fiscal year that ended Tuesday, said Rubin, who went to Harrisburg with Butkovitz Wednesday to lobby against the plan.

Butkovitz also wrote to legislative leaders Wednesday, saying he was concerned the plan "will have the effect of dramatically worsening the pension funding crisis and municipal solvency within the next five years in the event they are enacted."

Ronald Stagliano, the Fraternal Order of Police appointee to the pension board, says the impetus for a takeover is Gov. Rendell's desire to control the funds and millions in financial manager fees he can dole out to political allies.

"It's about someone grabbing the assets of the pension fund so they can manage them," Stagliano said.

Rendell's spokesman, Chuck Ardo, said, "Clearly, those that make that accusation don't have a grasp of the issue, nor an understanding of this governor's motivation."

The governor would support a pension bill that the legislature could agree on, Ardo said.

McAneny said the proposal was about reining in severely distressed funds - estimated to number about 75 in the state, including Pittsburgh. Politics "has nothing to do with this," he said.

"We don't actually want any of them," McAneny said.

McAneny pointed out that Philadelphia doesn't qualify as "severely distressed" and could stay out by managing itself. "If they want to maintain local control over everything, then they're going to have to behave," McAneny said.

McAneny said the issue of distressed pensions is urgent, and PERC's proposal would have to be enacted before the end of the legislative session to have its intended effect. No legislator has taken up the proposal and introduced it.