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Municipal pension crisis threatens Pennsylvania

By Randy Kraft, WFMZ.com Reporter, RKraft@wfmz.com
Published On: May 22 2014 05:40:33 AM CDT
Updated On: May 22 2014 04:30:29 PM CDT
ALLENTOWN, Pa. -

An economic tsunami is rumbling toward Pennsylvania. Unless it can be averted, it will do great harm to communities all across the state.

Many people will face massive tax increases. Others will have fewer police officers and firefighters to protect them.

Some may have to live with both higher taxes and cutbacks in those essential services.

And municipalities forced into bankruptcy will experience financial downturns that ripple out into surrounding communities, eventually harming the entire state.

The coming tsunami is being generated by skyrocketing municipal pension costs being faced by communities all over Pennsylvania.

Whether it can be stopped was the subject of a Municipal Pension Reform Summit presented by the Greater Lehigh Valley Chamber of Commerce Wednesday afternoon.

If the crisis is not averted soon, “our cities are going to go into bankruptcy --that is going to happen,” predicted Pennsylvania Auditor General Eugene DePasquale, one of several speakers on the program’s panel.

“The end of the rainbow is not a pot of gold. It is bankruptcy. And it is coming to a municipality near you. The longer we wait, the worse this gets.”

“It’s going to collapse cities across the commonwealth if we don’t address this problem,” agreed Allentown Mayor Ed Pawlowski. “If not addressed soon, you will see city after city after city fall like dominoes into bankruptcy.

“That means entire regional economies that support these cities will start collapsing in on themselves, which will have negative economic ripple effects across the entire commonwealth.”

“It’s critical that we address this issue and we address it soon,” said Pawlowski. “If we don’t, we’re going to have this economic tsunami that will hit the entire state. Our economic engines that have been built around these core cities will start collapsing.

“The entire economy of the state is on the line here if we don’t figure out how to address this. What happens to the economy of Pennsylvania if 20 municipalities in the state go bankrupt? It would have dramatic effects on every single one of us.”

“When you have to lay off police officers or firefighters or cut back services, it’s a quality of life issue,” confirmed Bethlehem Mayor Bob Donchez.

“It will hurt the cities and it will hurt the suburbs – it will hurt the Lehigh Valley -- because there’s a ripple effect.”

“It is a $6.7 billion problem,” said DePasquale, who has determined 575 of Pennsylvania’s 1,218 municipalities have under-funded and distressed pension plans.

“Almost half the land area of Pennsylvania is covered by the problem,” he said. “It doesn’t get nearly the attention it deserves.”

Why not?

“This is an issue that does not resonate with the public because it is too complicated,” said Donchez.

“This is a very complicated issue, even accountants can’t figure it out,” agreed Jeff Berdahl, chairman of the chamber’s tax & regulatory committee.

The auditor general said Pennsylvania has more municipal pension funds than the rest of the country combined.

DePasquale said so many municipalities are doing their own pensions that many of their staffs are “outgunned. They don’t have the expertise to make some of these financial decisions.”

He said Pennsylvania communities face rising pension costs not only for police and fire departments, but other employees as well. “That happens in city after city, township after township, all over Pennsylvania.”

About 75 people attended the chamber’s hour-long program in Lehigh Country Club in Lower Macungie Township.

Before DePasquale and the other panelists spoke, the stage was set by Barry Fisher, who is chairman of the chamber’s public policy committee and general manager of Channel 69 News.

“It’s not just a big city issue,” said Fisher. “Nearly half of all Pennsylvanians live in a financially distressed community. That’s substantial.”

He said more than 50 percent of some municipal budgets are going to pay pensions and other personnel costs.

Fisher said Pennsylvania’s health care and pension crisis “is sucking the life out of our cities and our governments. It has to be dealt with.”

A legislative solution?

“Sadly, little progress has been made in Harrisburg,” said Fisher.

“One wise mayor said to me that the major problems we face with this issue in Harrisburg is the Republicans like the police and firemen department and the Democrats like the unions, which creates the perfect storm for ‘let’s not do anything because we can’t get re-elected if we take either one of them on’," Fisher added.

“I’d rather fix that problem before it becomes a problem,” said State Rep. Seth Grove of York County, one of two Republican legislators on the panel who have introduced legislation to being tackling the issue.

“I know it’s very unique for government to actually try to solve it before it happens, right?

“The default position of the General Assembly is to do nothing. For me that’s unacceptable. We have a major problem. Let’s fix the problem.”

“We’re going to have to put together a bill to get this done,” said DePasquale, a former Democratic state representative. “I don’t think we can expect leadership from the top on this. We’ve got to have this come from the ground up to get something over the finish line.

He said people say “let’s wait till the next governor to get this thing done” but feels waiting will only make the problem worse.

Everyone is going to have to be a part of discussions and compromises leading to solutions -- police and fire departments, unions, the business community and legislators, said DePasquale. “This is not going to fix itself.”

“No matter where you are ideologically, there’s no way we’re going to get a bill to the governor’s desk that you’re going to think ‘everything about it is something I agree with’,” said the auditor general.

Program moderator Tony Iannelli, president and CEO of the chamber, said legislators in Harrisburg “are not lining up to jump on this bandwagon in terms of legislation. Someone’s got to support this.”

“I’m very disappointed in our Democrats,” said Easton Mayor Sal Panto, who is a Democrat. “We can’t get one Democratic representative to stand with us and say ‘I’m going to sponsor this’. That’s wrong. You need to go to the Democrats in this Valley and say ‘we need you on board’.”

One of those Democrats, State Rep. Mike Schlossberg of Allentown, attended the program but was not on the panel.

“This is not a Democrat issue, this is not a Republican issue –this is a Pennsylvania bipartisan issue,” said Donchez. “We really need to move forward, whether we have a new governor or not, to really save cities.”

Allentown’s mayor said it’s going to take a grassroots effort by people who are faced with losing municipal services and paying high taxes to say “enough is enough.”

“Until the general public starts putting pressure on their legislators, nothing is going happen that’s going to be substantive,”
said Pawlowski.

Losing benefits?

Iannelli asked if a legislative solution could result in municipal workers losing some of their pension benefits.

“We don’t know all the answers to those questions,” admitted DePasquale.

But the auditor general added if the state legislature doesn’t find solutions, people will get such questions answered by federal bankruptcy judges.

And he predicted: “Nobody will like what a federal judge says. I think people’s pension benefits will get whacked and taxes will go up. And there will be no negotiation because the judge will just say ‘here’s what you’re doing’.

“If you think that’s a good alternative, let’s just do nothing. Because I’m telling you, we’re going to have cities going there.”

Solutions

DePasquale’s department, which audits every municipal pension plan in the state, issued a special report on municipal pensions earlier this year that contains numerous recommendations aimed at averting a widespread crisis.

One of that report’s recommendations is consolidating all those pensions into one statewide pension system for municipalities.

Another recommendation is to end spiking, a tactic in which employees
work “unbelievable” amounts of overtime in their last few years of
employment, which raises their annual salary and favorably impacts their pensions.

DePasquale also said municipalities must become much more conservative in their projected rates of return when making pension fund investments. He said some still expect to get a nine percent return.

He added it would be better to expect three percent and get nine percent than to expect seven, eight or nine percent and only getting three. “It only digs the hole deeper.”

Also on the panel was Republican State Rep. Glenn Grell of Cumberland County, who is trying to consolidate municipal police pension plans into one statewide plan.

“We currently have 965 police pension plans in Pennsylvania,” said Grell. He said more than 300 of those plans have fewer than three members and about 650 of them have fewer than 11 members.

“We have all these administrative costs for every one of these plans.
Every one of them has a solicitor, financial advisors and accountants to service a pension fund that benefits three people. That is a big waste of money.”

Grell said much opposition to reform comes from professionals who make their livings off pension plans as well as from some municipalities who like having their own pension plan.

The three cities

Allentown averted its pension crisis by leasing its water and sanitary sewer systems for 50 years.

Bethlehem’s $71 million budget benefits from $9.8 million the city gets for hosting the Sands Casino, said Donchez. He said that $9.8 million is enough to pay for 25 police officers. Without that money, he said: “We would be in very bad shape.”

Donchez said about $23 million of next year’s city budget of about $72 million will go to medical benefits and pensions -- $3 million more than this year. “I probably have a $4 million gap, mostly because of pension and health care increases.”

“This is not sustainable,” said Donchez. “The options are tax increase, lay-offs, a reduction of services or a combination of all three.”

“Our city is doing extremely well,” said Panto, Easton’s mayor. “That means we manage our money well. It doesn’t mean we’re wealthy.”

But he said no matter how well Easton is doing financially, the pension problem always is in the back of his mind

“We have $35 million of bonds,” said Panto. “Twenty-five million dollars of that are pension bonds. I’d have a wealthy city if it wasn’t for pensions.”

Panto said one problem is that, while unionized municipal workers can’t strike, they can go to arbitration for decisions. In the last 15 years, he said, the decisions of those arbitrators have sided with the unions “way more” than they have sided with the cities.

If he was a legislator, said Panto, the first thing he would do is pass a law requiring all new municipal employees to be in the Pennsylvania municipal retirement system.