New Castle News

April 13, 2013

New Castle Finances: Stocks help city’s pension fund to rebound

John K. Manna
New Castle News

NEW CASTLE — The city of New Castle’s pension fund had a good year in 2012.

Due largely to a strong showing in the stock market, the fund increased in value by $2.6 million, or 11.28 percent, over the course of the year.

The increase boosted the fund’s value to $25,905,576, a level not seen since 2008 when the stock market took a nosedive during the recession. The value dropped all the way to $19,462,724 in March 2009 before rebounding to its current figure.

The fund — which covers pension plans for police, fire and nonuniform employees — has approximately 120 active members, full-time employees who contribute to their respective plans. The number of beneficiaries as of March 31 was 178.

Despite the improvement in the pension fund’s value, it is far from being sound, according to the city’s actuary, Mockenhaupt Benefits Group.

As of Jan. 1, 2011, the most recent actuarial report, the fund had an unfunded liability of $15,889,316. The figure is the difference between the accrued liability of $43,478,595 — the cost of benefits for current and former employees — and the fund’s assets of $27,589,279.

Broken down by departments, the unfunded liability for police was $7,405,978, for fire $5,397,185 and for non-uniform, representing all other employees, $3,086,153.

Although the unfunded liability is huge, the city is able to pay current beneficiaries. However, it’s the long-term picture that the actuary addresses.

Actuarial reports are performed every two years with the next one covering a two-year period ending Dec. 31, 2012. The next report is expected to be released in the summer, said Colleen Deer, vice president of Mockenhaupt.

Even though the investments are doing well, it’s the unfunded liability that is creating the most significant impact on the city’s finances and is a major reason the state declared New Castle financially distressed under Act 47 in 2007.

Last year, the city’s minimum municipal obligation to the pension fund was approximately $1.6 million. This year’s is $1.9 million, about 10 percent of the city’s budget. And based on Mockenhaupt’s projections, the city’s MMO as it is called, will increase to $3.2 million in 2015 and $3.3 million in 2017.

New Castle’s Act 47 coordinator said in the city’s financial recovery plan that meeting this obligation “is the biggest financial challenge the city will face” through 2015.



MANDATED EXPENSES

The MMOs are mandated under a 1984 state law that was adopted as a response to municipal funds throughout Pennsylvania that were underfunded.

If the pension problem didn’t exist, business administrator Stephanie Dean said, “More tax money could stay in the general fund to provide current service.”

The 1984 law allowed cities such as New Castle to increase the wage tax above its state-imposed limit to generate revenue to help in meeting the annual MMO.

While the city faces this financial challenge, it is better off now than it was in 2007 with the MMO. Back then, the city owed $1.2 million to cover MMOs for 2005 and 2006. Plus, making its 2007 payment was in doubt. Through borrowing under Act 47, the city was able to pay the obligations for all three years and is now current on its MMOs.

Being under Act 47 also allowed the city to increase the wage tax even further on residents and nonresidents who work in New Castle. That additional revenue has been used to retire debt on two pension funds and the city’s annual MMOs.

The actuary calculates the MMOs every other year and bases them on the cost of benefits for employees in the current year, payments to cover the unfunded liability and administrative expenses. Employee contributions are then subtracted to come up with the MMO.

The unfunded liability is amortized over a period of years much like a home mortgage.

Besides wage tax revenue, state aid goes toward funding the MMO. If any deficit remains, money must be transferred from the general fund, Dean said.

For this year, the city received $600,000 in state aid and $450,000 from wage tax collections, leaving a deficit of $889,750. That money was transferred from the general fund, which is used to cover daily operating expenses.

The additional wage tax revenue helped bring some sense of stability, but as the city’s Act 47 coordinator notes: “The stock market crash severely reduced the value of many organization’s investments. New Castle’s pension fund was caught in the national trend.”

Because the crash severely reduced the value of the fund, the unfunded liability increased as a result, thus resulting in a larger MMO.

The state Legislature amended the 1984 law in 2009. One of the chief provisions in the act was permitting municipalities to contribute 75 percent of their amortization payments. New Castle did this for 2011 and 2012.

However, that can be a double-edged sword.

David Stimpson, enrollment actuary of Mockenhaupt, said that lowering the contribution requirement in those two years results in “slightly higher contributions being required for the next 20 years.”

The city has few options to meet the MMOs: Raise the property tax, find some other recurring sustainable revenue or dip into reserves.

The Act 47 coordinator recommended last year that the city increase the property tax by one mill for 2013 and another mill for 2015. City council, however, with the coordinator’s approval, has budgeted $410,000 from funds it received for Marcellus Shale gas leasing rights to offset a one-mill tax increase.

The coordinator also agreed that if the city finds recurring sustainable revenue, a tax hike could be avoided for 2014 and 2015.



ALTERNATIVE OPTIONS

A balance of $1,010,934 remains from the Marcellus Shale funds. However, Dean said those funds have to be used for capital improvement projects, payment of debt or the pension fund. The money can be used toward the pension fund, but only in addition to the MMO, she said. Under the recovery plan, the city cannot use the funds again to offset a tax increase, she said.

The city also has built up a reserve of $2.7 million since becoming distressed. Dean said the reserve can be used for any purpose, but the mayor must make a recommendation, which has to be approved by council.

For the long term, one option is to have employees increase their contribution level and move toward a defined contribution plan for future employees. Earlier this year, council authorized Mockenhaupt to conduct an analysis of a defined contribution plan for future nonuniform employees.

Minimum pension benefits paid to city employees are governed by state law.

Both police and firefighters agreed to modifications in previously negotiated contracts for benefit changes for employees hired in recent years. For police, the benefits change for those hired after Jan. 1, 2008, and for firefighters, those hired after Jan. 1, 2007.

The city’s contract with Lodge 21, Fraternal Order of Police, expired Dec. 31. Police and the administration continues to negotiate on a new agreement, according to Mayor Anthony Mastrangelo.

A seven-year agreement with Local 160, International Association of Firefighters, expires this year. Talks are under way on a new pact.

Rich Johnson, union president, noted that firefighters made some concessions in the current contract. One was increasing firefighter contributions from 5 percent to 7 percent of pay.

What may happen with negotiations on a new contract, he added, is “hard to say.”

Mockenhaupt has recommended the city lower its interest earnings assumption on investments from 8 percent to 7.5 percent. Lowering the assumption will require the city to increase its MMO beginning next year. That, in turn, will improve the funding level. If the earnings are higher than 7.5 percent, the additional earnings will help lower future MMO payments.

The mayor said dealing with the pension issue is “going to be very difficult for us.

“It’s a difficult situation for us and for other communities.”

A solution to the problem needs to come at the state level “because we’re all suffering.”

Mastrangelo ruled out a bond issue to reduce the MMO in future years. The city currently is making payment on two pension bond issues.

Even the Act 47 coordinator says in the recovery plan that issuing pension bonds involves risk because of market factors and that the benefit is short-lived while the debt can last for decades.

So how long will it take for the city to eliminate the unfunded liability?

Deer said the most recent actuarial valuations show amortization payments continuing until 2032.

She said that if all the actuarial assumptions “we are making” are met and a return on investments continue, the unfunded liability should be zero after 2032.

(Email: jmanna@ncnewsonline.com)