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July 12, 2014

While state stalls, local governments solve pension mess

CNHI — While the state Legislature has been unable to shift away from the defined-benefit pension style that is creating a crippling unfunded liability, small rural governments have quietly been adopting pension plans that don’t carry the same risks.

A new study by the Center for Rural Pennsylvania found that four in 10 rural townships and boroughs use 401(k)-style pensions for their employees. And most of those plans are in no financial difficulty at all.

In contrast, the city pensions and the state-run pensions for state government employees and public school employees are teetering under the weight of future costs that far outstrip what they will have in the bank.

The pensions for state employees and public school employees are burdened by a combined $50 billion unfunded liability.

Gov. Tom Corbett has endorsed plans to shift future public school and state government workers into 401(k)-style plans.

Despite repeated pleading from the governor, the Legislature recessed for the summer without taking any major action on pension reform.

The House failed to pass any legislation; the Senate passed a bill that would move elected officials — including lawmakers and the governor — into 401(k)-style plans, while not forcing other government employees to follow suit.

In 401(k)-style plans, most common in the private sector, the employer and employee both contribute, but the pension benefit is determined by how much is in the employee’s account at retirement.

Under the defined-benefit approaches used by both the State Employee Retirement System and the Public School Employees Retirement System, the employee’s pension payments are guaranteed, based on a calculation that includes years of service and the average salary of the worker at the end of his or her career.

Corbett has become so frustrated by the General Assembly’s failure to act on pension reform that on Thursday, he used his line-item veto powers to cut $65 million from the Legislature’s budget and axed more than $7 million in earmarks tucked into the budget.

That included $5 million the Legislature had agreed to pay for parking around the Capitol.

“They are a full-time Legislature,” Corbett told reporters Thursday. “They need to return and enact meaningful pension reform.

Corbett noted that about one-third of Pennsylvania school districts this year asked the state for permission to raise taxes above the rate of inflation in order to cover pension costs.

In Lawrence County, both Ellwood City and Wilmington did so.

At the same time, local townships and boroughs with pensions have avoided the crisis.

“Using 2011 data, only 27 of the 3,207 municipal plans across the Commonwealth were classified as “severely distressed,” said Courtney Accurti, a spokeswoman with the Pennsylvania State Association of Boroughs.

“A very significant majority of local governments across Pennsylvania are out-performing state consolidated systems due to local use of defined contribution plans and prudent investment oversight.”

Accurti said that more local governments are looking to make the switch away from defined-benefit plans.

Even more local public pensions would be 401(k)-style plans if the state allowed it, said Elam Herr, assistant executive director of the Pennsylvania State Association of Township Supervisors.

Under current law, police and firefighters must be provided the same sort of defined-benefit pensions used for state workers.

Herr said his organization has lobbied for the freedom to make changes to the police and firefighter pensions.

(Email: jfinnerty@cnhi.com)

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