Who polices pensions?
Happy Finance Friday! Earlier this week, I was in Chester, Pennsylvania, meeting people and doing more reporting for my series on Route Fifty. This week’s piece, the second of three planned installments, focused on the city’s financial management with a deep dive into its pension system. It took me longer than usual to write this particular story because A) It’s unusual and complicated and B) Getting to the bottom of these issues felt a little like doing the un-funny version of Abbott and Costello’s “Who’s on First?” bit. My queries tended to lead to more questions instead of answers.
An underlying issue here is that there’s really no enforcement mechanism with any teeth when it comes to responsible pension funding. In this companion piece to the series, I’ll get into what that’s about and who really pays.
A chronology of pension neglect
Chester’s pension woes are about more than under-funding. As I outlined in my story, the system’s form of accounting hid the full amount of the city’s unfunded liabilities. What’s more, the liabilities could be even higher depending on the outcome over a dispute over what the actual pension benefits are for the city’s cops.
I got curious about how long it took for the overall plan to decline. A key turning point is when the city increased benefits—then stopped making its full pension payments. This neglect is not unique to Chester. While the benefits and accounting issues are unusual, the combo of increased benefits and shorting the annual pension bill is a story repeated across the country. The only difference is how long it takes to do something about it.
Big picture, the overall decline and lack of compliance by the city’s police pension was a known quantity for years. The following is Chester’s timeline but I encourage you to consider how this compares to your own municipality before casting judgement.
2003 - 2007: Chester’s police plan improves from 49% funded to 62% with nearly $27 million in assets. (2010 audit report.) State auditor says Chester has failed since 2001 to reduce its disability pension benefits through collective bargaining to comply with state law for Third Class cities. (This issue still wasn’t fixed as of the 2019 audit.)
2009: The impacts of the recession starts hitting tax rolls.
Pennsylvania passes pension relief legislation that, among other things, allows certain municipalities to defer and phase in their owed pension payments.
Chester’s police pension benefits are reportedly changed to be calculated using the final year’s total pay instead of the average of the final three years.
2011: Chester’s police plan falls to 44% funded with over $23 million in assets (2014 audit report).
2013: The annual pension bill starts going up dramatically. Between 2012 and 2015, the police pension bill nearly triples. (2016 audit.)
2014 - 2020: City stops paying its full annual pension bill, resulting in penalty and interest payments and adding substantially to its unfunded liabilities.
2015: Funding falls to 31% and the police pension is placed in the state's “severely distressed” category.
2016: State audit says the city’s practice of basing pension benefits on the final 12 months’ earnings (including overtime, vacation, sick and personal pay) “has resulted in the average pension benefit…approximating or exceeding each respective retiree’s final rate of base pay.”
Chester’s financial recovery plan warns that, “In addition to significant wage, benefits and overtime costs, the Police Pension Fund is on the verge of collapse.”
2018: “The unfunded liability of the Police Pension Fund is actually much worse than it appears… Assets, not including account receivables, equal just 9.5% of actuarial accrued liability.” - Amended Chester financial recovery plan.
2020: Chester is put under receivership.
2021: The police pension starts the year at 3% funded and $1.5 million in cash assets.
May: “The City’s pension and retiree health care funding situation are the worst of any city in the Commonwealth. The police pension plan remains critically underfunded and close to running out of money to pay pension benefits.” - Chester receiver presentation.
June: Auditor General Timothy L. DeFoor calls out Chester for owing more than $34 million in back payments to all three of its pension plans.
Chester makes its full pension payment for the first time in eight years.
2022: Police plan is approximately 8% funded, with about $7 million in assets, according to the most recent market valuation.
So there you have it. Interestingly, Pennsylvania is one of the few states that has some type of pension enforcement mechanism on the books. Back in 1985 it enacted actuarial reporting and funding requirements for local pension plans, along with a formula for distributing state aid to them. The punishment for not making a full pension payment is: 1) Penalties and fines, and 2) Withheld state pension aid. In Chester’s case, penalty #1 was applied and #2 wasn’t.
There is no such thing as pension police
So if one of the few states with enforcement powers isn’t using it to apply pressure here, is there any entity that really polices pensions?
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