Scranton pension funds face challenges on road to recovery

Jan. 28--With the sale of its sewer system, Scranton is poised to get its severely distressed pension plans back on track.

However, pension experts caution city officials may just be throwing good money after bad if they do not properly manage the funds going forward.

"If they don't do anything to change the way they've been doing business, the hole is just going to grow again ... and they will go right back to where they are," said attorney James McAneny, former executive director of the Public Employee Retirement Commission.

To ensure the funds' survival, city officials must commit to making long-term changes that will increase funding and rein in expenditures, said state Auditor General Eugene DePasquale.

"Any infusion of cash, assuming it's properly managed, is going to be a positive," Mr. DePasquale said. "It's still going to take years of discipline to move forward and get it fully on track."

City officials say they are committed to doing that.

After a 2014 Times-Tribune investigation exposed myriad problems with the city's pension funds, Mayor Bill Courtright vowed to take action to right the wrongs that have left the police, fire and non-uniform funds on the verge of insolvency.

In the last two years, his administration made some progress, but officials acknowledge more must be done.

The efforts, so far, have paid off. The composite pension fund, which consists of the police, fire and non-uniform funds, ended 2016 with $59.4 million in assets, the highest market value since 2011.

Continuing that trend will not be easy, Mr. McAneny said, but the city is clearly on the right track.

"Getting it under control is going to be painful," he said. "The bottom line is, this is a real debt. Someone, one way or another, is going to have to figure out how to pay the bill."

The city received $70 million from the sewer sale thus far, with the potential to reach $83 million after funds placed in escrows for various expenses are returned to the city over the next few years.

Officials still are working out final details, but expect to announce soon how much of those proceeds will go toward pensions.

Here is a look at the major issues that impact the funds, what the city and pension boards have done to address them and what still needs to be done:

Disability rate

Problem: The city has the highest percentage of police officers and firefighters receiving disability pensions in the state, with 58 percent of retired firefighters and 50 percent of retired police officers on disability.

Resolved: City officials made addressing the high disability rate a priority.

In early 2015, the administration negotiated new contracts with the police and fire departments that included new rules for determining if an employee qualifies for a disability pension.

Previously, workers qualified if two of three doctors -- one chosen by the employee, one by the pension board and a third neutral party -- agreed. The unions agreed that the decision now will be left to a single physician, with no city or union ties, who specializes in the field of their injury.

Unresolved: City officials pledged they would investigate enacting an ordinance to allow the city to require disabled employees to get re-examined to determine if their disability persists.

They also said the city would investigate enforcing an existing ordinance that allows the city, under certain conditions, to reduce the amount of the disability pension if the employee becomes re-employed elsewhere.

To date, no action has been taken on either of those matters.

Scranton Business Manager David Bulzoni said the issues have been discussed, but no plan has been developed. The administration will revisit the matter once it implements a separate agreement it reached with the police and fire unions to appoint a third-party administrator to oversee the pension plans.

Plans underfunded

Problem: The city underfunded significantly the pension plans.

From 2011 to 2016, the city legally shortchanged the funds of $15.9 million by taking advantage of Act 44, a state law that allows municipalities with distressed pension funds to reduce their required contribution, known as the minimum municipal obligation, or MMO, by 25 percent.

Resolved: City officials acknowledged the reduction hurt the funds' finances, but said they had no choice because they did not have the money to pay the full MMO, which, with the reduction, ranged from $4 million to $14 million. Without the reduction, the MMO would have ranged from $4.9 million to $18.7 million.

Mr. Bulzoni said the city succeeded in meeting one goal: it paid the MMO by the required Dec. 31 deadline the past two years. Prior to that the payment was late, which resulted in significant interest penalties.

Unresolved: Act 44 limits the MMO reduction to six years, which meant 2016 was the last year the city could take the cut.

Mr. Bulzoni said the city is committed to making the full payment. If the funds' financial condition continues to improve, as expected, the city may be able to pay more than the required MMO, he said.

"Even if it's a small amount, anything beyond the MMO will certainly be helpful to the plans," he said.

Paying out more

Problem: Up until last year, annual payouts from the funds exceeded contributions. Over the past several years, the funds paid out $13 million, but took in just $11 million annually.

Resolved: Though it was unable to increase its contribution, the city negotiated increases in police and firefighter contributions in contracts signed in 2015. The contribution rate, which was 3.5 percent in 2014, increased each year, topping off at 6 percent this year.

The police and fire unions also agreed to forgo $2.1 million in interest they were due as part of a settlement of the back pay award that stemmed from a 2011 state Supreme Court ruling. Instead, that money was deposited in the pension fund.

Those deposits coupled with the city's on-time payment of the MMO put the fund in the black as of the end of 2016, with total contributions of $17.5 million and distributions of $12.9 million.

The pension board also kept administrative expenses in check. The pension fund paid fees of $185,258, or an average of $457 per employee, in 2013, the latest year for which data is available. The state average for similarly sized plans was $414 per member, according to data from PERC.

Unresolved: The city also wants to reduce payouts, but doing so is difficult because it cannot unilaterally cut benefits. The city and non-uniform pension board are challenging issues that could increase payouts, however.

The non-uniform pension board is continuing its battle to halt double pensions that never were authorized properly for 35 employees who retired in 2002 and 2007.

As of last year, the board settled 12 of the cases. The cases of the remaining employees went before two hearing examiners, who are expected to rule some time this year.

The city is engaged in its own fight with the police and fire unions over two issues: raises for retirees and a dispute over the age at which police officers can retiree.

Since 2014, the city has refused to pay retired police officers and firefighters a 0.87 percent increase in benefits because the pension funds are financially unsound. A Lackawanna County judge recently heard arguments on the matter and is expected to rule soon.

A more concerning issue relates to a dispute that developed in March 2015, over three ordinances passed in 1987, that set the retirement age at 55 for police, firefighters and non-uniform employees. For an unknown reason, the age requirement was omitted from the police ordinance.

The city maintains it was a clerical error, but the union disputes that. The case went before an arbitrator in April 2015, but no ruling has been issued yet.

If the arbitrator rules in the unions' favor, the plans' actuary determined it would add $6.2 million in liabilities to the pension fund and require the city to pay an additional $888,046 annually to the plan for the next 15 years.

With limited options to reduce expenditures, the city must also commit to increasing its contributions to the funds, Mr. McAneny said. That includes making changes to actuarial assumptions -- most importantly the assumed rate of return on investments -- it uses in determining how much money to put in.

Scranton has assumed an 8 percent return on investments, despite repeated warnings from its actuary that the figure is not realistic. A report prepared last month by the funds' former investment manager, BNY Mellon, shows that it has not met that rate in years.

Mr. McAneny said he believes the rate should be no more than 6 percent to 6.5 percent.

Mr. Bulzoni said the city realizes its assumed investment return is too high. Just like the MMO reduction, it has had little choice but to assume that rate because dropping it lower would require the city to pay more into the fund than it could afford, he said.

Even so, he said he hopes to reduce the assumed rate to 7.5 percent in the near future. The city should be able to do so because the infusion of the sewer cash will reduce the unfunded liability, which will reduce the MMO. The increase in MMO that would come with reducing the assumed rate would be offset by the reduction caused by the fact the fund is in better condition.

Lax oversight

Problem:Oversight of the administration of the plans has been lax.

The Times-Tribune's 2014 investigation revealed city administrators, council and pension board members made multiple mistakes in managing the plans that could have been avoided had matters been more thoroughly investigated.

The most glaring example involves the double pensions that were awarded to employees who took a 2002 retirement incentive former Mayor Chris Doherty offered.

The newspaper's findings, which the auditor general's office later confirmed, found that city council enacted several ordinances, but none of them specifically authorized the doubling of the pensions.

Resolved: The city has taken some steps to address this issue, but it is not fully resolved yet.

Unresolved: Mayor Courtright announced in April that the unions agreed to the appointment of a third party administrator for the pension plans.

It remains unclear precisely what role the administrator will play because the city has not finalized the details.

Mr. Bulzoni said the administrator likely will work in conjunction with the three pension boards, which will continue to exist. Newly appointed city solicitor Jessica Boyles now is preparing a request for proposals that will be sent out seeking interested parties.

Council members say they also are determined not to repeat mistakes of the past. In November, they voted to seek records of a criminal probe the state police conducted. Council subpoenaed the records, but state police refuse to turn them over. A Lackawanna County judge will rule on the dispute.

Contact the writer:

[email protected]

@tmbeseckerTT on Twitter

___

(c)2017 The Times-Tribune (Scranton, Pa.)

Visit The Times-Tribune (Scranton, Pa.) at thetimes-tribune.com

Distributed by Tribune Content Agency, LLC.