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PITTSBURGH, PA (March 16, 2015) Mayor William Peduto this morning addressed the House Urban Affairs Committee, which is in Pittsburgh to hold an informational meeting on municipal pensions. The Mayor supports bipartisan efforts to address the mounting pension costs that are straining city budgets across Pennsylvania.

His remarks as prepared for delivery are in full below:

Testimony to House Urban Affairs Committee on Municipal Pension Reform

Mayor William Peduto

March 16, 2015

Good Morning. Thank you Chairman Petri and all Members for coming to Pittsburgh to hold this important hearing today.

There are two overarching issues that must be addressed to secure our municipal pension plans and ensure that we make good on the promises we have made to our workers for decades to come. The first issue is chronic underfunding of many of the thousands of municipal pension plans across Pennsylvania. The second issue is the byzantine and unwieldy system of administration for these thousands of plans. If we can address these two underlying issues and the symptoms that grow out of them not only will we secure the future we promised for our retirees but we will restore municipalities all across the Commonwealth to stable fiscal footing and begin to remove the looming danger of runaway pension costs once and for all.

Issue 1: Chronic underfunding of municipal pension plans

Symptoms of the problem:

Municipal pension plans in Pennsylvania are currently carrying over $7.5 billion in total debt, a staggering figure that is a constant drain on the ability of local elected officials and city workers to maintain infrastructure, carry out public safety responsibilities, and modernize government. The City of Pittsburgh spends about one fifth of our budget every year just on our pension obligations and despite the radical reforms we have put in place through Act 47 and other initiatives our pension fund is still constantly hovering between 50 and 60% funded. We are expending tens of millions and making sweeping reforms just to keep our heads above water.

And we’re not alone. Local governments across the Commonwealth are dealing with exactly the same problems, as municipal workforces shrink and the number of municipal retirees grows. We’re still operating under a 1970s style pension system while trying to build 21st century governments and it’s long past time that we make some basic common-sense changes to reflect our current needs and priorities. That’s why I stand with elected officials like Governor Wolf and Auditor General DePasquale and groups like the Pennsylvania Municipal League and the Coalition for Sustainable Communities in calling for real municipal pension reform that protects retirees, ensures a good pension for current workers, and sets up a framework that will allow us to meet the needs of future employees.

There are some clear steps the General Assembly could take to address these problems now and you will have my full support and, I expect, the support of hundreds of local elected officials across the Commonwealth dealing with this same challenge. It is our responsibility to stop kicking the can down the road and to address this challenge head on, now, before it grows beyond our ability to do something about it.

Solutions to the problem:

  • Eliminate the practice of ‘spiking’ overtime used in order to artificially inflate pension benefits;

  • Bring retirement age and service requirements for full pension eligibility into line with updated life expectancies;

  • Shift to a more cost-contained pension system for new hires;

  • Establish consistent member contribution provisions;

  • Amend the current formula of state aid distribution under Act 205 to provide for additional state aid to distressed municipalities on the condition that they meet certain requirements such as funding plans in accordance with Act 205 standards, capping benefit increases, putting in place a new benefit structure for new hires, and ensuring that both the employee and the employer are already contributing to the fund.

  • Additionally, Act 205 pension aid payments should be based on the number of retirees, not the number of current employees.

  • Limit the percentage of aid that can be provided by the Commonwealth and require that all municipalities contribute a baseline percentage of their total plan liabilities;

  • Create a new acceptable standard range for rate of return assumptions that is more in line with current economic conditions;

  • Require public reporting of pension costs, broken down by plan;

  • Mandate reductions in administrative and overhead expenses.

Issue 2: Administration challenges of municipal pension plans

Symptoms of the problem:

Pennsylvania is home to over 3,000 individual municipal pension plans, more than 25% of all of the municipal pension plans in the entire country. This extreme decentralization has led to extreme inefficiencies, high costs of administration, and the loss of economies of scale. Many municipalities simply don’t have the capacity to manage their plans and make successful investments, to comply with statutory rules and guidelines, and to do the long term actuarial analyses necessary to budget appropriately. Even for the larger municipalities that have the staff to perform these functions there are significant annual costs for outside consultants and analysts to assist. These inefficiencies and duplication of efforts are draining municipal coffers and diverting scarce resources away from the basic services that we should be providing to our citizens.

Solutions to the problem:

  • Work with DCED or another state agency to develop an oversight, standards, and training regime to assist local governments in complying with statutory rules regarding plan funding and administration.

  • Begin to develop a plan to consolidate the thousands of municipal pension plans in the Commonwealth into several jointly administered plans based on employee class;

  • Modernize plans by including portability options that would allow municipal employees to change jobs without fear of losing their accrued benefits and service times;

Thank you.