Senate Approves Municipal Pension Relief Measure

Amended version of HB 1828 provides assistance to distressed communities

The Senate today approved legislation designed to aid Pennsylvania’s ailing municipal pension plans, according to Senator Pat Browne (R-16), author of an amendment that expanded the bill to include communities across the Commonwealth.

House Bill 1828, as initially approved by the House of Representatives, only addressed the pension crisis facing Philadelphia. Senator Browne amended the legislation when it came before the Senate Finance Committee, of which he is the Chairman, to expand the scope of the municipal pension relief to include all municipalities based on their level of funding for their individual programs.

The measure now returns to the House of Representatives for concurrence on amendments.

Senator Browne said two recent public hearings by the Finance Committee on municipal pension issues provided valuable information that assisted him in drafting the amendment.

"Philadelphia is facing a crisis in maintaining its support for its pension plan and so are many other municipalities across the state," Senator Browne said. "We worked to develop an assistance program that would be more than a hand out, but rather would help communities work their way out of the problem. In the worst cases, some plans will be taken over by the state to restore solvency and protect the benefits of their employees and retirees."

Level I municipalities, those at funding levels ranging from 70 percent to 89 percent, would be considered to be in minimal distress. They would see a reduction in contribution limits for two years.

Level II municipalities, those at funding levels from 50 percent to 69 percent, would be considered to be in moderate distress. They would see a reduction in contribution limits for four years and be required to submit an administrative improvement plan. They would also be restricted from increasing pension benefits until specified conditions are met.

Level III municipalities, those at funding levels below 50 percent, would be considered to be in severe distress. They would be required to enter a Municipal Pension Recovery Program and be administered by the Pennsylvania Municipal Retirement Board. They would have to revise their benefit plans for new hires to provide for a traditional defined benefit plan and/or a defined contribution plan (such as a 401k) that requires employee contributions of at least 6 percent of payroll and a matching employer contribution of 6 percent.

"Currently, state statutes provide a complex formula for determining the health of municipal plans. This formula is cumbersome and extremely difficult to apply. This bill simplifies the process by establishing clear definitions of three levels of distress and the relief available based on the severity of the municipality's unfunded liability," Senator Browne said. "The provisions of this bill are necessary to improve the conditions and accountability of pension plans across the Commonwealth."

HB 1828 provides Philadelphia with a 30-year "fresh start" for amortizing its unfunded pension liability and allows the city to defer up to $155 million in pension funding in 2010 and $80 million in 2011. The deferred funding must be repaid, including 8.25 percent interest, by June 30, 2014.

The legislation also permits Philadelphia to temporarily increase its sales and use tax by 1 percentage point, from 7 percent to 8 percent. All revenue received from the sales and use tax increase must be applied toward its pension funding obligation. The temporary tax increase would expire on July 1, 2014.

Philadelphia must freeze pension benefits for current employees and submit a revised plan for new hires by September 10, 2009. The new plan cannot cost more than 80 percent of Philadelphia’s current pension plan. The legislation also bars elected officials from participating in a deferred retirement option plan (DROP) addressing recent concerns in Philadelphia.

HB 1828 also incorporates new provisions creating a code of conduct for municipal pension systems, which will be required to adopt policies regarding conflicts of interest – including "revolving door" policies for employees of the system and contractors.

The legislation also bars contractors from giving gifts to pension system officials and employees. Contractors also will be barred from making campaign contributions to pension system officials.

"The code of conduct provisions of this bill ban actions that are inappropriate and unacceptable," Senator Browne said. "Pension fund managers have a basic responsibility to uphold the trust of those they serve. The reform measures strengthen that trust and restrict actions that could be interpreted as inappropriate."

Contact:

Stacey Connors
(717) 787-1349