3rd Annual Public Pension Summit

PUBLIC
SUMMIT By Bruce Barron, a frequent writer on
LEXUS CLUB AT PNC PARK MAY 20, 2011 issues of policy and politics

An Unmistakable Mood of Reform
Tempered by a heavy dose of political realism, pension reform was in the air as the Allegheny County
Retirement Board hosted its third annual Pension Summit on May 20, 2011, at PNC Park’s Lexus Club.

“We’re under a different kind of pressure and scrutiny these days because of the size of the pension
problem and what it will take to fix it”, said Tim Johnson, summit organizer and Allegheny County plan
trustee, in his opening remarks. Pa has a $5 billion unfunded liability in municipal pensions; add SERS
and PSERS that figure explodes by 2015. “ He and many of his Allegheny County colleagues emphasized
consistently that this pension summit was part of the effort to be proactive and encourage tough but
prudent decisions before their options narrow further.

Pennsylvania Senate Minority Leader Jay Costa (D-Forest Hills) summarized the status of state public
employee pensions, including the reforms passed in 2010. Cost-saving measures included raising the
minimum retirement age with full benefits from 60 to 65; raising the tenure required for full vesting from
five years to eight; and dropping the multiplier used to calculate retiree benefits from 2.5 to 2. Costa said
these changes will result in employer savings of $2.8 billion over 30 years.

Costa indicated that no further changes in state pension
provisions are likely in the near future, but he expressed
hope that legislation to reduce “spiking” by county and
municipal employees, championed by him and State
Rep. Matt Smith (D-Mt. Lebanon), could move forward
in this session. The legislation would base pensions on
an employee’s last four years of salary (rather than the
last two) and would exclude overtime. “I think there is an
appetite to address this issue,” Costa stated, “because we
realize where it is leading.”

Following Costa’s remarks, the participants split up for
two hours of breakout sessions to discuss aspects of More than 120 pension, political, municipal and
the pension funding problem and possible solutions. school district leaders participate at PNC Park’s Lexus
Prominent themes emerging from the discussions are Club.
summarized below.

The Diagnosis
Although causes of the current pension crisis were old news to many of the participants, the discussants
nevertheless generated an impressive array of contributing factors:

• Longevity. As Mary Esther Van Shura, Director of Community Affairs for the Onorato
Administration, pointed out, U.S. life expectancy has grown from 65 years to 78 in the time since Social
Security’s creation. Defined-benefit pensions designed to sustain a retiree for a few years are now providing

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monthly paychecks for decades. In many cases, employees
who retire at age 55 or 60 with 25 to 30 years of service will
live more years in retirement than they worked.
• Generous pension terms. While participants
acknowledged that the physical demands and safety risks
faced by police and firefighters deserve consideration, many
said that the costs have become greater than taxpayers
can support. Jim McAneny, Executive Director of the Public
Employee Retirement Commission, stated that five
Pennsylvania cities are spending more money on police and
fire costs alone than they generate in revenues. Mike Thomas,
manager of Plum Borough, said that police there are retiring “I’m fortunate that I’m not an elected official,”
on pensions 25 percent higher than the borough’s median remarked Jennifer Liptak, Allegheny County
family income. Joe King, President of Pittsburgh Firefighters Council’s Budget Director. “To take a stand for
Local 1, countered that surviving widows of firemen who die on change can be scary. But if we wait, the choices
duty receive an average monthly benefit of just $625 a month; will be made for us.”
“Whatever you do, please don’t touch my widows,” he pleaded.
• Nonmandatory benefits. Pension lawyer Rich Miller, who represents numerous Pennsylvania
municipalities including the City of Pittsburgh, observed that many governments have awarded pension
benefits beyond those required by statute, in such forms as cost-of-living increases or additional increments
for years of service. Many plans, he added, have created a “super-annuated benefit” for employees who take
disability retirement, setting their pensions at 60 or 70 percent of final salary rather than 50 percent—and
thereby creating an incentive for employees to demonstrate a disability before their departure.
• Rosy assumptions. Pennsylvania governments have shown a propensity for taking advantage of
good market returns and assuming they would continue. When returns were high, as in 2000, employer
contribution rates to the State Employees Retirement System (SERS) and Public School Employees
Retirement System (PSERS) were lowered. McAneny of PERC described state legislation of 2003 (after the
previous two years’ negative returns) as “throwing the accounting rules under the bus and making believe
that I will earn my way out of this problem in 10 years by amortizing liabilities over 30 years, but gains over
10 years.” In contrast to Pennsylvania’s practice, Wade Steen, incoming Finance Director of Cuyahoga County,
Ohio, noted that contributions to Ohio’s public pension funds—set at 10 percent for employees and 14
percent for employers—do not change from year to year.
• History of public-sector compensation. As Miller pointed out, generous pensions were enacted
half a century ago to encourage qualified employees to accept the lower wages in the public sector. Now, in
many cases, the wages aren’t so bad—some kindergarten teachers and bus drivers earn $100,000 a year—
but the pension benefits remain. Miller concluded, “We now have public-sector employees that we can no
longer afford.”
• Political interests. Former state legislator and current Allegheny County Councilman Bill Robinson
provided a no-nonsense explanation of why many public employees receive nice pensions: “It seemed like
a good idea many years ago to use public money to negotiate political support. So we public officials made
a very promising pension program available to people whom we wanted to love us. Except that now the
money has run out.”

Spiking: Whose Fault?
With Matt Smith, prime sponsor of state anti spiking legislation, moderating one of the breakout sessions,
the spiking problem got detailed attention. Smith presented some imposing figures on what he called
“the Allegheny County Pension Preservation Bill.” According to his calculations, a hypothetical employee
retiring at age 55 on a final salary of $56,400 and actively accumulating overtime during his last two years

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of employment could earn an annual pension of $91,000. With the provisions of Smith’s bill that number
would be reduced to $34,800. The difference over 20 years would be more than $1.1 million—for just one
employee.

While participants questioned, as actuarial consultant Mike Dieschbourg put it, “whether the implicit social
contract entailed in pension promises was ever intended to encompass overtime,” many pointed out that
there is more to the spiking story than employees creatively gaming the system. Joe King noted that the
total complement of Pittsburgh firefighters has been reduced from 895 in the year 2000 to 625 today, saving
salary costs, but necessitating greater use of overtime.

Steen, who also serves on a municipal council in Ohio, declared, “The only way that spiking can happen is
if the manager is not managing overtime. People don’t just show up [for extra hours], they get scheduled.
Someone is failing to manage the overtime budget and busting the pension budget besides.”

Van Shura pointed out the significant gender differences in relation to spiking, noting that female
employees (except for teachers) tend to receive pension benefits based on lower salaries, but live longer
after retirement; of Americans aged 85 years or older, more than two-thirds are women.

Schools: Way Out of Balance
Pennsylvania school districts face a distinct set of fiscal challenges, including the significant funding cuts
contained in Governor Corbett’s first budget plus legislative proposals to enact a school voucher program
and further limit school boards’ ability to raise taxes without a referendum.

Mt. Lebanon School Board Director Faith Stipanovich explained two dynamics that inflate school pension
obligations in ways analogous to spiking in municipal and county governments. First, teacher contracts
generally include a “jump step” that rewards veteran teachers, usually after 15 years of employment, with a
large salary increase. Second, teachers can increase their total pay in the years prior to retirement by taking
on various extra duties, with additional compensation stipulated in the contract.

Mike Panza, who deals with school finance issues as both Superintendent of the Carlynton School District
and Moniteau (Butler County) school board member, pointed out that the 1992 legislation (known as the
Mellow Bill for its sponsor, State Senator Robert Mellow) that
let teachers retire after 30 years of service rather than 35 with
no pension penalty “put a lot more people in the retirement
system, and now we are starting to pay for it.”

The Republican-led General Assembly is moving to remove
the ten exceptions that school districts can cite in order to
raise taxes by more than the stipulated maximum. Van Shura
said that 22 percent of the exceptions claimed have been
due to rising pension obligations. Other cost-cutting ideas
included changing the reimbursement formula for cyber-
charter schools and rebalancing the bargaining environment
by docking teachers a day’s pay if they go on strike. Mike Panza, Superintendent of Carlynton
School District (standing)

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Still More Opportunities
The summit’s closing session brought together a wide
variety of players who have made innovative contributions
toward addressing pension-related issues.

First to speak was Dormont council member Laurie Malka,
who became an unintentional rabble-rouser last fall when
she sought to educate her constituents on pension costs
through the borough’s newsletter. Malka told summit
attendees that, in her judgment, Dormont has had “20
State Senator Jay Costa, Senate District 43 years of inept labor negotiations and inadequate contract
David J. Mayernik, Eckert Seamans Cherin & Mellott, LLC
Jennifer Liptak, Budget Director, Allegheny County
oversight, ending up with benefits that are now exorbitant.”
Council, RBAC Trustee Her newsletter article explained how borough staff used
Joseph King, Secretary/Treasurer, Firemen’s Relief and spiking strategies to increase their pension entitlement
Pension Fund, City of Pittsburgh to as much as 90 percent of their final base salary. To help
residents understand clearly the extent of the problem, a
chart accompanying the article displayed each employee’s salary without names, but with job titles.

Amidst the heated reactions to this article, Malka discovered that most residents thought spiking didn’t
cost the borough any money. On the contrary, she said, Dormont’s minimum municipal obligation (MMO,
the amount it must contribute to keep its pension system properly funded) rose from $130,000 to $177,000
in a single, two-year cycle. State aid (under Act 205 of 1984) currently covers this cost, but Malka said
the borough is in effect “cosigning a loan” because, should the state aid go away, Dormont will still be
responsible for the payments.

Wade Steen summarized the provisions of public pension reform legislation under development in Ohio.
He indicated that the state legislature is expected to increase the retirement age by two years and to base
pension calculations on the employee’s five highest salary years rather than the highest three.

Both Moe Coleman, Director Emeritus of the University of Pittsburgh Institute of Politics, and Joe King cited
inequities in the state pension aid formula, which calculates payments to municipalities based on their
current workforce. As a result, many suburbs (like Dormont) have their pension contributions fully state-
funded while cities with shrinking workforces and large numbers of retirees receive only a fraction of what
they need. Coleman also called the amazing fragmentation of Pennsylvania’s public pension system, with
more than 3,100 plans, a source of inefficiency. In the two years since the Institute of Politics recommended
consolidation of small pension plans, 47 new plans have been created—of which just four have more than
10 employees enrolled.

Paul Brahim, a partner with BPU Investment Management, focused on a more practical issue: helping
employees do financial planning prior to retirement. He said that, according to a Wharton Business School
study, 49 percent of high-paid employees reported having taken time off to deal with a financial crisis. Firms
like IBM, Brahim noted, offer financial counseling to employees long before they approach retirement age.
Failure to plan leads to absenteeism, but also “presenteeism” which is the situation where employees come
to the office but spend significant work time on personal concerns, such as resolving their financial issues
online.

Brahim also offered suggestions as to how employers, especially if they offer defined-contribution pension
plans, can provide appropriate investment education to their employees so as to protect against the risk of
litigation alleging breach of fiduciary duty.
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Summit Consultant Dorien Nuñez warned governments considering a switch from defined-benefit (DB) to
defined-contribution (DC) plans that they do not deliver the savings hoped for and bring other problems
with them. Noting that West Virginia reverted to DB public-sector pensions after switching briefly to DC,
Nuñez suggested that DC plans are more about shifting risk to employees than about saving money,
and that they do not achieve higher returns. “If a water main breaks, I don’t want my city employees busy
watching CNBC because they’re worried about their retirement plan investments,” he stated.

Jim McAneny reminded listeners that the pension problem gets worse every day, because the Pennsylvania
Supreme Court has held consistently that, once a benefit is promised to a public employee, it can never
be taken away. “So we have to do something going forward and not dig the hole any deeper or bring new
people into a benefit system that is not sustainable,” he stated. Noting that municipalities are required to pay
the calculated minimum municipal obligation but that the state has no such requirement, McAneny said
that during the last 15 years Pennsylvania has not paid sufficient money into SERS and PSERS to keep them
fully funded.

“We have to get the entire compensation system for government employees redone at the state level,”
McAneny concluded. “The answers are simple, but politically impossible.” A major effort will be required to
press the General Assembly into action.

The Solutions Tool Box
Just as the summit identified numerous causes of the present pension woes, it also generated a variety of
possible solutions. Following is a series of options for pension managers and elected officials to consider:

• Use more reasonable assumptions regarding annual return on investments. County controller Mark
Patrick Flaherty observed that the former standard assumption of an 8 percent annual return is
often being lowered to 6 percent, which he believes will provide a more realistic picture and give
governments a better chance of solving their funding problems.
• Raise the retirement age; even a two-year increase delays everyone’s access to pension monies for
two years, thereby making a huge contribution to plan solvency.
• Raise the number of years required for employees to become fully vested.
• Change the accrual percentages used to determine how much of the employee’s salary is
accumulated in pension rights for each year worked.
• Calculate pensions based on the last four or five years of base salary rather than the last two or
three.
• Implement anti-spiking legislation.
• Follow Ohio’s example and grant employers no
holiday on pension fund contributions.
• Change the state aid formula to assist struggling
cities more.
• Place a minimum yearly contribution requirement
upon state funds, just as is now required for
municipal pensions by the Public Employees
Retirement Commission.
• Eliminate nonmandatory contributions to the
pension fund.
Vince Larence of Twin Capital (left), Jed Robie of
Federated (center), and Craig Moyer of Stoneridge
Investment Partners (right).

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Tim Johnson
Acknowledgements Summit Organizer

Presenters Jim Perry Snow Capital Management
Executive Director David Mathews
Edwin R. Boyer PA Association of Public
Principal Employee Retirement System
Asset Strategy Consultants Eckert Seamans Cherin & Mellott, LLC
Bradford L. Rigby David J. Mayernik
Paul Brahim Senior Consultant and Actuary
Executive Vice President Cowden Associates, Inc.
BPU Investment Management, Inc.
Asset Strategy Consultants
Edwin Boyer
Randall Rhoades, Esq.
Morton Coleman Rhoades & Wodarczyk LLC
Director emeritus, Advisor Draper Triangle Ventures
University of Pittsburgh William Robinson Jay Katarincic
Institute of Politics Allegheny County Councilman
Jay Costa ValStone Partners
Matt Smith
State Senator State Representative Larry Jennings
Mike Dieschbourg Wade Steen
Managing Director President
RBAC Trustees
Broadmark Asset Management Steen & Company
John K. Weinstein
Vincent Gastgeb Allegheny County Treasurer
Mary Esther Van Shura, Ed.D. RBAC Chairman
Allegheny County Councilman Director of Community Affairs
Office of County Executive Dan Onorato
Joseph King Ted Puzak
Secretary/Treasurer RBAC Vice Chairman
Firemen’s Relief and Pension Fund Sponsors
City of Pittsburgh Mark Patrick Flaherty
Twin Capital Management Allegheny County Controller
Michael Lamb Andy Balogh RBAC Secretary
City of Pittsburgh Controller
Federated Investors William Gallagher
Nancy Luttrell RBAC Trustee
Vice President, Retirement and Actuarial Services
Jed Robie
Cowden Associates, Inc. Timothy H. Johnson
Mellon Capital Director of Administrative Services
Laurie Malka Diane Hallett Allegheny County
Councilperson RBAC Trustee
Borough of Dormont
PIA
Jennifer Liptak
David J. Mayernik, Esq. Christine Sasse Budget Director
Eckert Seamans Cherin & Mellott, LLC Allegheny County Council
BNY Mellon RBAC Trustee
James L. McAneny Carlos Pacheco
Executive Director Dan Onorato
Public Employee Retirement Commission Allegheny County Executive
iNetworks
RBAC Trustee
Rich Miller, Esq. Anthony Lacenere
Partner
Campbell Durant Beatty Palombo & Miller P.C. PFM Advisors
Dorien Nunez John Spagnola
Managing Director
Omniresearch

Summit Consultant: OMNIResearch
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3rd Annual Public Pension Summit

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