Pittsburgh’s multimillion-dollar pension liability is set to balloon to $1.04 billion today, when city officials must comply with a state requirement to report retirement obligations to police, firefighters and other city workers. With $296 million on hand in February, the city has about 30 cents for every dollar required to cover pension promises to about 3,200 employees and thousands of pensioners.
Mayor Luke Ravenstahl wants to avoid a state takeover of the pension funds looming at year’s end by depositing at least $200 million from a controversial plan to lease city parking garages and meters for 50 years to a private firm.
“They’re going to have to be very liberal in their assumptions, if they think that $200 million is going to bring them to 50 percent,” said James McAneny, director of the Pennsylvania Employee Retirement Commission. “They’re going to have to assume really good earnings and that nobody is going to be able to get a pay raise.”
If the fund reaches 50 percent by year’s end, it can remain under the city’s control. If not, the state could require the city to increase its annual pension contribution of $54 million, a level Ravenstahl considers to be painfully high.
McAneny is not the only skeptic.
“I don’t know that it can be done that quickly,” said police Detective Rich Ruffalo, a pension board member since 2004. “It’s taken a year to get to this point with (the lease plan), but the money has to get there by Dec. 31.”
City Finance Director Scott Kunka acknowledged time is limited.
“It’s a short, aggressive time frame that’s there, but on the other hand that does work to our favor from an investment standpoint,” Kunka said. “Investors know our situation and that we’re serious about what we need to do.”
Eleven firms submitted bids, but simply reaching 50 percent wouldn’t qualify the pension fund as healthy, financial experts said, particularly when the pension board set the expected rate of return on investments at a lofty 8 percent.
“It’s one of the worst pension funds I’ve heard of,” said Edward Siedle, president of Florida-based Benchmark Financial Services, Inc.
“Eight percent is an extraordinarily high expected return. Most funds are in the sevens,” he said. “If you fail to meet your investment return, your liabilities grow each year. It’s like setting an unrealistic bar.”
Generally, a pension fund isn’t considered healthy until it reaches 80 percent, said David Lindberg, managing director of investment consultant Wilshire Associates.
Pay raises and retirements are two major reasons the pension liability climbed.
Pittsburgh’s obligations to three pension funds rose 19 percent from 2002 to 2007, or about $146 million, according to the most recent records available.
Half of the increase came from the firefighters’ pension fund. It has the fewest members.
A lucrative four-year firefighter contract in 2001 and a surge of 240 firefighter retirements in 2005 increased the size of the firefighters’ pension liability twice as fast as that of police and municipal workers combined.
According to a list of 32 police and fire retirees who are paid $50,000 or more a year from pensions, 27 are former firefighters and five are former police officers.
Many veteran firefighters retired out of concern they would be required to pay more for health insurance under a state-run financial recovery law called Act 47.
“An increase in salary and an increase in overtime results in a higher level of pension payments,” Kunka said. “It was compounded by the sort of mass exodus of the firefighters.”
The firefighters’ share of the liability shot up $75 million from 2002 to 2007.
During that period, the police portion increased $39.5 million and the municipal workers’ portion (mostly nonunion employees) increased $32 million.
The controversial 2001 firefighter contract former Mayor Tom Murphy approved was worth about $33 million. It gave some firefighters raises of up to 8 percent.
Comparatively, the city’s current five-year agreement with firefighters is valued at $17 million, about half the cost of the 2001 contract.
The 650-member fire union endorsed Murphy just before the primary, which he won by 699 votes over challenger Bob O’Connor.
Joe King, president of Firefighters Local No. 1, said the 2001 contract had little impact on the pension liability. Firefighters deserve higher pensions because, like police, they don’t receive Social Security, King said.
His fear is that a state takeover would spike the city’s pension contribution by $20 million a year.
“Where will that money come from? It is going to come out of operations, the working men and women on the street, and it will impact services,” he said.