Dec. 20 (Bloomberg) -- A firefighter in Allentown, Pennsylvania, which plans to lease its water system to meet retirement costs, left last year with an annual pension of $99,289, more than double what state law says was due.
Most municipalities in the state, home to a quarter of U.S. public pension plans, show similar disregard for local statutes, said James McAneny, executive director of Pennsylvania’s Public Employee Retirement Commission. They’re paying the price. The liability for the extra payments may approach $1 billion, said Rick Dreyfuss, senior fellow at the Manhattan Institute for Policy Research and the Commonwealth Foundation.
“There is a severe penalty to the taxpayer,” said Jack Wagner, the state’s auditor general, who’s based in Harrisburg. “If you’re offering something you can’t afford, the taxpayer is going to pay more.”
The unauthorized benefits, which some cities resort to partly because they prefer pension perks over raises, add to financial burdens lingering from the recession that ended in 2009. Localities in the sixth-most-populous state face $8.5 billion in unfunded pension liabilities, according to the retirement commission.
With municipal yields near 47-year lows, bond buyers have yet to punish the state for the excess payouts. Investors demanded 0.28 percentage point of extra yield yesterday to own debt of Pennsylvania and its localities instead of benchmark securities, the least since October 2011, data compiled by Bloomberg show.
For communities ignoring the laws, the only sanction the state can impose is withholding pension aid. That step doesn’t apply in most cases, and the auditor general, which disburses the assistance, doesn’t track costs when flagging violations in audits. In 2012, the auditor general distributed about $230 million in such aid.
In Pennsylvania, most cities aren’t permitted to pad pension payments to police and firefighters by including overtime. Philadelphia, Pittsburgh and Scranton are the exceptions. The law also bars consideration of accumulated unused vacation and sick leave. Boroughs and townships employing three or more police officers may also be subject to such regulations.
Yet some municipal officials don’t realize the added perks are illegal, said McAneny, who’s based in Harrisburg. And when violations are flagged, they prove difficult to remove.
Courts are “reluctant to take away benefits,” said Ryan Cassidy, a partner at Eckert Seamans Cherin & Mellott LLC in Philadelphia who represents local governments in labor issues.
Some communities have been unable to negotiate them out of contracts.
Altoona, 98 miles (158 kilometers) east of Pittsburgh, has been told it’s been giving firefighters illegal benefits since at least 2006, said Joseph Weakland, the city manager. The community of 46,300 in May became the latest to enter the state’s program for distressed localities.
Every time the contract is up for renewal, city officials unsuccessfully try to remove a provision giving retirees an additional $100 monthly, Weakland said. That costs Altoona $1,900 a month, according to an audit issued in December 2010. Meanwhile, Altoona has only 76 cents for each dollar of pension liabilities, according to the retirement commission.
“The firemen just don’t want to give it up,” Weakland said. Bryson Peterman, the Altoona fire union president, didn’t immediately return a call.
In most cases, officials won’t face consequences. If illegal benefits result in extra state aid, that amount could be withheld. Since most municipalities already get the maximum sum even without the cost of illegal benefits, nothing happens, McAneny said.
There is no comprehensive tally of illegal benefits granted by Pennsylvania’s 3,228 municipal pension plans, of which 68 percent cover no more than 10 active members. The latest audits for many were for fiscal 2008, and when they note violations, they don’t always state the cost.
It’s up to local governments to negotiate their contracts and to use “common sense,” said Wagner, the auditor general.
Audits of Pennsylvania cities that fall under pension restrictions show that 26 percent have given illegal benefits.
One such municipality was Allentown, a city of 119,000 whose plans are 64 percent funded, according to the retirement commission.
Police and fire contracts inherited by current Mayor Ed Pawlowski have had a “devastating” budgetary impact, said Gary Strathearn, finance director for the city about 60 miles north of Philadelphia.
In agreements struck in 2004, police and firefighters were allowed to retire early and select the period to use as the basis of their pension benefits, which “artificially inflated” them, said an audit from 2011.
John Stribula, president of the fire union, said members asked for overtime to be applied to their pensions since police officers had that provision. It’s Pawlowski’s fault that overtime became extensively used in fire operations, according to Stribula, who said there are now 123 firefighters, down from 140 in 2006.
“We share in the irritation” of the public about firefighters receiving annual pensions that exceed their salaries, he said. “I’m a city taxpayer myself.”
Stribula retired as a lieutenant last year and receives a yearly pension of $57,017.
Tony Alsleben, president of the police union, didn’t immediately return an e-mail or call.
Gregory Scheirer, the fireman who retired last year with the $99,289 pension, left at 52 after 26 years of service and receiving a leadership award. His is the biggest pension among police and fire personnel in Allentown, said Mike Moore, a city spokesman. His annual payment was 29 percent greater than his salary, and the payout should’ve been $38,491 under state law, according to Strathearn.
The former battalion chief didn’t immediately return a call yesterday to his home in Catasauqua, Pennsylvania.
Contracts in place now cap overtime for pension benefits for some Allentown public-safety workers.
Yet the damage has been done to the city’s finances. In 2005, its annual pension payment required by state law was $3.83 million; that will jump to $13.6 million next year, according to projections by its actuary.
Pawlowski plans to bolster pensions by leasing the city’s water and sewer system for 50 years. The move may be worth at least $135 million, according to the Pennsylvania Economy League.
The utility generated more than $14.8 million of operating revenue in 2011, according to a city request for qualified firms. The transaction may close in the first half of next year, and the upfront payment would reduce annual pension contributions, Strathearn said.
Moody’s Investors Service in October cut Allentown’s rating one step to A3, its seventh-highest grade, citing budget deficits.
“If we don’t solve this problem, our financial health is seriously impacted,” Strathearn said.
In municipal-debt trading yesterday, yields rose across all maturities. The interest rate on AAA munis due in 10 years reached 1.79 percent, the highest since August, data compiled by Bloomberg show.
Following is a pending sale:
ORANGE COUNTY, California, plans to sell $268.5 million of pension-obligation bonds the week of Jan. 7, according to Fitch Ratings. (Added Dec. 20)
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