Monday, 11 February 2019 11:45

Barrett Township Employee Pension Plan – How Liable are Taxpayers? Featured

(This article was originally posted on BarrettCommunity.com)

 

Disclaimer:  The ideas expressed below are the personal thoughts and opinions of Nate Covington and do not necessarily reflect the position of Barrett Township or the Board of Auditors.

Earlier this year I filed a Right-to-Know request as a private citizen to view the township’s pension plan.

 

Why should residents care?

Well, for starters, township residents were taxed $55,000 in 2017 to fund the plan which has around $1 million in assets.  In the same year, the State of Pennsylvania contributed an additional $32,000 to the pension fund.  

Second, the net pension liability (NPL) was $174,066 (page 7 of Attachment 1). This is the amount the plan is currently underfunded.

However, perhaps these figures seem small. After all, the government just has to raise taxes a “little bit” to raise the necessary funds from the people. Well, the NPL assumes that the fund performs at an annual investment rate of return of +7.5%. If the annual rate of return drops even just to +6.5%, the new pension liability leaps to $305,119 (page 4 of Attachment 1).

Well, that can’t happen, you may say. Governments are really smart and know how to invest money in the stock market, or at least hire a competent investment firm that won’t flee with the tax money.  On page 4 is the annual money-weighted rate of return, net of investment expenses for 2015, a loss of 3.6%.  If a 1% decrease from 7.5% is ~$131k, how much are taxpayers responsible for with a ~11% difference (7.5% + 3.6%)?  Of course if the stock market has a market crash, Barrett taxpayers will be on the hook for much, MUCH more than $305,119. 

 

Here are a few facts...

...as I understand them (although there are special rules for bureaucrats’ early retirement, survivor benefits, etc. See Attachment 2

  1. All full-time municipal government workers are eligible.
  2. Once obtaining 5 years of service, all bureaucrats are 100% vested. (I don’t see any partial vestment, i.e. if a bureaucrat leaves before hitting 5 years, I do not believe they receive a pension.)
  3. The monthly payout uses the bureaucrat’s latest 3 years compensation which is called the “Average Monthly Compensation” (AMC).
  4. To determine the bureaucrat’s monthly pension, the “Average Monthly Compensation” is multiplied by 1.5% and the number of years of service. (I.e. a bureaucrat serving the minimum 5 years for full vesting would receive a monthly pension of 7.5% of their AMC for the rest of their life.)   (See Attachment 2)
  5. The bureaucrat does not contribute to the pension fund at any time.
  6. As of January 2019, the plan had 16 active members.  
  7. The pension fund appears to have been initially created in 1986 (See Barrett Township Ordinance #91)

To set up a real-life example, let’s say a township employee has been employed 20 years of service which would mean a payout of 1.5% x 20 or 30% of the average monthly compensation.  Let’s assume this employee was receiving an average salary of $60,000 per year for the last 3 years of their employment.  Therefore, upon retirement this employee will probably be paid around $1500 per month or $18,000 per year.

Next Steps...?

Perhaps the township should consider ending the pension plan, especially for new employees and perhaps offering a tax-advantage defined contribution plan funded solely by the bureaucrats’ contributions from their pay as is common practice everywhere else. Even a small plan like the township’s can cause major financial problems for the township or the retirees down the road, which is why private sector companies do not offer it.

A defined contribution plan (like 401k, etc.) would at least keep the taxpayers off the hook in the event of a stock market crash. 

 

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