Faced with skyrocketing pension fund debt and few options to pay it off, Dunmore council took out a $5 million loan in December, hoping it would help nurture the borough's three pension plans back to financial health.
The loan, which will be paid back over 15 years, will provide a much-needed infusion of cash into the borough's police, fire and non-uniform pension funds, boosting their assets and allowing them to emerge from distressed status.
Numerous municipalities throughout the state have taken this route in recent years, said Bernard Kozlowski, an official with Pennsylvania's Public Employee Retirement Commission, which monitors municipal pension plans statewide.
Whether it's a good idea is a matter of debate among financial experts.
Mr. Kozlowski said the loans can be a great benefit to some municipalities, particularly those struggling to make the state-mandated contribution into the fund, known as the minimum municipal obligation or MMO. But the loans are not without risk.
In the past decade, many plans statewide, including Dunmore's, have fallen on financial hardship because of escalating costs of benefits coupled with massive investment losses caused by the downturn in the economy. That has boosted significantly the amount of money municipalities must pay into the funds to keep them solvent.
Some government bodies have found they can no longer make their MMO payments, leaving them little option but to seek a loan, Mr. Kozlowski said.
"If they miss the MMO payment, the state comes in with a court order and says, 'You have to put in the money.' What do you do? You take out a loan and hope for the best," Mr. Kozlowski said.
Dunmore council had no choice but to take a loan because the amount of money needed to keep the plans solvent has grown each year, said Council Vice President Michael McHale.
PERC evaluates pension plans to determine how much money a municipality must contribute. That evaluation is based in part on the plan's funding ratio, which is equal to the plan's assets divided by its liabilities. Plans with a funding ratio of 70 to 89 percent are considered minimally distressed; those with a ratio of 50 to 69 are moderately distressed, while those with a ratio of less than 50 percent are severely distressed. A ratio of 90 or above is not distressed.
Visa/MasterCard
In Dunmore, the police pension plan is in the worst condition, with a funding ratio of 43.3 percent as of Jan. 1, 2009, the most recent rating available. That places it in the severely distressed category. The firefighters plan is moderately distressed, with a funding ratio of 55.5 percent, while the non-uniform plan is minimally distressed, with a funding ratio of 78 percent.
Dunmore paid more than $1 million into the three plans in 2012, according to borough records. It is estimated that the amount would grow to $1.3 million in coming years, Mr. McHale said, taking away money that could be used for other projects.
"That's a big part of an $11 million budget," Mr. McHale said.
The $5 million loan will be used to increase the assets of the three funds, bringing each to a funding ratio of at least 90 percent, he said. That is expected to reduce the required MMO by roughly 50 percent, he said.
Richard Dreyfuss, a business consultant and actuary who studied the national pension crisis, cautions that pension loans are a bad idea because they simply shift the burden from one financial instrument to another and do nothing to reduce the burden on taxpayers.
"It's like using a Visa to pay your MasterCard," Mr. Dreyfuss said.
The real solution, he said, is for municipal officials to make tough decisions, such as increasing taxes and reducing pension benefits for future retirees.
Steven Herzenberg, executive director of the Keystone Research Center, a think tank that studies pension reform, said reducing benefits is an option, but is not easily implemented.
In many cases, pension woes are caused in part by generous benefits, Mr. Herzenberg said. Benefits often exceeded state pension law limits, and were offered by municipalities when their pension funds were flush with cash because of strong financial markets, he said. That came back to haunt them when the markets crashed in 2008.
'Bad idea'
State appellate courts have consistently ruled municipalities cannot unilaterally alter benefits, even if they are illegal. They must work to bargain them out with their unions, which has proven a challenge.
That is what happened in Dunmore with its police pension plan. The borough attempted to halt excessive benefits provided to its police officers who retired between 1992 and 1995, but the court system ruled against it.
Mr. Herzenberg said he believes pension loans can be beneficial, as long as they are taken out in conjunction with other efforts to shore up a pension fund.
These efforts include increasing the amount of money active officers contribute to the fund, he said. Municipalities must also have the discipline to contribute enough each year to cover the plan's cost. The danger, Mr. Herzenberg said, is once the fund is shored up, municipalities will stop making contributions, which they are not required to do if the fund is deemed financially sound by an actuary.
"That's a bad idea," he said. "Even if the financial markets are great and over funded, you should at least cover the cost of pension obligations in the current year."
Mr. McHale, a certified public accountant, said he and other council members, who unanimously approved the loan, realize there is a risk, but they are confident they made the right choice. Even after interest on the loan is factored in, the borough will still save money because its MMO will be reduced.
Councilman Michael Hayes said he agreed to the loan because the annual MMO payments have been a "huge burden" on taxpayers.
"This is going to save taxpayers money every year by having the fund be actuarially sound," Mr. Hayes said.
Mr. McHale said he is also confident the fund will earn additional revenue because it will get a better return on pension fund investments than it is paying on the pension loan, which has an interest rate of 3.59 percent,
Contact the writer: tbesecker@timesshamrock.com