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June 1, 2016

Municipalities in Distress 101: Reading

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Image courtesy of the City of Reading’s website

Reading, Pennsylvania, is in trouble. About $85 million of trouble, to be exact. What kind of trouble costs over $85 million? The kind that is appearing all over the state caused by unfunded liability from unsustainable municipal pension plans.

What kind of problems are caused by $85 million of trouble?

Well, where do we begin…?

Reading City Auditor David Cituk has been in his position since 2000 and has seen the way that municipal pension troubles have affected his city firsthand. In his interview with the Reading Eagle, he said, “when you have to put $17 million in your budget for pensions and $15 million for debt service, that’s $32 million before you can hire one police officer, one firefighter, fix one pothole.”

That $32 million is just what Reading is required to pay each year. They are currently at about a 69% funding ratio, which is considered moderately distressed – and it’s only getting worse.

Why does this problem exist?

Pennsylvania’s pension system for municipal public safety officers is outdated.   State law mandates the benefit public safety officers are to receive.  The municipality, as the employer, assumes all the risk of pension fund investments.  Additionally, the retirement age is low; unplanned benefit enhancements are common through collective bargaining; and final monthly pension payments can be “spiked” with overtime in the final months before retirement.   For cities like Reading, there is another pressure on the pension fund – more retirees than employees paying in.  The City must make up the difference or the underfunding grows.

As Cituk stated above, the City must consider the pension payments first.  That means no new hires in the public safety department.  That creates a dangerous situation, especially in a municipality like Reading, the fifth largest in the state with a population of over 88,000. Each Reading public safety worker must protect about 161 Reading residents from fire as well as crime. This is almost 40 more residents per public safety worker than the average of the top 10 most populous municipalities in Pennsylvania. To put it frankly, it’s unsafe.

Not only does the municipal pension issue create an unsafe scenario in Reading, it also creates an unfavorable one for taxpayers. Municipalities have few available options, which include raising taxes to cover pension costs and/or cutting services and personnel.  The earned income tax rate in Reading went from 3.4% in 2012 to 3.6% in 2015. With the way that Reading’s municipal pension obligations continue to increase, residents should expect taxes to continue to increase as well.

The issues that PA municipalities like Reading are facing are not theirs alone. Nearly every resident of the state of Pennsylvania feels the effects of the municipal pension crisis in one way or another. That’s why we need you to tell your Pennsylvania State Senators and Representatives to fix the numbers regarding municipal pension reform today.

*Note:  The $85 million figure and the 69% funding ratio pertain to all City of Reading pension plans.