Visible Spending, Invisible Debt

Allegheny County’s pension crisis is not an investment mystery. It is the accumulated cost of political choices made one budget at a time.

Allegheny County’s pension crisis is not difficult to diagnose. For more than two decades, the county failed to contribute enough money to keep its pension debt from growing. The result is an unfunded liability now estimated at approximately $1.4 billion and a retirement system that consultants warn could exhaust its assets by 2043 without substantial corrective action. The recent funding report estimates that the county may need to contribute roughly $100 million more each year for the next 20 years to restore the system to financial health.

That is the problem.

The public debate surrounding the report, however, is already at risk of becoming more complicated than the underlying financial reality.

District Attorney Stephen Zappala argues that the report understates the role of political conflicts within the Retirement Board, raises insufficient concern about illiquid and alternative investments, and fails to confront questionable decisions made by those responsible for the fund. He has called for independent oversight, possible changes to the pension system, new revenue sources and a Retirement Board less directly controlled by elected officials.

Some of those concerns deserve examination. Pension trustees should be held to rigorous fiduciary standards. Investment performance, fees, liquidity, manager selection and potential conflicts should be independently reviewed. The system’s governance structure may warrant reform.

But none of those issues changes the essential cause of Allegheny County’s pension crisis.

The Retirement Board manages the pension system. It does not control the county budget. It cannot appropriate county revenue. It cannot compel the Executive and County Council to contribute the actuarially necessary amount.

The central political conflict is therefore not merely that elected officials sit on the Retirement Board. It is that the same government responsible for paying the pension bill must decide each year whether to fund that obligation or spend the money somewhere more immediately visible. That is where the incentives become dangerous.

A new program can be announced. A public facility can be opened. A grant can be awarded. A new initiative can generate a press release, a photograph and political credit. A payment against an unfunded pension liability offers none of those things.

It does not open a building, pave a road or create a new service. It simply pays for compensation that employees have already earned and reduces a debt that taxpayers already owe. The political reward is small because the public benefit is largely invisible. The political cost can be immediate because every dollar used to reduce pension debt is a dollar unavailable for something elected officials would rather announce.

That is why underfunding persists. It is not usually the product of a single dramatic decision. It occurs through a series of annual budgets in which the pension receives the minimum required payment while discretionary spending is treated as the real expression of the government’s priorities.

Allegheny County needs to change that budgetary incentive.

County Council should adopt an ordinance requiring every proposed comprehensive fiscal plan to begin with a pension-first budget baseline.

The Executive should remain responsible for proposing the budget, and Council should retain its full authority to amend and adopt it. But the budget presented to Council should be required to show, clearly and separately, at least three pension numbers.

First, it should identify the minimum contribution required by statute or existing contribution rules.

Second, it should identify the actuarially determined contribution necessary to pay the cost of benefits being earned and prevent the unfunded liability from continuing to grow.

Third, it should identify the additional contribution recommended under a formal unfunded-liability amortization policy to place the system on a credible path toward improved funding.

Those are not the same number. Treating them as though they are interchangeable is one of the ways pension problems remain hidden.

The proposed budget should then demonstrate how the county would fund the actuarially recommended pension contribution before appropriating money for new or expanded non-statutory programs and other discretionary “want-to-have” expenditures.

This would not prohibit the Executive from recommending a different allocation. Nor would it bind Council to adopt the pension-first version. Elected officials must retain the authority to balance competing public needs, respond to emergencies and make policy judgments.

But departures from the pension-first baseline should be explicit.

When the Executive proposes spending money on a discretionary initiative instead of making an additional pension payment, the budget should identify that choice. It should disclose how much less will be contributed, how the decision affects the unfunded liability and what additional long-term cost is expected to result.

Similarly, if Council chooses to reduce the pension contribution to fund another priority, it should do so through a visible amendment during the public budget process.

The purpose is not to eliminate political discretion. It is to eliminate political concealment.

Allegheny County’s Home Rule Charter already requires the Manager to prepare a comprehensive fiscal plan and the Chief Executive to present it to Council. It also provides that the specific components of that plan are to be established in the Administrative Code. County Council may amend appropriation items before adopting the final balanced budget.

That framework provides a logical path forward. Council should direct the County Solicitor to prepare an ordinance amending the Administrative Code’s budget requirements so that the annual comprehensive fiscal plan includes:

• the statutory minimum pension contribution;

• the actuarially determined employer contribution;

• the recommended unfunded-liability amortization payment;

• a pension-first baseline budget funding that amount before new discretionary spending;

• an alternative budget reflecting the Executive’s preferred recommendation, when different;

• and an actuarial explanation of the long-term consequences of any proposed contribution below the pension-first amount.
  

These figures should also be presented at every required public budget hearing. The actuary, Budget and Finance Department and Retirement Board should explain them in plain language before Council considers discretionary additions to the budget.

The public should be able to see the answer to a basic question:

Before deciding what new things Allegheny County wants to purchase, how much must it spend to keep the promises it has already made?

This is the accountability mechanism missing from the current debate.

Zappala is right that politics contributed to the pension crisis. He is right that conflicts and investment decisions should not be ignored. But replacing trustees or scrutinizing alternative investments will not resolve a structural funding deficit if the annual budget continues to subordinate pension payments to more visible spending.

Investment reform may improve returns. Governance reform may improve oversight. New revenue may provide additional resources. Benefit changes may reduce future costs.

None of those reforms can substitute for a disciplined contribution policy.

Nor should current officials be permitted to treat the problem solely as the inheritance of prior administrations. They did not create the entire liability, but they now control the budgets through which it will either be addressed or allowed to compound.

The county’s leaders will understandably argue that the pension cannot consume every available dollar. That is true. Government must provide public safety, courts, human services, public health, infrastructure and other essential services. The ordinance should recognize statutory obligations, contractual commitments and essential operating requirements.

But once those obligations are met, the pension debt should come before discretionary expansion.

That is not austerity. It is responsible ordering of public priorities.

Pension underfunding is a form of borrowing except that the borrowing is rarely described honestly, the interest cost is buried in actuarial reports and the repayment obligation is transferred to future taxpayers. Each year that the county pays less than the responsible contribution, it is effectively financing current programs with money taken from the future.

County Council cannot repair 20 years of underfunding in one budget. It can, however, ensure that no future budget disguises the choice.

Put the full pension obligation in the budget first. Show what remains afterward. Allow the Executive to recommend alternatives and Council to make the final decision but require every elected official to vote with the true cost visible.

That would not end the political debate. It would simply make it an honest one.

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Andrew Flynn

Andrew Flynn writes about public leadership, fiscal stewardship, and the systems communities rely on to function well. He is a commissioner in Mt. Lebanon, Pennsylvania, works in public finance, and serves as a volunteer firefighter and EMT. Browse the Writing section for more articles, or visit Meet Andrew to learn more.