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Act 47 overseer says $495M unfunded liability puts finances at risk in Pittsburgh

| Sunday, June 15, 2014, 10:10 p.m.

Pittsburgh's fiscal recovery plan includes a strategy to deal with nearly $500 million in retiree benefits, a liability that exceeds revenue collections and is poised to get worse before it gets better.

The city carries a $495 million unfunded liability for “other post-employment benefits,” primarily retiree health benefits for police officers and firefighters. Commonly referred to as “OPEB,” the legacy costs are annually covered on a “pay-as-you-go” basis, about $20 million to $25 million in recent years.

The proposed five-year update to the city's state oversight plan, under a program called Act 47, recommends continuing to squirrel away $2.5 million each year in a trust fund to handle uncovered costs and future payments.

Dean Kaplan, a coordinator of the Act 47 financial oversight team, said OPEB liabilities threaten city government's long-term financial health. Even a small but growing trust fund helps, he said.

“Doing more now makes the overall long-term ability to keep up with the benefits more manageable,” he said. “Otherwise, they just keep getting larger to the point they're unsustainable.”

The fiscal overseers addressed OPEB in 2004, when the initial recovery plan eliminated retiree health coverage for new employees. An update in 2009 established the trust fund.

Tim McNulty, spokesman for Mayor Bill Peduto, said the administration supports the way the Act 47 proposal handles the liability.

“It's a big part of the legacy costs the city's starting to tackle through the Act 47 plan,” McNulty said. “We took the first steps a couple years ago, and we'll continue making them as we go.”

Eric Montarti, policy analyst with the Allegheny Institute in Castle Shannon, said because the city decided to eliminate retiree health care coverage for new employees, the liability will max out — eventually. OPEB liabilities will grow over time as employees eligible for benefits retire, compounded by increased life expectancy and growing health care costs.

From 2006 to 2012, the liability increased by about $175 million, according to the Act 47 plan.

“The amount is still growing, because you still have people that are employed with retiree health care benefits,” Montarti said. “As they retire, you're paying that out.”

By 2031, annual OPEB costs are expected to peak at about $29 million, before tapering off, according to a report filed with the state in 2012. Kaplan said the liability is likely to end in three to four decades.

Henry Sciortino, executive director of the city's Intergovernmental Cooperation Authority oversight body, said overseers support continued use of the trust fund and paying down the liability, “without tipping the balance of having to manage all the other legacy issues, as well as capital improvements and operational expenses.”

Controller Michael Lamb said Pittsburgh is unique in having the trust fund. Governments in Pennsylvania aren't required to stash away money to pay for retiree health care costs the way they are for pensions, Lamb said.

“We are probably one of the few larger cities in the country that have this problem that are attempting to fund it, even though we're funding it at a very small scale,” Lamb said. “We would do more if we could, but we're doing the right thing by trying to pre-fund now for when the bigger bills come in the future.”

Melissa Daniels is a Trib Total Media staff writer. Reach her at 412-380-8511 or mdaniels@tribweb.com.

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