While state employee pensions have gained attention for running up a bill of unfunded liabilities that threatens to bankrupt the state, many municipal pension plans in Pennsylvania are in dangerous territory as well.

A report issued last week by the state's Public Employee Retirement Commission (PERC) shows more than 644 municipal pension plans are less than 90 percent funded - calculated as the ratio of assets to liabilities - and have been termed "distressed" by the commission.  Of those, 26 are less than 50 percent funded and branded as "severely distressed."

Allegheny County leads the way in distressed municipal pensions with 65, followed by Delaware and Montgomery Counties with 36 distressed pension plans each.

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The most underfunded pension plan in the state belongs to Braddock Hills Borough, located just eight miles east of Pittsburgh, which has assets of only $127,000 to cover liabilities of more than $558,000 for a funded ratio of 23 percent.  Columbus Township in Warren County also has a pension funded ratio of 23 percent, with assets of $43,000 and liabilities exceeding $188,000.

Of the state's large cities, Pittsburgh is in the worst shape with only 34 percent of its $989 million pension liabilities currently funded.  Scranton also falls into the "severely distressed" category with only 47 percent of its $138 million liabilities funded. 

Doing better but still listed as "minimally distressed" are the cities of Allentown (71 percent funded), Altoona (73 percent funded), Bethlehem (84 percent funded), and Reading (81 percent funded).  Harrisburg's city pension plan is one of 507 in the state to actually exceed 100 percent funding of liabilities.

"If I'm a taxpayer in one of the [severely distressed] municipalities, I'd want to know what the municipality is doing and why they are at that level," said James Allen, secretary of the Pennsylvania Municipal Retirement System, which manages 900 local government pension plans on behalf of municipalities. 

Generally, pension plans with fewer individuals enrolled fall more easily into deficits but also recover more quickly, so large municipalities with low ratings are a bigger concern, he said.

"The good news is that it brings a flashlight onto the problem," said Mr. Allen.

The report is part of Act 44 of 2009, which required PERC to assess the condition of municipal funds across the state.  The report analyzed 1,409 municipal pensions, with 12 percent reported as moderately or severely distressed for being funded at less than 70 percent.

Rick Dreyfuss, a business consultant and actuary who studies pension issues as a senior fellow at the Harrisburg-based Commonwealth Foundation, said the picture is likely to be worse than what was reported by the commission because of how the report was calculated.

"What you have is assets that are probably overstated in terms of the market value and the liability is probably understated," said Mr. Dreyfuss.  "This has a negative impact across the board because when you divide the assets by the liabilities, the ratios are actually a lot lower."

Act 44 of 2009 allowed municipalities to change the way they evaluate their assets and liabilities over time - referred to as the "smoothing corridor" - from 20 percent to 30 percent.  As such, the municipal plans included in the report could be underfunded by as much as 30 percent more than was reported.  Mr. Dreyfuss said the report also included the actuarial value of the pensions, which assumes growth rates and expenses for the future, rather than the current market value of the plans.

Because of the 30 percent "smoothing corridor," every dollar in the report could represent as much as $1.30 or at little as $0.70 cents in present market value, but the changes do not make the report less accurate, said Mr. Allen.

As part of the report, PERC is requiring municipalities with ratings of "moderate distress" or "severe distress" to submit a report to the state demonstrating a plan for administrative improvement.  Municipalities in "severe distress" must also establish a revised benefit plan for all newly hired employees.

Eric Boehm is a reporter for PA Independent.  He can be reached at Eric@PAIndependent.com