Lower Nazareth Township Pension Plan – How Liable are Taxpayers?

Since Lower Nazareth Township has chosen to not freely share any financial documentation with myself, one of the duly elected auditors, earlier this year I filed a Right-to-Know request as a private citizen to view the township’s pension plan, which is not currently shared online. As a public document not currently shared on the township website, I am releasing it to the public from the link below. A condensed overview published August 8, 2018 is available online from the PA Auditor General’s website here.

Lower Nazareth Township Non-Uniformed Pension Plan

Why should residents care?

Well, for starters, township residents were taxed $115,000 in 2017 to fund the plan which has around $2.4 million in assets, mostly invested in stocks and some bonds. Residents are taxed every year as can be seen on page 13/18, and the township has overpaid the actuarially determined contribution every year by amounts ranging from an excess of $11,745 to $72,649. (While it is true the state of Pennsylvania also contributes towards the pension plan, this shell game is no manna from heaven; the state of Pennsylvania also extorts funds from resident taxpayers.)

Second, the net pension liability (NPL) was $33,383 (page 8/18). This is the amount the plan is currently underfunded. [The township could of course have already saved this money by using the board of auditors to complete the annual audits instead of outsourcing to an accounting firm. See “Lower Nazareth Audit Practices Cost Taxpayers >$34720.”]

However, perhaps this $33,383 figures seems small. After all government just has to raise taxes a “little bit” to extort the money from the people. Well, the NPL assumes that the fund performs at an annual investment rate of return of +7.5%. If the annual rate of return drops even just to +6.5%, the new pension liability leaps to $340,215 (page 9/18).

Well that can’t happen you may say. Governments are really smart and know how to invest money in the stock market, or at least hire a competent investment firm that won’t abscond with the tax money.

Well, on page 14/18 is the annual money-weighted rate of return, net of investment expenses (which will depress the rate of return) for 2015-2017. For 2017, this rate was an impressive +13.7%. In 2016, a less impressive +5.41%. In 2015, a loss of -1.00%. For the fund to have risen at 7.5%, it would need to have gained +24.2%. Instead, it’s actual performance was +18.65%, which is already less than +6% annually.

Of course if the stock market has a market crash, Lower Nazareth taxpayers will be on the hook for much, MUCH more than $340,215.

A few facts as I understand them from the plan document, although there are special rules for bureaucrats’ early retirement, survivor benefits, etc. (see pages 14-17/18)

1. All full-time municipal government workers are eligible.
2. Once obtaining 10 years of service, all bureaucrats are 100% vested. (I don’t see any partial vestment, i.e. if a bureaucrat leaves before hitting 10 years, I do not believe they receive a pension.)
3. The monthly payout uses the bureaucrat’s highest monthly pay from 36 months of consecutive employment which is called the “Average Monthly Compensation” (AMC).
4. To determine the bureaucrat’s monthly pension, the “Average Monthly Compensation” is multiplied by 2% and the number of years of service. (I.e. a bureaucrat serving the minimum 10 years for full vesting would receive a monthly pension of 20% of their AMC for the rest of their life.) Payout cannot exceed 55% of their AMC.
5. The bureaucrat does not contribute to the pension fund at any time.
6. There are currently 14 active township employees covered by the plan and 2 retirees and beneficiaries receiving benefits.
7. The pension fund appears to have been created in 2008.

To use a real-life example, the recently-retired township manager had been employed by the township since 1987 through 2017. Assuming all of his years were eligible, this is about 31 years of service which would mean a payout of 2% x 31 or 62% of the Average Monthly Compensation. As payout cannot exceed 55%, the payment would be “limited” to 55% of AMC.

Per township records, this township manager was paid a salary of $114,400 in 2017 per Resolution LNT-02-17, a salary of $110,000 in 2016 per Resolution LNT-02-16, and a salary of $103,500 per Resolution LNT-02-15. Therefore, the AMC would most likely be around $9100 per month. So post-calculation, this bureaucrat is probably paid around $5005 per month or $60,060 per year.

Not bad for government work! Perhaps the township should consider ending the pension plan, especially for new employees and perhaps offering a tax-advantage defined contribution plan funded solely by the bureaucrats’ contributions from their pay as is common practice everywhere else. Even a small plan like the township’s can cause major financial problems for the township or the retirees down the road, which is why private sector companies do not offer it.

A defined contribution plan (like 401k, etc.) would at least keep the taxpayers off the hook in the event of a stock market crash. Or simply have no pension or retirement plan whatsoever and just offer compensation.