FRACKVILLE — A biannual audit report of Frackville’s police pension plan for 2013-14 designates the plan to be in “Level II — Moderate Distress” due to an excessive benefit in the disability pension.
“I did get a copy of it and I forwarded it to (borough solicitor) Mark Semanchik for him to review it,” Mayor Kim Phillips said. “We are aware of it and we are in the process of doing what we need to do to get it corrected and resolved.”
The compliance audit by the office of state Auditor General Eugene A. DePasquale was released in December. The report noted two noncompliance issues.
“The results of our procedures indicated that, in all significant respects, the Frackville Borough Police Pension Plan was administered in compliance with applicable state laws, regulations, contracts, administrative procedures and local ordinances and policies, except as noted in the following findings further discussed later in this report:
• Noncompliance With Prior Audit Recommendation — Inconsistent and Unauthorized Pension Benefits.
• Noncompliance With Prior Audit Recommendation — Untimely Deposit Of State Aid.”
According to the current collective bargaining agreement between the police union and the borough, retirement benefits equal 50 percent of the final 36 months average salary, plus a service increment of $100 per month for participants who retire with 26 or more years of service. That is in line with the regulations in Act 600, which sets the regulations for municipal police pensions.
Act 600 also sets the disability retirement pension percentage at 50 percent, however, the borough’s police contract sets the benefit at 75 percent of the member’s salary at the time the disability was incurred, offset by Social Security disability benefits received for the same injury.
The finding in the audit report states that “Providing unauthorized pension benefits increases the plan’s pension costs and reduces the amount of funds available for investment purposes or for the payment of authorized benefits or administrative expenses. Since the borough received state aid based on unit value for its pension plans during the current audit period, it did not receive allocations attributable to the excess pension benefits provided. However, the increased costs to the pension plan as a result of the excess pension benefits could result in the receipt of excess state aid in the future and increase the municipal contributions necessary to fund the plan in accordance with Act 205 funding standards.”
The four-page cover letter of DePasquale to the audit report states:
“We are extremely concerned about the funded status of the plan contained in the schedule of funding progress included in this report which indicates the plan’s funded ratio is 54.2 percent as of January 1, 2013, which is the most recent data available. Based on this information, and the funded status of the borough’s non-uniformed pension plan, the Public Employee Retirement Commission issued a notification that the borough is currently in Level II moderate distress status. We encourage borough officials to monitor the funding of the police pension plan to ensure its long-term financial stability.”
The letter also states that the contents of this report were discussed with officials of Frackville Borough and, where appropriate, their responses have been included in the report.
The Auditor General’s Office recommends that municipal officials take appropriate action to ensure the plan’s governing document and the collective bargaining agreement contain consistent benefit provisions that are in compliance with Act 600 at their earliest opportunity to do so. The report states that borough officials have contacted the plan’s actuary regarding the problem and the need to address it in the upcoming actuarial valuation report. Also, discussions with the police bargaining unit may result in changes to the current collective bargaining agreement.
Semanchik said, “Act 600 says that if one of your officers gets disabled while doing his police duties, Act 600 says you should give a pension of 50 percent of his average monthly salary into his retirement.”
Semanchik said that through the negotiations between the police union and the borough, the police officers requested 75 percent as the disability pension in lieu of a salary increase in one year, which the AG office considers an excessive benefit.
“Act 600, in my opinion, sets pretty much what the requirements are and what the benefits are, but I think it establishes in some cases a minimum and it does not preclude the municipality from going beyond the minimum and giving more as part of the negotiation of the terms in the collective bargaining agreement,” Semanchik said. “They (auditor general office) are letting you know that by doing more than the minimum, that it exposes your pension plan to more liability, and that’s where the discussion then turns to this distress factor. So, by collective bargaining for more than the minimum of the benefits, it imposes a greater liability on the pension plan and the auditor general using these timely audits to make sure that the municipality knows that there is excess liability and their contribution to the pension plan will increase.”
He said that the pension plan has three sources of income: state subsidy, the borough, and active police officer contributions.
“The lion’s share comes from the state and the local municipality,” Semanchik said. “In Frackville’s case, there have been times when the officers did not contribute anything. So, if the municipality bargains for ‛extras,’ the state wants to make sure that the municipality knows that there is a cost related to those extras and the borough’s contribution to the fund is going to be increased because of the extras. The state’s amount is fixed according to a formula.”
Semanchik said the borough will address the issue.
“What the findings show are that the borough needs to try to bring everything together so that Act 600 and the collective bargaining agreement is consistent and the same,” Semanchik said. “Based on the findings that I’ve been made aware of, when the borough negotiates with the police department at the end of its current contract, the borough is committing that it will consider the findings of the auditor general in relation to Act 600 and the terms of its collective bargaining agreement, and we will make every effort to bring everything together so we can meet the findings of the auditor general.”
Semanchik continued, “What the borough could adjust the next time they are bargaining with their police, in those instances where it might be deemed to be an ‘extra’ or an ‘excess,’ they could negotiate with the police officers to bring it down to the minimum.”
The second finding was that the borough failed to pay the interest due to the plan for the late deposits of its 2007, 2008 and 2009 state aid allocations. Furthermore, during the current audit period municipal officials failed to deposit the 2013 and the 2014 state aid within the 30-day grace period as required by Act 205.
Section 402(g) of Act 205 states, in part: “... the total amount of the general municipal pension system state aid received by the municipality shall, within 30 days of receipt by the treasurer of the municipality, be deposited in the pension funds or the alternate funding mechanisms applicable to the respective pension plans."
The audit report said that plan officials failed to adopt adequate internal control procedures to ensure the timely deposit of state aid allocations. Although the state aid was deposited into the police pension plan, the interest earned beyond the 30-day grace period was not deposited into the police pension plan. When state aid is not deposited into a pension plan account in a timely manner, the funds are not available to pay operating expenses or for investment and the risk of misapplication is increased.
The report recommends that the municipality deposit the interest due to the pension plan for the untimely deposit of the state aid allocations. A copy of the interest calculation must be maintained by the borough for examination during the next audit period of the plan.
The borough’s response is that it will take the necessary steps to ensure compliance by making the required deposit plus applicable interest.