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McKeesport officials made what Auditor General Eugene DePasquale called a "costly pension mistake" when they spent more than $729,000 in state pension aid on general operating expenses, instead of depositing it into employee retirement funds.
Although the auditor general made no allegations of intentional wrongdoing, DePasquale said on Thursday the error does put future state contributions to city pension plans into jeopardy until the problem is fixed.
And the mistake only exacerbated a $2.3 million shortfall in four different pension funds covering 164 employees who have retired from McKeesport's police, fire, public works and administrative departments.
City officials acknowledged the problem and will make amends, McKeesport Mayor Michael Cherepko said.
"(We) immediately reached out to the Auditor General’s Office to inform them of what we plan to do to remedy the situation at hand," he said. Raising the money will probably require sale of a city asset, Cherepko said.
In October 2015, Patrick Cloonan, then of the Daily News, reported that the city is contemplating the sale or lease of the city's sewerage authority.
"For at least 15 years, the City of McKeesport has relied on one-time sales of assets to improve budgetary deficits and maintain operations at a quality standard," Cherepko said. The city is struggling to balance "ever-decreasing revenues along with ever-increasing expenditures," he said.
DePasquale's reports are available online:
- City of McKeesport Police Pension Plan
- City of McKeesport Firefighter's Pension Plan
- City of McKeesport Officers and Employees Pension Plan
- City of McKeesport Combined Pension Plan
DePasquale acknowledged that the city is in a difficult financial situation, with more retired employees collecting benefits than the 112 employees who are actively working and paying into the pension plans; and with a tax base that has declined from 55,355 people to 19,731.
At the same time, McKeesport's annual pension obligation, DePasquale said, jumped $1 million between 2009 and 2015, in part because of stock market fluctuations that the audits note have caused "years of less than expected returns."
"I commend city officials for their quick response acknowledging the mistake and coming up with a remedy," he said, but cautioned that "McKeesport needs a broader, long-term solution to keep its pension plans healthy."
In reports made public on Thursday, and previously provided to Cherepko and city council, DePasquale's office said that on Sept. 24, 2015, a state government check for $729,275 was deposited into the city's general fund.
But the money was spent on operating expenses before it was distributed to Hefren Tillotson, the investment firm that manages the pension funds.
City officials blame a "ledger error" for the mistake and told DePasquale that "with the sale of an asset in the near future, this $729,275 will be forwarded to the eligible pension plans" along with "any interest that should have been gained on these funds."
The audit recommended that McKeesport officials "develop and implement adequate internal control procedures" to ensure that state aid checks are deposited into the pension plans within 30 days of receipt.
The pension plans for non-uniformed city employees are funded to between 83 and 92 percent of what they should be, the audit findings indicate, but police and fire pensions are only between 70 and 73 percent funded.
With that, McKeesport is actually in better shape than cities like Pittsburgh, where, according to a 2015 audit, pension funds were only 58 percent funded, or Jeannette, where according to a separate 2015 audit, plans ranged from 55 to 81 percent funded.
Indeed, McKeesport is hardly the only Pennsylvania municipality struggling with more retirees and lower returns on investments. According to DePasquale, nearly half of all municipal employee pension plans across the state are classified as "in distress" and pensions for police, fire and municipal workers are underfunded by nearly $8 billion.
DePasquale said he is advocating for a statewide pension reform program for municipalities, but in the meantime, McKeesport must complete the $2.3 million in total payments --- with interest ---- and make its pension plans whole.
In total, DePasquale said, the city owes $1.1 million to the police officers' pension fund, $661,449 to the firefighters' pension fund, and $131,062 and $347,697, respectively, to two other funds for other city employees.
If state aid is withheld, it will only make the situation worse and the deficit will "snowball" out of control, the auditor general said.
"If these pension plans fall further into distress, it will be more challenging to climb out of that financial hole," DePasquale said.
He said his office will re-audit McKeesport to ensure compliance.
Cherepko said the city is doing its best "even in times of financial distress" to provide "the highest quality police and fire protection" that residents need.
"We are doing this with less revenue and less manpower, but we will continue to strive for the level of service that defines our community," Cherepko said. "We will continue to move our city forward and take the necessary steps to assure our city will never file for Act 47 municipal bankruptcy."
Originally published June 10, 2016.