Act 44 – of 2009, amends and makes significant changes to the Municipal Pension Plan Funding Standard and Recover Act (Act 205). The Act provides actuarial tools to provide fiscal relief to local governments operating public pension plans. It also regulates Deferred Retirement Option Plans (DROPS – see definition below), establishes conduct and disclosure standards for pension plan professional service contracts and provides special remedies to the cities of Philadelphia and Pittsburgh.
Act 51 – of 2009. The Act specifically repeals the current Act 600 Killed in Service Benefit from Police pension plans. The Killed in Service Benefit will now be funded by the Commonwealth, and will be equal to the monthly salary of the deceased officer, adjusted annually for the cost of living. The benefit is payable to the deceased’s surviving spouse or, if there is no surviving spouse, to the deceased’s minor children under the age of 18. If those children are attending college, they can receive the benefit up to the age of 23. In addition to law enforcement officers, the new benefit applies to paid firefighters, ambulance service members, and rescue squad members.
Act 205 – the Municipal Pension Plan Funding Standard and Recovery Act of December 1984. The Act controls pension funding in Pennsylvania and provides for reporting of actuarial information and for a recovery program for qualifying municipalities.
Act 600 – the Police Pension Fund Act of May 1956. The Act states that all boroughs, towns, and townships with three or more full-time police officers, or a regional police force, must establish a police pension plan in accordance with the provision of this Act. In addition, boroughs, towns and townships with fewer than three full-time police officers may establish their plans in accordance with this act.
Accrued Benefit – the portion of the participant’s retirement benefit that is attributable to service completed before the calculation date.
Actuary – a business professional who calculates the financial impact of risk and uncertainty. Actuaries mathematically evaluate the likelihood of events and quantify the outcomes in order to minimize financial losses.
Chief Administrative Officer – the person with primary responsibility for the execution of the administrative affairs of the pension plan.
Cost of Living Increases (COLAs) – an optional provision of some plans that provides for an annual increase of retiree benefit payments, which may not exceed the percentage change in the Consumer Price Index (CPI).
Deferred Retirement Option Plans (DROPs) – a period of time (may not be longer than 5 years) during which participants
who have reached their normal retirement date “retire” for the purposes of the pension plan and yet continue to work for a municipality for a set period of time.
Defined Benefit (DB) Pension Plan – a retirement plan designed to pay a specific benefit to a retiree upon retirement. The benefit is typically payable monthly for the remainder of the retiree’s lifetime.
Defined Contribution (DC) Pension Plan – a retirement plan designed to accept fixed contributions, which are allocated to individual accounts to provide a benefit upon retirement. The benefit is typically paid in a lump sum.
Employee Contributions – contributions that are typically deducted from the employee’s paycheck on an after-tax basis, but may be deducted on a tax-deferred basis for federal tax purposes. Can be mandatory or voluntary, depending upon pension plan requirements.
Employer Contributions – contributions that the employer makes to its employees’ pension plans.
Funding Requirements for Pensions – the amount to be contributed/deposited in employees’ retirement accounts. For Defined Benefit plans the amount is calculated by an actuary based upon certain facts and assumptions (e.g. return on investments, future salary increases, timing and likelihood of employee termination/death). For Defined Contribution plans the amount is typically fixed by the plan provisions as a percentage of pay or a flat dollar amount.
Killed in Service Benefit (Death Benefits) – a benefit for spouses or dependent children of police officers that are killed in service.Act 51 of 2009 states that these benefits will be paid by the State.
Minimum Municipal Obligation (MM0) – The MMO determines the amount of money that must be contributed to a pension plan by a municipality for a given year.
Pensions Plans and Unions – most unions bargain over pension benefits. An actuarial study must be prepared and presented to the governing body prior to the union adopting or agreeing to changes. Also, a municipality must verify that changes requested by the union are in compliance with state and federal laws.
Plan Document – a written compilation of all the benefits and administrative provisions of the pension plan and the legal governing document for the pension plan.
Smoothing – an accounting/actuarial process that averages financial data over several years, rather than showing specific financial data each year.
State Aid – Pennsylvania provides for an annual allocation to municipal pension plans from a special fund dedicated exclusively to fund retirement plans. The source of the fund is taxes paid on foreign fire and casualty insurance premiums. The amount each municipality receives depends on such factor as the financial need of its plans, the number of full-time employees participating in a plan, if the plan is an eligible plan, if the plan has been in effect for three or more years, total payroll of eligible plan members, and if there is an Order to Show Cause outstanding due to non-compliance with state regulations. State Aid is usually dispersed to municipalities around October 1 of every year and must be deposited in the pension plan within 30 days of receipt.
Vesting – the participant’s non-forfeitable right to receive a benefit, provided that the participant survives until benefit eligibility.