Download - Pension Manual
-
8/3/2019 Pension Manual
1/48
Centerfor LocalGovernment
Services
Governors
Pension Manual
for Pennsylvania
Local Government
Commonwealth of PennsylvaniaTom Ridge, Governor
www.state.pa.us
Department of Community and Economic DevelopmentSam McCullough, Secretary
www.dced.state.pa.us
DCED
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
2/48
Pension Manualfor Pennsylvania
Local Government
First Edition
Harrisburg, April 2000
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
3/48
Comments or inquiries on the subject matter of this publication should be addressed to:
Governors Center for Local Government Services
Department of Community and Economic Development
325 Forum Building
Harrisburg, Pennsylvania 17120
(717) 720-7395
1-888-223-6837
Printing of this edition ofPension Manual for Pennsylvania Local Governments was funded from
appropriations of the General Assembly of the Commonwealth of Pennsylvania.
Copyright 2000, Pennsylvania Department of Community and Economic Development, all rights reserved.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
4/48
Table of Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Overview of Municipal Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Fiduciary Responsibility of Governing Body . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Act 205 of 1984 - The Municipal Pension Plan Funding Standard and Recovery Act. . . . . . . . . . . . . 7
Act 600 of 1956 - The Municipal Police Pension Plan Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Regional Police Departments and Purchase of Service Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 12
Third Class City Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
General Municipal Pension System State Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Budgeting for Annual Pension Plan Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Starting a New Pension Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Amending Existing Pension Plans and Collectively Bargained Plans . . . . . . . . . . . . . . . . . . . . . . . . 30
Plan Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Plan Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Record Keeping. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Plan Audits and the Governmental Accounting Standards Board (GASB) . . . . . . . . . . . . . . . . . . . . 36
Investment Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Reference Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Definitions of Commonly Used Pension Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Calendar of Filing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
NOTE: As you read through the manual, if you come across a term or statute with which you are unfa-
miliar, refer to the sections entitled Reference Statutes (page 39) or Definitions of Commonly Used
Pension Terms (page 41) for clarification.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
5/48
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
6/48
1
Introduction
Pennsylvania has a large number of local governments. More than 80% of Pennsylvanias municipalities have
populations under 5,000 and are ably served by dedicated elected and appointed officials. Municipal and
County pension plans cover approximately 133,224 employees in Pennsylvania. There are over 1,100 munici-
pal police departments.
Financial security for these county and municipal employees is as important in the public sector as it is in the
private sector. To assist in obtaining this security, Pennsylvania local governments operate 2,913 individual
pension plans, the most of any state in the country. These plans vary in size, participation and structure giving
Pennsylvania the unique distinction of being the leading state in the number and diversity of public sector pen-
sion plans.
The material included in this publication is for the purpose of providing general information on municipal pen-
sion plans. Statements do not represent legal opinion on any particular issue, either by the author or by the De-
partment of Community and Economic Development. Any viewpoints expressed within this publication are
solely those by the author and do not represent positions or policy of the Department.
The information provided in this manual is based on legislation currently in effect at the time of publication.
Changes frequently occur through federal and state legislation, as well as, court decisions. A thorough research
of legal questions should be undertaken prior to enacting or making policy decisions.
The Department would like to express its gratitude to William Asay and Colleen Deer who authored this publi-
cation and to Mockenhaupt Associates who permitted them the time to devote to writing this manual. The De-
partment also thanks the Pennsylvania Department of the Auditor General and to the Public Employees
Retirement Commission (PERC) for their review and commentary on the contents of this publication.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
7/48
2
Overview of Municipal Pension Plans
Sponsors and administrators of municipal pension plans are responsible to plan participants, the governing
body, and the taxpayers of their community.
There are many reasons why a municipality maintains a pension plan for its employees:
Reward employees for years of service with the municipality
Attract good employees
Retain good employees
Comply with legal requirements (Act 600 and Third Class City Code)
Utilize available state aid
A municipality may have multiple plans. The most common covered groups are police, paid full-time firefight-
ers, and non-uniformed employees. Sometimes there is more than one plan for non-uniformed employees. Re-
cords, reports and filings must be maintained separately for each plan.
Boroughs and Townships - Police
If your municipality is a borough or township and has a police department of three or more full-time officers,
you must provide a defined benefit pension plan for the full-time officers. Refer to the section entitled Act 600
of 1956 (page 10) for details. Municipalities with fewer than three full-time officers may provide a pension
plan for the officers. If the municipality does provide a plan, it can be an Act 600 plan or another benefit struc-
ture determined by the governing body (defined benefit or defined contribution) subject to the applicable provi-
sions in the borough or township codes. If the municipality has a non-Act 600 plan and subsequently increases
the force to three full-time officers, the plan must be amended to conform to Act 600 on a prospective basis.
Boroughs and Townships - Non-Police
Boroughs and townships may provide a pension plan for non-uniformed employees or paid firefighters. There
are no statutes outlining plan provisions for these plans. In general, when a non-uniformed or firefighter plan is
started, the governing body determines the benefits. Refer to the section titled Starting a New Pension Plan
(page 28) for more information about setting up plan provisions and other matters to consider for a new plan.
If your municipality already sponsors a plan for non-police employees, the governing body may amend any of
the provisions at any time. However, if union employees participate in the plan, and pension benefits are sub-
ject to bargaining, you may need to negotiate benefits. Before adopting changes to a defined benefit plan, an
actuarial study must be performed to evaluate the financial impact on the plan. Refer to the section titled
Amending Existing Pension Plans and Collectively Bargained Plans (page 30) for details.
Third Class Cities
A Third Class City must provide a defined benefit pension plan for its police officers and paid firefighters in
accordance with the provisions of the Third Class City Code. It may provide a plan for non-uniformed employ-
ees. If it does, the benefits must comply with the Third Class City Code under the plan for officers and employ-
ees or the optional plan for officers and employees. Refer to the section entitled Third Class City Code (page
13) for details.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
8/48
3
Pennsylvania Municipal Retirement System (PMRS)
Any municipality, whether a borough, township, or city can establish a plan with or transfer a plan to PMRS.
This includes police, fire and/or non-uniformed plans.
The PMRS is governed by a state law (Act 15 of 1974) that creates a separate pension system. It establishes an
entire administrative and investment program including a choice of various levels of benefit provisions. For
pension purposes, a plan maintained under PMRS must comply with the PMRS statute rather than Act 600 orthe Third Class City Code, where applicable.
If a plan transfers out of PMRS, it must then only comply with Act 600 or the Third Class City Code, if appli-
cable. A transfer out of PMRS must be approved by the governing body, a 75 percent vote of the plan mem-
bers, and by the PMRS Board of Trustees.
All Municipal Plans
The above discussion relates to the types of plans sponsored and the statutes that govern plan provisions. All
local government plans in Pennsylvania, however, are governed by the funding and reporting requirements of
the Municipal Pension Plan Funding Standard and Recovery Act, Act 205 of 1984. This law sets forth the way
in which a municipality must calculate and pay the annual contribution to the plan, the reports that need to be
prepared, filing deadlines, and when state aid entitlements are determined. All of this information is discussed
in detail within this manual.
Defined Benefit Pension Plan
A defined benefit retirement plan is designed to pay a specific benefit to a retiree upon retirement. The benefit
is calculated according to a specific formula that may be a percentage of the participants final average salary, a
percentage of the participants average pay multiplied by the participants credited service, or a dollar amount
multiplied by the participants credited service. The benefit is typically payable monthly for the remainder of
the retirees lifetime.
Other options may be available. When a retirement plan is created, plan provisions defining the benefit struc-
ture and events that trigger benefit payments should be established in a governing document. The benefit struc-
ture must be designed to comply with applicable laws. Plans may have varying benefits that reflect the needs
and desires of plan participants within the limits set by law.
Defined Contribution Pension Plan
A defined contribution retirement plan is designed to accept fixed contributions, which are allocated to individ-
ual accounts to provide a benefit upon retirement. The benefit is determined based upon the accumulated con-
tributions, investment earnings, and experience gains and losses credited to the individuals account. The
benefit is typically paid in a lump sum.
Investment Trust Account
An Investment Trust Account is opened by the plan Trustee/Administrator when a plan is created. The purpose
of the Trust Account is to serve as a bank account into which contributions are deposited and from which ex-
penses and benefit payments are disbursed (see illustration on page 4).
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
9/48
4
Annual Funding Requirements
For defined benefit plans, the annual amount to be contributed/deposited (funding requirement) is calculated by
an actuary based upon certain facts and assumptions, including the following:
Benefit provisions/specifications
Return on investment
Future salary increases
Timing and likelihood of participant termination, death and/or disability
Generally, if there are no changes to the plan provisions, and if the assumptions used in calculating the required
contributions match the actual plan experience, the annual funding requirements will remain relatively con-
stant, as a percentage of payroll. If, however, actual experience differs from the assumptions (for example,
higher/lower investment earnings are realized; higher/lower salary increases are granted; and /or plan provi-
sions change), then the contribution requirement will change.
For defined contribution plans, the annual contribution is typically fixed by the plan provisions as a percentage
of pay or a flat dollar amount. Contribution requirements are not affected by investments gains or losses.
Funding
As the foregoing illustration indicates, there are five sources of funding that will eventually be used to pay
benefits: (1) state aid; (2) employee contributions; (3) municipal contributions; (4) investment earnings; and
(5) gifts.
State Aid
The Commonwealth of Pennsylvania provides for an annual allocation to municipal pension plans from a spe-
cial 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 factors 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
Employer Contributions
Investment Earnings
State Aid
Gifts Employee Contributions
PLAN ASSETS
Benefit PaymentsExpenses
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
10/48
5
or more years, if all forms were filed in a timely fashion, total payroll of eligible plan members and if there is
an Order to Show Cause outstanding due to non-compliance with state regulations.
One check is sent to each municipality, around October 1, regardless of the number of plans sponsored (unless
the municipality is part of a regional plan). The governing body must allocate the check among the plans and
make the deposits to the respective funds within 30 days. If additional funds are needed to meet the minimum
obligation, the municipality must contribute the balance by December 31.
Refer to the sections on General Municipal Pension System State Aid (page 18) and Budgeting for Annual
Pension Plan Costs (page 22) for more detail on state aid allocations and minimum obligations.
Employee Contributions
Typically, in defined benefit plans, employee contributions serve to reduce the cost to the employer. In defined
contribution plans, employee contributions enhance the retirement benefit. They can be a significant source of
funding for your plan. Employee contributions may be mandatory or may be reduced or eliminated (Act 600
police plans require employee contributions), depending upon the laws governing your plan.
Traditionally, these contributions have been deducted from the employees paycheck on an after-tax basis.
However, it is permissible to deduct mandatory employee contributions on a tax-deferred basis for federal taxpurposes (refer to IRS Code 414(h)(2)). This change would reduce the negative impact the contributions would
have on the employees net pay. Total wages, including contributions to the retirement plan, will remain sub-
ject to social security (to the annual maximum), state, and local taxation. It is important to note that these tax-
deferred contributions would be subject to federal tax at the time of distribution from the plan, either by termi-
nation payout or disability or retirement benefits. To adopt the tax-deferred method of collecting employee
contributions, you must maintain a qualified plan under the Internal Revenue Code and amend your plan prior
to making this change.
Statutory Requirements
There are numerous regulations and acts that affect municipal retirement plans and dictate procedures and re-porting requirements. This manual contains summaries of several of the more important provisions with which
you should be familiar.
It is important that you contact your actuary prior to making changes in your pension plan. Act 205 requires an
actuary to prepare a study for defined benefit plans before any change is adopted.
Internal Revenue Code (IRC)
Municipal pension plans are exempt from the provisions of the Employee Retirement Income Security Act
(ERISA); however, they are not exempt from certain provisions of the IRC. Since it is the IRC that provides
the plan participant with special tax advantages, it is extremely important that the plan document meet those re-
quirements in order to be considered a qualified plan. Refer to the section entitled Plan Documents (page32) for more information regarding federal compliance.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
11/48
6
Fiduciary Responsibility of Governing Body
Responsibility of the Municipal Officials
In designing and administering a public pension plan, many questions arise from the governing body and the
participants. The following are some of the most commonly asked questions.
This is the employees pension plan, shouldnt they run it? After all, its their money.
What benefits can we give them?
What are the costs of adding benefits?
If the investments lose money, can we be held responsible?
What does fiduciary responsibility mean to us?
Answers
The ultimate responsibility for any pension plan rests with the governing body. The governing body has a fidu-ciary responsibility for the ongoing administration of the pension plan. A fiduciary is defined as a person who
has a duty to transact business or handle the money, not for his (or her) own benefit but for the benefit of an-
other. A fiduciary relationship imposes a duty to act in good faith and candor, with a special regard to the in-
terest of the person who places this trust and confidence in the fiduciary.
The governing body has certain responsibilities under state statutes, whether it is Act 600, Act 205, the Third
Class City Code, or other statutes that have a direct impact on the pension plan. It is important for the govern-
ing body to be aware of and comply with the statutory requirements that are further detailed in this handbook.
In addition, because this is a qualified plan under the Internal Revenue Code, other IRS specific items must be
included so that the pension plan maintains its tax-qualified status. Refer to the section entitled Plan Docu-
ments (page 32).
The responsibility for the plans solvency and proper investment management rests with the governing body.
Refer to the section entitled Investment Management (page 38). Benefits are granted to employees through
collective bargaining or unilaterally. The benefits are then formalized in the labor contract, ordinance or resolu-
tion and plan document. In a defined benefit pension plan, if the plan assets lose their value or do not perform
to expectations, the governing body must make up any additional contributions (directly or through increased
state aid). It is not only mandated by statute but also fiscally responsible for a municipality to have an actuarial
study performed prior to making any benefit changes. The study should provide a reasonable estimate of the fi-
nancial impact on the plan.
Delegation of Duties
The governing body has the authority to delegate certain duties to committees or boards and/or to investmentmanagers, third party administrators, trustees, or custodians. A pension board can serve a valuable function in
the ongoing administration of the pension plan. It should, however, act in an advisory capacity (except for
those responsibilities specifically outlined in the Third Class City Code). The ultimate responsibility rests with
the governing body.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
12/48
7
Act 205 of 1984 The Municipal Pension Plan FundingStandard and Recovery Act
This municipal pension reform legislation was signed on December 18, 1984. Act 205 includes reforms for thefunding, reporting, and financing of municipal pensions in Pennsylvania. The legislation addresses the follow-
ing major issues.
Standardized actuarial and financial reporting
Minimum employer contribution requirements
Revision of the allocation formula for distributing state aid to pension plans (including funding for non-uniformed plans)
Recovery plan and additional state funding for distressed pension plans
Revision of the distribution of State Foreign Fire Insurance taxesfor VolunteerFirefighters Relief Associations
Actuarial and Financial ReportingFor the plan year commencing in 1985, each municipality and authority must have an actuarial report prepared
for each defined benefit pension plan. The valuation must follow a prescribed format, and be calculated using
standardized assumptions and cost methods. In addition, plan valuations must be performed biennially (every
odd year - 1987, 1989, etc.). The retirement plan biennial valuation must be prepared and signed by an ap-
proved actuary. The definition of approved actuary is a person who has at least five years of actuarial experi-
ence with public pension plans and who is either enrolled as a member of the American Academy of Actuaries
or enrolled as an actuary pursuant to the Federal Employee Retirement Income Security Act of 1974.
The reports must be submitted to the Public Employee Retirement Commission (PERC) every other year (bien-
nially) beginning with 1985, regardless of the size of the plan, unless the plan is sponsored by a distressed mu-
nicipality receiving Supplemental State Assistance. A distressed municipality must submit reports annually.
Plans with 1,000 or more members must also submit a five-year experience investigation report every four
years.
Filing Requirements
Act 205 actuarial reporting forms for all plans, including defined benefit and defined contribution, must be
filed with PERC no later than the last business day of March following the year of valuation. The law clearly
places the responsibility for supervision and direction of the plan with the Chief Administrative Officer of the
pension plan, who is also responsible for filing the document. In the event the report is not filed in a timely
fashion, all financing that the Commonwealth provides to the municipality for the pension plan may be with-
held until the report is filed. In some instances, the withheld Commonwealth financing may be less than it
would have been otherwise. All pension plans may pay the fees associated with the preparation of the actuarialreports and consulting services from the assets of the pension plan.
Amortization of Unfunded Liabilities
An unfunded liability is the amount by which the plans liabilities exceed the assets. Effective January 1, 1985,
the unfunded liability was recalculated for all municipal pension plans. The amount of the initial unfunded li-
ability was required to be amortized over the next 30 years or the average future service of the active partici-
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
13/48
8
pants, whichever is less. Any change in the unfunded liability after 1985 is required to be amortized as
follows.
Any change in actuarial assumptions, or modification of benefits for active members, was required to be amor-tized over the next 20 years or the average future service of the active participants whichever is less.
Any modification in benefits for retired employees that results in increased unfunded liabilities was required tobe amortized over ten years.
Any increase or decrease in the unfunded liability caused by actuarial experience (actuarial loss or gain) was re-quired to be amortized over 15 years or theaverage futureservice of theactive participantswhichever is less.
Municipal pension plans sponsored by distressed municipalities are permitted to apply different rules to amor-
tize their initial unfunded liability. In addition, the municipality may use the maximum amortization periods al-
lowed for changes in unfunded liability without regard to the average future service.
Act 61 of 1997 permits a municipality to make an irrevocable election to eliminate the existing amortization
bases, periods and annual payments in favor of a straight 10 year amortization of the current unfunded actuarial
accrued liability. Municipalities considering this option should consult their actuary or consultant to discuss
the short and long term advantages and disadvantages of this election.
Contribution Requirements
Annually, Act 205 requires the Chief Administrative Officer of the pension plan to determine the total financial
requirement and the Minimum Municipal Obligation (MMO) for the next year based upon the most recent actu-
arial report prepared under the requirements of Act 205 and submitted to PERC. Refer to the section on Budg-
eting for Annual Pension Plan Costs (page 22) for more information.
Benefit Changes
Prior to the adoption of any benefit plan modification by the governing body of the municipality, Section 305
of Act 205 requires that the Chief Administrative Officer of the pension plan provide the governing body withan actuarial study of the financial impact of the change.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
14/48
9
Act 600 of 1956 - The Municipal Police Pension Law
Compliance
Act 600 applies to police pension plans for full-time police officers in a borough, town or township, and thoseregional police departments established after May 10, 1996. Municipalities with one or two full-time police of-
ficers may comply with Act 600; however, municipalities with three or more full-time police officers and re-
gional police departments must comply with Act 600. (Plans operating under Act 15, the PennsylvaniaMunicipal Retirement Law, will differ slightly). Act 600 includes mandatory and optional provisions for bene-
fits.
Note: As of the date of this manual, it is the opinion of the Department of the Auditor General that all home
rule municipalities, which would otherwise be required to follow Act 600, must comply with the provisions of
Act 600.
Mandatory ProvisionsAge and Service Requirements for Retirement
A participant must attain age 55 and complete 25 years of service in the same municipality to be eligible for a
normal retirement benefit.
Monthly Pension Benefit
The monthly pension benefit is fifty percent of the average monthly salary. The average monthly salary must be
based on a period of not less than 36 months and not more than 60 months immediately prior to retirement. For
those municipalities where police officers are covered by the Federal Social Security Act, the municipality
may, at its discretion, offset the monthly pension benefit upon attainment of normal social security retirement
age. The offset may be up to 75 percent of the primary social security benefit as calculated using wages earned
by the participant while employed as a police officer by the municipality.
Employee Contributions
Plans not covered by social security have a mandatory employee contribution rate of between 5 and 8 percent
of the officers total monthly compensation. For plans whose members are covered by social security, the man-
datory rate is 5 percent, if there is no social security offset.
If the retirement benefit is offset by social security, the maximum mandatory employee contribution will be cal-
culated as follows:
5% minus (3% social security offset percentage)
For example, if your plan includes a 75 percent offset, the mandatory employee contribution rate is calculated
this way:
5% (3% 75%) = 5% 2.25% = 2.75%.
Return of Employee Contributions
Employees who are ineligible to receive a pension benefit for any reason must have their total contributions
plus interest refunded by the plan upon termination of employment. If the reason for payment is due to the
death of the employee, then the refund is paid to the beneficiary.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
15/48
10
Intervening Military Service
A regularly appointed member of the police force who has been employed as such for at least six months, and
who enters active military service for the United States, must receive retirement credit for the period of active
military service. To be eligible, the person must return to employment within six months of separation from
such military service and be ineligible to receive military retirement pay as a result of that service.
In-Service Disability
The plan must provide for a disability benefit if a police officer incurs a total and permanent disability as a di-
rect result of, and in the line of duty of, employment as a police officer. Specific benefit provisions are to be
determined by the governing body.
Optional Provisions
Reduced Retirement Age
A reduction in the retirement age from 55 to as low as 50 may be provided if an actuarial cost study indicates
that it is feasible. The completion of at least 25 years of service is still required.
Reduce Social Security Offset
The social security offset to pension benefits may be reduced or eliminated. Such a reduction would changethe mandatory employee contribution rate (refer to Employee Contributions on page 9).
Vesting Provisions
A vesting provision may be added allowing an employee who terminates with 12 or more years of service to re-
ceive a partial pension benefit. The benefit would commence when the employee would have become eligible
for normal retirement.
Elimination/Reduction of Employee Contributions
Employee contributions may be reduced or eliminated on an annual basis if this does not result in the need for a
municipal contribution. This elimination/reduction must be actuarially certified and authorized by the govern-
ing body annually by ordinance or resolution.
Surviving Spouse BenefitA benefit designed to pay the spouse of a deceased police officer who was retired or eligible to retire at the
time of death. The benefit is equal to 50 percent of the normal pension benefit to which the participant was en-
titled or was actually receiving.
Killed-in-Service Provision
The plan may adopt a benefit for spouses or dependent children of officers killed in service. The benefit struc-
ture is to be determined by the municipality.
Length of Service Increments
Additional retirement benefits may accrue to participants for each year of completed service in excess of 25
years. The maximum additional benefit may not exceed $100 per month.
Cost-of-Living Adjustments (COLA)The plan may provide for an annual increase of retiree benefit payments, which may not exceed the percentage
change in the Consumer Price Index. The total benefit plus increases may not exceed 75 percent of the average
salary used for computing retirement benefit. Further, the total increases may not exceed 30 percent of the
original benefit. No COLA shall be granted which would impair the actuarial soundness of the fund. For plans
whose assets exceed the Present Value of Future Benefits, that is, fully-funded, the COLA increase may exceed
the limits listed above for the retirees that have received benefits for 20 or more years.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
16/48
11
Non-Intervening Military Service
This provision provides that a participant may purchase retirement credit for up to five years of active military
service with the United States which occurred before employment with the municipality began, if the partici-
pant is not eligible to receive military retirement pay for that service. The participant must pay an amount equal
to the statewide average normal cost for similar municipalities (but not more than 10 percent), times the partici-
pants average annual compensation during the first three years of employment as a police officer, plus interest
at the rate of 4.75 percent compounded annually, from the participants date of hire to the date of payment.
Early Retirement Provision
This recently enacted provision allows members with 20 or more years of service the option of retiring prior to
normal retirement. The benefit is the actuarially reduced accrued benefit. The actuarial reduction is based on
the interest rate and mortality table used in the latest actuarial report submitted to the state.
Example: A police officer is hired at age 30 with a normal retirement age of 55. The officer is currently 50
with an average monthly salary of $4,000. The latest actuarial report submitted to the state used a UP-84 mor-
tality table and 7.5 percent interest rate assumption resulting in a reduction factor of 62.7 percent. The benefit
would be calculated in the following manner.
Normal Retirement Benefit
Average Monthly Salary x 50% = Monthly Benefit$4,000 x 50% = $2,000
Accrued Benefit (payable at Normal Retirement Date) (NRD)Actual Yrs of Yrs from Hire x Monthly Normal = Accured Benefit
Early Retirement Benefit (payable immediately)
Accrued Benefit x Actuarial Equivalent = Early Retirement
Reduction Factor Benefit
$1,600 x 62.7% = $1,003.20
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
17/48
12
Regional Police Departments and Purchase of ServiceAgreements
History
Prior to the passage of Act 33 of 1996, it was generally concluded by regional pension plan sponsors that re-
gional police departments and the associated pension plans were created by Act 180, the Intergovernmental Co -
operation Act. Accordingly, they believed that they could transfer participation credits, transfer plan assets,
grant benefits that exceeded Act 600 limitations, and do all the things necessary to administer the new pension
plan.
For those municipalities that entered into agreements with other municipalities to create a regional police de-
partment and a regional police pension plan, it was widely accepted that the benefit structure would include the
best provisions of each of the original participating police pension plans.
Act 33 of 1996
There is now a benefit structure mandated by statute. All regional police pension plans created on or after May
9, 1996, must comply with the provisions of Act 600 (on page 9). Plans established prior to that date may con-
tinue to provide benefits previously granted, but any subsequent amendments must comply with the provisions
of Act 600.
Mandated Requirements for Proposed Regional Plans
Prior to the establishment of the new pension plan, the specific benefit structure must be determined and an ac-
tuarial study must be completed to determine the cost of the new plan. The pension plan must be adopted by or-
dinance by each of the participating municipalities with a consistent structure. Participants of the regionalpolice pension plan shall be credited with all of their time spent in the prior plan, if they are employed by the
regional department within six months of its creation.
Purchase of Service Agreements
What happens when a municipality disbands their full-time police department and purchases police services
from another municipality that hires their officers? Prior to Act 33, the police officers could not receive credit
for the previous full-time employment. Now, unless the municipality is a city, an officers service credit and
appropriate assets may be transferred from the purchasers pension plan, provided that the transfer is addressed
in the original intermunicipal agreement and that the officer is employed within six months of the date that the
purchasing municipalitys police force was terminated.
Should the purchasing municipality decide to terminate the agreement, they may rehire the police officer within
six months and transfer the appropriate assets from the pension plan of the municipality that provided the po-
lice service.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
18/48
13
Third Class City Code
Application
The Third Class City Code includes sections pertaining to the establishment of retirement plans for employeesof Third Class Cities. These cities must establish a pension fund for police officers and one for paid firefight-
ers. The cities may establish a pension fund for other city employees using the regular city plan requirements or
the optional plan requirements. The following is an overview of the pension sections of the Third Class City
Code; however, due to vagueness in the original statute and various lawsuits that have been decided, certain
provisions have been interpreted differently from one city to another. The City should seek the advice of their
solicitor for interpretation of the individual provisions applicable to their plan.
Note: As of the date of this manual, it is the opinion of the Auditor General that home rule municipalities that
were previously third class cities must maintain pension plans that comply with the Third Class City Code.
Police Pension Fund Mandatory ProvisionsAge and Service Requirements for Retirement
The city shall establish a minimum service requirement of no less than 20 years of service as a police officer in
the same city to be eligible for a normal retirement benefit. If a minimum age is prescribed, it must be age 50.
Monthly Pension Benefit
The monthly pension benefit is 50 percent of the average monthly salary. The average monthly salary is the
greater of the highest average monthly salary during any five years of service or the rate of monthly pay at the
date of termination of employment. Refer to 53 PS 39303, Third Class City Code.
Employee Contributions
The mandatory employee contribution rate will be up to 5 percent of the officers compensation, plus one dollar
per month to provide for the service increment benefit.
Return of Employee Contributions
Employees who become ineligible to receive a pension benefit for any reason must have their total contribu-
tions, without interest, refunded by the plan. If the reason for payment is due to the death of the employee, then
the refund is paid to the beneficiary.
Length of Service Increment
Additional retirement benefits accrue to attainment of age 65 to participants whose length of service exceeds
the minimum required for retirement. The amount of additional benefit is 1/40 times the monthly pension bene-
fit for each year over the minimum; it may not exceed $100 per month.
Surviving Spouse Benefit
A benefit is paid to the surviving spouse or dependent children of a deceased police officer who was retired orkilled in service. The benefit is equal to 50 percent of the normal pension benefit to which the participant was
entitled, without reduction for early commencement. The benefit continues until the later of the death of the
spouse or attainment of age 18 of the participants children.
In-Service Disability
The plan provides for a disability benefit if a police officer incurs a total and permanent disability as a direct re-
sult of, and in the line of duty of, employment as a police officer. The benefit will be the normal monthly pen-
sion benefit.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
19/48
14
Police Pension Fund Elective Provisions
Vesting Provisions
Vesting provisions may be included to allow a terminated participant with at least 12 years of service to leave
employment and receive a partial pension benefit. The benefit will commence when a participant would have
become eligible for normal retirement.
Disability
A disability benefit may be provided for a police officer who incurs a total and permanent disability not as a di-
rect result of, and in the line of duty of, employment as a police officer. If the participant has fewer than ten
years of service, the benefit will be 25 percent of the annual compensation benefit; and if more than ten years
of service, the benefit will be 50 percent of the annual compensation benefit. Refer to 53 PS 39303, Third Class
City Code.
Cost-of-Living Adjustments
The plan may provide for cost-of-living adjustments to the pension benefit, but they may not permit a retiree to
receive a benefit that exceeds 50 percent of the salary of a patrolman of the highest pay grade. Increases must
be on a uniform scale.
Non-Intervening Military ServiceThis provision provides that a participant may purchase retirement credit for up to five years of active military
service with the United States, which occurred before employment with the city began, if the participant is not
eligible to receive military retirement pay for that service. The participant must pay the employee contributions
that would have been paid during the service, plus the equivalent of the contributions of the city as a result of
that service.
Surviving Spouse Benefits
The plan may increase the killed-in-service or retiree death benefit for surviving spouses to 100 percent of the
normal retirement benefit. Also, a benefit may be provided for spouses of participants whose death did not oc-
cur in the line of duty. For deaths before 10 years of service, the benefit may be 25 percent of compensation
and after 10 years of service may be 50 percent of compensation.
Firefighters Pension Fund Mandatory Provisions
Age and Service Requirements for Retirement
The city shall establish a minimum service requirement of no less than 20 years of service as a firefighter in the
same city to be eligible for a normal retirement benefit. If a minimum age is prescribed, it must be age 50.
Monthly Pension Benefit
The benefit is 50 percent of the average monthly salary. Average monthly salary is the greater of the highest
average monthly salary during any five years of service or the rate of monthly pay at the date of termination of
employment.
Employee ContributionsThe mandatory employee contribution rate will be up to 5 percent of the firefighters compensation, plus up to
one dollar per month to provide for the service increment benefit.
Return of Employee Contributions
Employees who become ineligible to receive a pension benefit for any reason must have their total contribu-
tions, without interest, refunded by the plan. If the reason for payment is due to the death of the employee, then
the refund is paid to the beneficiary.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
20/48
15
Length of Service Increment
Additional retirement benefits accrue to participants to attainment of age 65 whose length of service exceeds
the minimum required for retirement. The amount of additional benefit is 1/40 times the monthly pension bene-
fit for each year over the minimum; it may not exceed $100 per month.
Surviving Spouse Benefit
A benefit is paid to the surviving spouse or dependent children of a deceased firefighter who was retired or
killed in service. The amount of the benefit is the amount the member was receiving or would have been re -
ceiving if he were retired. The benefit continues until the later of the death of the spouse or attainment of age
18 of the participants children.
In-Service Disability
The plan provides for a disability benefit if a firefighter incurs a total and permanent disability as a direct result
of, and in the line of duty of, employment as a firefighter. The amount of benefit and the date of commence-
ment will be determined under the terms of the plan and will not take into consideration any benefits provided
under applicable workers compensation laws.
Firefighters Pension Fund Elective Provisions
Vesting Provisions
Vesting provisions may be included to allow a terminated participant with at least 12 years of service to leave
employment and receive a partial pension benefit. The benefit will commence when a participant would other-
wise have become eligible for normal retirement.
Cost-of-Living Adjustments
The plan may provide for cost-of-living adjustments to the pension benefit, but may not permit the benefit to
exceed 50 percent of the then current rate of pay to active firefighters of the highest pay grade.
Non-Intervening Military Service
This provision provides that a participant may purchase retirement credit for up to five years of active military
service with the United States, which occurred before employment with the city began, if the participant is not
eligible to receive military retirement pay for that service. The participant must pay the employee contributionsthat would have been paid during that service, plus the equivalent of the contributions of the city for that serv-
ice, and interest on the city contribution amount.
Officers and Employees Pension Fund Mandatory Provisions
Age and Service Requirements for Retirement
A participant must complete at least 20 years of service in the employment of the same city and have attained
age 60 to be eligible for a normal retirement benefit.
Monthly Pension Benefit
The benefit is 50 percent of the average monthly salary. Average monthly salary is the greater of the average
monthly salary during the last or any five years of service. The monthly benefit will be reduced by 40 percent
of the participants primary social security insurance amount (if covered) at the time that the participant be-
comes eligible to receive the social security primary insurance benefit.
Employee Contributions
The mandatory employee contribution rate will be 3.5 percent of the monthly compensation on which social se-
curity allowances are payable and 5 percent of any monthly compensation in excess of that amount. (However,
should the officers and employees not be covered by social security, then the contribution rate will be 2 per-
cent.)
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
21/48
16
Return of Employee Contributions
Employees who become ineligible to receive a pension benefit for any reason must have their total contribu-
tions, without interest, refunded by the plan. If the reason for payment is due to the death of the employee, then
the refund is paid to the beneficiary.
Early Termination Provisions
A participant who has completed at least 20 years of service but has not attained age 60 shall be entitled to a
deferred pension provided the participant continues paying monthly employee contributions equal to the last
amount due while in active employment. Payments must continue until employee reaches the age of 60.
Disability
The plan provides for a disability benefit if an employee incurs a total and permanent disability after complet-
ing at least ten years of service and before attaining age 60. The benefit is calculated in the same way as the
normal retirement benefit but without offset for social security benefits.
Officers and Employees Pension Fund Elective Provisions
Surviving Spouse Benefit
A benefit may be provided to the surviving spouse of a deceased participant who has retired or was killed inservice. The benefit is equal to 50 percent of the pension benefit to which the participant was entitled as of the
date of death. City Council may require additional contributions by employees of up to 1 percent of compensa-
tion, if deemed necessary, to fund this benefit.
Elimination of Social Security Reduction
The pension board may permit a participant to elect to receive a monthly pension benefit without any reduction
for the payment of social security benefits provided that the participant pays the fund an amount equal to the
difference between what was actually contributed to date and the amount which would have been contributed if
the contribution rate had always been 5 percent of pay. Those participants must continue to make contributions
of 5 percent after such election.
Vesting Provisions
Vesting provisions may be included to allow a terminated participant with at least 12 years of service to leaveemployment and receive a partial pension benefit. The benefit will commence when a participant would other-
wise have become eligible for normal retirement.
Optional Plan for Officers and Employees Mandatory Provisions
Age and Service Requirements for Retirement
A participant must complete at least 20 years of service in the employment of the same city and have attained
age 60 to be eligible for a normal retirement benefit.
Monthly Pension Benefit
The benefit is 50 percent of the average monthly salary. Average monthly salary is the greater of the average
monthly salary during any five years of service or the rate of monthly pay at retirement. The monthly benefit
will be reduced by 40 percent of the participants primary social security insurance amount (if covered) at the
time that the participant becomes eligible to receive the social security primary insurance benefit.
Employee Contributions
The mandatory employee contribution rate will be 3.5 percent of the monthly compensation on which social se-
curity allowances are payable and 5 percent of any monthly compensation in excess of that amount. However,
should the officers and employees not be covered by social security, then the contribution rate will be 3 per-
cent.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
22/48
17
Return of Employee Contributions
Employees who become ineligible to receive a pension benefit for any reason must have their total contribu-
tions, without interest, refunded by the plan. If the reason for payment is due to the death of the employee, then
the refund is paid to the beneficiary.
Early Termination Provisions
A participant who retires or is terminated after 20 years of service shall be entitled to a deferred pension pro-
vided the participant continues paying monthly employee contributions equal to the last amount due while in
active employment. Payments must continue until employee reaches the age of 55.
A participant who is involuntarily terminated after 12 years of service, but before 20, shall be entitled to a pro-
rated benefit (based on ratio of completed service to 20 years) payable at age 60 (or immediately if already past
age 60). Contributions must continue until the participant has contributed for 20 years.
Disability
The plan provides for a disability benefit if an employee incurs a total and permanent disability after complet-
ing at least 15 years of service and before attaining age 55. The benefit is calculated in the same way as the nor-
mal retirement benefit but without offset for social security benefits.
Optional Plan for Officers and Employees Pension Fund Elective Provisions
Surviving Spouse Benefit
A benefit may be provided to the surviving spouse of a deceased participant who has retired, who was eligible
to retire, or was killed in service. The benefit is equal to 50 percent of the pension benefit to which the partici-
pant was entitled as of the date of death. City Council may require additional contributions by employees of up
to 1 percent of compensation, if deemed necessary, to fund this benefit.
Elimination of Social Security Reduction
The pension board may permit a participant to elect to receive a monthly pension benefit without any reduction
for the payment of social security benefits provided that the participant pays the fund an amount equal to the
difference between what was actually contributed to date and the amount which would have been contributed if
the contribution rate had always been 5 percent of pay. Those participants must continue to make contributionsof 5 percent after such election.
Vesting Provisions
Vesting provisions may be included to allow a terminated participant with at least 12 years of service to leave
employment and receive a partial pension benefit. The benefit will commence when a participant would other-
wise have become eligible for normal retirement.
Service Increment
A participant can receive a monthly service increment benefit in addition to the monthly pension for complet-
ing more than 20 years of service. The service increment is calculated by multiplying the number of full years
of service completed in excess of 20 years by 1/40th of the monthly pension benefit. Service completed after
age 65 may not be counted. Eligible employees must contribute an additional 1/2 of 1 percent of their compen-sation.
Cost-of-Living Adjustments
The plan may provide for cost-of-living adjustments to the pension benefit, but may not permit the benefit to
exceed 50 percent of the current salary being paid to non-uniformed employees of the highest pay grade.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
23/48
-
8/3/2019 Pension Manual
24/48
19
ticipants. The financial need calculation and the unit value calculation are determined by the Department of the
Auditor General for each municipality that sponsors a retirement plan. The municipality will receive the lesser
of those amounts each year.
Financial Need Calculation
The financial need calculation is based upon the total payroll reported on the AG-385 Form filed with the De-partment of the Auditor General (AG) and the cost components contained in the most recent actuarial report
filed with the Public Employee Retirement Commission (PERC).
For each defined benefit retirement plan, PERC certifies to the AG, the Normal Cost Percentage (NCP) and ei-
ther the amortization contribution or the funding adjustment (10 percent of the amount by which assets exceed
the actuarial accrued liability). Your plan should never have both an amortization contribution and a funding
adjustment. The NCP is the normal cost (NC) plus the average administration expense (AAE) minus the mem-
ber contributions (MC), divided by the total annual payroll (TAP). These figures can be found on the Act 205
Form.
(NC + AAE MC) / TAP = NCP
The normal cost percentage is multiplied by the payroll on the AG-385 Form. (Note that this normal cost per-centage is different from the Normal Cost Percent used on your Minimum Municipal Obligation). The Depart-
ment of the Auditor General either adds the amortization contribution to the normal cost, or subtracts the
funding adjustment from the normal cost to determine the need for each plan.
(NCP x Payroll) + Amortization Payment (or) Funding Adjustment = Financial Need
The defined contribution Normal Cost Percentage is either the stated contribution rate or the contribution rate
determined by dividing the employer contribution by the payroll on the Act 205 Form. The Normal Cost Per-
centage is then multiplied by the AG 385 payroll to determine the financial need of the plan. The need for each
of the plans sponsored by a municipality is added together to determine the total municipal financial need.
Unit Calculation
The unit calculation is based upon the number of units for the municipality multiplied by the State Aid Unit
Value, as determined by the Department of the Auditor General.
The number of units for the municipality is determined by adding the applicable number of units that are attrib-
utable to each eligible employee. An eligible employee is an active member of an eligible pension plan, em-
ployed on a full-time basis (at least 35 hours per week), for a minimum of six consecutive months in the prior
year. The applicable number of units for each eligible employee is as follows:
Police Officer 2 units
Firefighter 2 units
All other employees 1 unitThe State Aid Unit Value is determined on an annual basis by the Department of the Auditor General based
upon the total amount of aid available, the total number of units certified by all eligible municipalities, and cer-
tain adjustments required by law. The chart on the following page shows the State Aid Unit Value amounts
through 1999.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
25/48
20
Allocation of State Aid
The State Aid amount for all plans sponsored by the municipality will be paid in one disbursement to the mu-
nicipality around October 1 of each year. The governing body of the municipality will decide how the funds
will be allocated among the eligible retirement plans sponsored by the municipality. It is important to remem-
ber that all of these funds must be used for the pension plans, and must be deposited into the plan(s) within 30
days after being received by the municipality.
The Department of the Auditor General periodically audits each of the retirement plans of the municipality to
ensure the proper allocation and administration of State Aid funds to provide retirement benefits.
In addition, if applicable, a separate disbursement is made to municipalities who continue to qualify under Act
147 of 1989, the Ad Hoc Cost of Living provision. The act mandated COLA increases for individual police
and firefighters retiring normally before February 1984 and under the disability provision of the plan with less
than 10 years of service. The act also provided for an annual reimbursement of these COLA increases as long
as the municipality submits an AG 490 Form and attachments on a timely basis. (April 1st
of each year).
Should the municipality grant a COLA after the enactment of the Act, February 1989, the new COLA will af-
fect any COLA granted under Act 147 and the amount of reimbursement from the Auditor General.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
26/48
21
The disbursement is made to the municipality and need not be deposited into the pension funds.
Type of Retirement Amount Years Retired as of January 1, 1989
Normal $25/mo. At least 5, but less than 10
Normal $75/mo. At least 10, but less than 20
Normal $150/mo. At least 20
Disability $50/mo. Less than 10 and retired prior to January 1, 1985
Under court order, the surviving spouse of the retiree may continue to receive the survivor portion of the Ad
Hoc COLA if the plan provided for such a benefit.
Year Value Change Year Value Change Year Value Change
1985 1,146$ 1990 2,501$ -23.5% 1995 2,311$ 1.1%1986 1,624$ 41.7% 1991 2,490$ -0.4% 1996 2,200$ -4.8%
1987 2,173$ 33.8% 1992 2,331$ -6.4% 1997 2,248$ 2.2%
1988 2,746$ 26.4% 1993 2,310$ -0.9% 1998 2,437$ 8.5%
1989 3,269$ 19.0% 1994 2,286$ -1.0% 1999 2,217$ -9.1%
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
27/48
22
Budgeting for Annual Pension Plan Costs
Minimum Municipal Obligation
The required municipal contribution, referred to as the Minimum Municipal Obligation (MMO), is calculated
annually. The MMO represents the municipalitys annual funding requirement. The calculation must be pre-
pared for the upcoming calendar year, certified by the Chief Administrative Officer, and submitted to the
municipalitys governing body by the last business day of September. Note that if the plans assets exceed the
present value of future benefits, based on the last valuation prepared for filing with the Public Employee Retire -
ment Commission, no MMO is required.
MMOs for Defined Benefit Plans
Normal Cost
This is the annual cost component of funding a pension plan. The actuarial report contains the amount ex-
pressed as a percentage of payroll.
Administrative Expense
Act 205 allows actuarial and certain other administrative expenses to be paid from plan assets at the option of
the Plan Sponsor. If expenses are paid from plan assets, an amount representing an estimate of the expenses for
the upcoming year should be included in the MMO. The last actuarial report may contain an estimate of the av-
erage administrative expense, which may be expressed as a percentage of payroll.
Amortization Payment
This figure is from the actuarial report and reflects the net annual amortization payment of the Unfunded Actu-
arial Accrued Liability, if any. If the actuarial report indicates that the plan has an Amortization Payment, there
will be no Funding Adjustment.
Estimated Total Annual PayrollThis figure is the estimated pay for each member of the plan during the current year (which is the year before
the payment is due). This figure should be your best estimate of pay for the current year determined by adding
current year W-2 pay up to the date of calculation to the projected salary or base wages to year end, using the
payroll rates in effect from the date of calculation to year end. Payroll should only be included for active plan
members at the time you are preparing the calculation.
Employee Contributions
Multiply the estimated payroll above by the contribution rate anticipated for next year.
Funding Adjustment
This figure is from the most recent actuarial report and reflects 10 percent of the excess of the Actuarial Value
of Assets over the Actuarial Accrued Liability, if any. If the actuarial report indicates that the plan has a Fund-ing Adjustment, there will be no Amortization Payment.
Insurance Premiums
If the pension plan owns life insurance policies, determine net insurance premiums payable from plan assets for
the next plan year using your best estimate.
State Aid
State Aid is no longer included in the Minimum Municipal Obligation (MMO) calculation. The financial re -
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
28/48
23
quirement calculation is reduced only by employee contributions and the funding adjustment. Municipalities
are now required to deposit the full MMO using state aid and municipal contributions. A separate estimate
should be made for anticipated state aid to be received for budgeting purposes.
If budgeted state aid is overestimated, the community must make up the shortfall by year-end, even though the
shortfall amount was not included in the original budget. Just the opposite will occur if the state aid is underes-
timated. In that case, the municipal share is simply reduced or eliminated.
An accurate estimate of state aid will enable municipalities to include an appropriate amount in the budget for
local contributions and avoid surprises the following October when the state aid is received. This is especially
important if the employee contribution rate depends on whether a local contribution will be needed (as in an
Act 600 plan).
MMOs for Defined Contribution Plans
Though preparing an MMO for a defined contribution plan is required, the amount calculated may not be equal
to the actual employer contribution obligation. This is unlike a defined benefit plan in which the MMO is ex-
actly equal to the employer obligation. In a defined contribution plan, the MMO should be viewed as more of a
budget estimate. The actual contribution is determined by the employer contribution rate, actual plan yearpayroll and actual eligible participants. The payroll that should be used for the MMO calculation should be the
projected payroll for the budget year (upcoming year) including projected increases in salaries and membership.
Amending an MMO
An MMO may, but is not required to, be amended after September 30 to increase the estimated payroll, or if a
more current actuarial valuation report is completed for filing with PERC. However, it is important that the
employee contribution rate of the final MMO matches the actual rate for the upcoming year. The final MMO
must be adopted by the time the final municipal budget is adopted.
Contribution Due DatesState aid must be deposited to the individual plan(s) within 30 days of receipt (approximately October 30). The
balance of the MMO or employer contribution must be deposited to the appropriate plan by December 31.
Interest Payment/Penalty
For late deposits of state aid, interest must be deposited based on the actual rate that would have been earned by
the plan. Any unpaid portion of the MMO after December 31 must be paid along with an interest penalty. The
interest penalty is calculated based on the greater of the interest rate assumption used in the actuarial report or
the six- month Treasury Bill rate on the last business day of the plan year. The interest is calculated from the
beginning of the plan year in which it was due through the month of payment, compounded monthly.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
29/48
24
Questions:
1. Can we pay our plans MMO at the beginning of the year so that we can earn as much interest as
possible?
Yes! Depositing all or part of the contribution at the beginning of the year for that year will help in-
crease plan earnings for the year. Then, when the state aid is allocated around October 1, you may sim-
ply reimburse the municipality for the amounts already deposited.
2. We deposit the employer contribution for our defined contribution plan on each payday with the
employee contribution. Can we use state aid for this?
Yes. When the state aid check comes, you can reimburse the municipality for contributions made year
to date (as long as they were for the current plan year) and reserve an amount needed to pay contribu-
tions for the balance of the year in an interest bearing account.
3. What should we do if we get more state aid than we need to pay our MMOs?
If you have funded the full amount of the MMO for your defined benefit plans and the required em-
ployer contribution for your defined contribution plans, you may use the rest in any of the following
ways:
Extra contribution to a defined benefit plan
Extra contribution to more than one defined benefit plan
Reimburse the municipality for any plan administrative expenses incurred duringthe year which were paidby the general fund
If none of these apply (because you only have a defined contribution plan and have no further administra-tive expenses to reimburse) you should contact the Department of the Auditor General to see if the excessshould be returned.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
30/48
25
_____________________Pension PlanSample Defined Benefit MMO for 20___
A. Normal Cost
1. Normal Cost as a Percent of Payroll ______________ %
2. Estimated 20__ payroll for active participants $______________
3. Normal Cost (A1 A2) $______________
B. Financial Requirement
1. Normal Cost (From A3) $______________
2. Anticipated insurance premiums (if applicable) $______________
3. Anticipated administrative expense $______________
4. Amortization payment, if any $______________
5. Financial requirement (B1 + B2 + B3 + B4) $______________
C. Minimum Municipal Obligation
1. Financial requirement (from B5) $______________
2. Anticipated employee contributions $______________
3. Funding adjustment, if any $______________
4. Minimum Municipal Obligation (C1 - C2 - C3) $______________
Notes
Any deposit equal to the MMO must be made by December 31, 20___ to avoid an interest penalty.
20___ General MunicipalPension SystemState Aidmay be used to fund part or all of themunicipal obligation.
Anydelinquent MMOs from prior years must be included in the20___budget along with an interest penalty.
Certification
I hereby certify that the above calculations, to the best of my knowledge, are true, accurate and conform with
the provisions of Chapter 3 of Act 205 of 1984.
Prepared using the January 1, _________ Valuation.
________________________________________ _________________
Chief Administrative Officer Date
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
31/48
26
Starting a New Pension Plan
Do you have employees working for your municipality who are not covered by a pension plan? If so, do you
want to start a new plan? If you already have a plan, do you want to expand the eligibility requirements to
cover your other employees? There are many questions that need to be answered before proceeding with a new
plan or expanding your current plan.
Police Employees
If the employees you are considering covering with a pension plan are full-time police officers, three questions
will guide your decision.
Do you have three or more full-time officers?
If you are a borough or a township with three or more full-time officers, you must construct the plans benefit
provisions in compliance with Act 600 (see section on Act 600, page 9). If you have fewer than three full-time
officers, the municipality may determine the benefit provisions at its discretion.Will you have three or more full-time officers in the foreseeable future?
If you dont currently have three or more full-time officers but will at a future date, the plan will have to be
amended at that point to comply with Act 600. The more provisions of the plan that are different from Act 600,
the more difficult the transition. If you dont anticipate ever having three or more full-time officers, you are not
required to conform with Act 600; however, you may choose to comply with Act 600.
Are you considering covering part-time officers?
You may not cover part-time police officers in an Act 600 plan.
Non-Police and One or Two-Member Police Departments
Do you want to give credit for past service?
If not, you have much more flexibility in plan design. Cost containment is simple. More careful plan design is
required if the plan is to credit past service to current employees. A defined benefit plan would more likely be
the type of plan that will meet this goal. You should consult an approved actuary to determine how the granting
of past service will affect plan costs.
What are your primary goals and objectives in providing a pension plan for your employees?
Reward long-service employees
Entice and retain employees with a valuable retirement program
Utilize state funding
Supplement a total benefits package
Do you want to include part-time employees in the plan?
You can include part-time employees; however, you wont be eligible for state aid for those employees.
Should you have a defined benefit plan or a defined contribution plan?
A defined benefit plan is one in which the amount of monthly benefit at retirement is defined by a formula. It is
payable for the lifetime of the participant, and possibly to a beneficiary as well. A defined contribution plan is
one in which the amount of the annual contribution is defined. The retirement benefit is based on the value of
the participants account at the time of distribution.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
32/48
27
Defined Benefit Plans
Benefit formula
Can be based on years of service
Can be based on final average salary
Can be based on final average salary and years of service
Can be a flat dollar amount
Retirement eligibility requirements
Minimum age
Minimum service
Early retirement with a reduction
Ancillary benefits
Total and permanent disability pension Death or survivor benefits
Vested pension
Advantages
Secure retirement income to retirees because benefit is guaranteed for life
Easier for employees to judge level of income provided by pension plan
Employee bears no investment burden
Can credit past service for current employees
State aid is provided for administrative expenses paid from plan
If investments perform better than expected, contributions may go down or be eliminated
Disadvantages
Employer bears investment burden; if investments underperform, contributions increase
Dependingon the formula, canbe difficultto understand howmuch of a benefit hasbeen earnedat a given time
Contribution levels can fluctuate
Must employan actuary to evaluate the plan biennially andany time benefit improvementsare being considered
Benefits are not typically portable
Defined Contribution PlansContribution rate
Can be a percentage of pay
Can be a flat annual dollar amount
Can be a weekly or hourly rate
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
33/48
-
8/3/2019 Pension Manual
34/48
29
Hire an investment manager/custodian for the fund
Invest and manage assets
Handle deposits and payments
Maintain record of fund transactions
Provide periodic value of assets
Appoint a Chief Administrative Officer
Should be someone familiar with state regulations and involved in the day-to-day operations of the plan.
Make sure that you obtain and file the necessary forms
Act 205 Form prepared biennially as of January 1 every other odd-numbered year, and due to be filed 15 monthslater; obtain from Public Employee Retirement Commission (for defined benefit plans, form must be certifiedby an Approved Actuary).
AG-385 Form prepared annually; report employee payroll for calendar year; filing deadline is March 31 afterthe end of the year; forms can be obtained from the Department of the Auditor General.
Starting your plan effective the beginning of a year (January 1) will entitle your municipality to state aid sooner.
The state requires that a municipality fund a new plan for three full years before being eligible for state aid.
IndexHome
County Officials City Officials Township Officials Borough Officials Council of Governmen
http://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdfhttp://../Start_Here.pdf -
8/3/2019 Pension Manual
35/48
30
Amending Existing Pension Plans and CollectivelyBargained Plans
Pension Plans Covering Union Employees
Most unions bargain over pension benefits. It