Oct 12, 2019 3 min read

The City of Washington is planning to reduce its Act 205 distressed pension tax again, for the second year in a row.

Earlier this month, City Council held its first reading on the ordinance to reduce the tax from 0.4% to 0.2%, now that the city’s Aggregate Pension Fund is more than 90% funded.

“This is going to help the working residents of the City of Washington,” Mayor Scott Putnam said.

The distressed pension tax is an addition to the city’s earned income tax, which is at 1.15%, Putnam said. The Act 205 was initiated in the city in 2009, at 0.63%.

“When the tax was put in place, that pension fund was distressed and something had to be done to make it solvent,” said council member Joe Manning.

He attributed the turnaround to “very good work” from the city’s pension consultant, Frank Burnette, with Morrison Fiduciary Advisors.

“They made all the right moves as far as where they were investing the funds, and found significant returns above and beyond the expectation,” Manning said.

Burnette, who’s been working with the city since 2009, said the city’s annual return average has been 9.5% for the past 10 years.

“Their goal was to generate a 7.5% return during that period,” he said.

Burnette said that in 2008, “when the market took that turn,” the city’s pension fund was only 50% funded, which he called “severely distressed.”

“That was a low point,” he said.

On June 30, 2009, the pension fund was at $15.7 million, Burnette said. As of this past June, the city had about $56 million in that fund.

“They’ve obviously worked on controlling their liability – what they owe to their employees,” Burnette said. “And passing that tax was substantial in reestablishing their position.”

In a news release, Burnette said annual contributions to the fund increased, thanks to the Act 205 tax, general fund contributions, state aid and employee contributions. According to the release, the city’s general fund is making $902,000 annual pension bond payments until 2024.

In that release, Putnam said the city had not expected the pension fund to improve as quickly as it did.

“City officials understand the burden of this tax on people living or working in the City of Washington,” Putnam said in the release. “But responsible fiscal policy required these actions because the long-term benefits of a fully funded pension plan will make our city much stronger.”

He said that instead of worrying that Washington would become “a prime example” of the statewide problem with underfunded pension funds, city officials now anticipate achieving fully funded status of the pension fund within two years, meaning more tax reductions after 2021, according to the release.

“Now, we can say the city pension fund is one of the most fiscally sound in Pennsylvania,” Putnam said in the release.

The proposed ordinance reducing the tax from 0.4% to 0.2 will get a second reading at council next month and a final reading in December, Manning said. If approved, people will see the effects of the reduction by January. For a family earning $40,000, the reduction would save them $80 annually, according to the news release.

“What we would like to do, to give back to the people who work here and our residents, is to reduce the money they’re putting into the city when it’s not necessary,” Manning said. “We’re happy to be able to do this.”