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HANOVER TWP. — The health of Hanover Township’s police pension fund slipped from bad to worse in recent years, according to a report by the state auditor general’s office. The “funding ratio” — the percentage of total liabilities covered by current assets — plummeted from an already sickly 58.1 percent to an anemic 49 percent.

Township Manager Sam Guesto blamed the decline on two factors: Disability pensions, which are paid at a higher rate than regular retirement pensions, and new rules in doing the pension fund math.

“There were some members put on pension through disability, which would have a great impact,” Guesto said. Disability pays 75 percent (of average monthly pay), compared to 50 percent for the regular pension.

But a number of changes in how the fund’s health is gauged also contributed, he said. New rules restrict the use of “smoothing” the estimated amount a fund is making on investments by using an average return over a stretch of years. The rules also restrict amortization, or how many years over which an obligation can be spread.

“The mortality rate was increased too,” Guesto said. “People are living longer, so they changed that.”

All of this, he argued, could make a pension fund look worse than it did prior to the changes simply by altering the math used to calculate whether a system is fully funded.

The auditor general’s office looked at the pension fund from Jan. 1, 2013 to Dec. 31, 2014 as part of regular audits scheduled for all such funds to check for compliance with laws and regulations. It found no problems on that front.

But it did note the steep drop in the funding ratio.

“We are extremely concerned about the funded status of the plan,” the report says, citing a drop in the funding ratio “from 58.1 percent as of Jan. 1, 2011, to a ratio of 49 percent as of Jan. 1, 2013, which is the most recent data available.

“We encourage township officials to monitor the funding of the police pension plan to ensure its long-term financial stability.

The state Public Employee Retirement Commission uses the funding ratio to label municipal plans: “Not distressed” at 90 percent to 100 percent, “minimal distress” at 70 percent to 89 percent, “moderate distress” at 50 percent to 69 percent, and “severe distress” below 50 percent.

On its own, the drop in the police pension ratio would mean a switch from moderate to severe distress, but the state aggregates all of a municipality’s pension programs for a single rating. In this case, the township’s other pension program, for non-uniformed employees, is healthy enough — 65 percent — to lift the combined ratio above 50 percent, keeping the township’s overall pension system where it has been since 2009, in moderate distress.

Guesto said that the township continues to pay the “minimum monthly obligation” required by the state. He also said changes were made in the police contract that should, over time, improve the pension fund’s health.

Police had been receiving 1 percent longevity pay every two years, but new hires will get the same longevity pay every three years. The cumulative increase is also capped at 10 percent, a limit that didn’t exist in the prior contract.

And while it doesn’t directly affect the pension fund, changes in health care coverage should ease strain on the township’s overall budget, Guesto said, including changes in the percentage of the insurance premium paid by new hires.

“All municipalities are facing a dilemma as far as pensions go,” Guesto said. “We think we’ve made some strides over the last couple years, and I’m hopeful (the ratio) will improve when there is a new evaluation.”

By Mark Guydish

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Reach Mark Guydish at 570-991-6112 or on Twitter @TLMarkGuydish.