"...the notion that the second largest city of this Commonwealth would record the unprecedented status of bankruptcy is simply an unacceptable alternative"-

Report of the Intergovernmental Cooperation Authority, April 12, 2004

Five years ago when the City was new to Act 47 status and the oversight board was getting its bearings there had to be some inkling of a very real possibility Pittsburgh could find itself in front of a bankruptcy judge.  The City was characterized as being saddled with an outmoded tax structure and out of budgetary gimmicks to meet its spending needs.  Per capita debt was far out of line with other U.S. cities. To forestall a worsening situation, the state had approved the City's petition for Act 47 status, created a new, separate oversight board, and enacted a tax reform package for the City.   

The issue of legacy costs-pensions, post-retirement health care, debt, and workers' compensation-was serious then and has become even more severe. The Act 47 team recently noted they "have reached unsustainable levels". This is especially true of the City's pension situation.  Consider that in 2003 the plans contained 41 percent of the assets needed to meet liabilities; that ratio has fallen to as low as 28 percent in recent months.  Indeed, at 41 percent funded, dramatic and immediate steps were called for but were not forthcoming. Instead, procrastination and hope for a miracle were the City's policy response.  

Currently, the City and the state are at cross purposes on the issue of Pittsburgh's pensions.  There is a plan in the Legislature to turn administration and management of the pensions over to the Municipal Retirement System, heretofore a voluntary organization.  However, the City wants to opt out of the legislative plan and wants to hang its fate on trying to lease parking garages and lots for an upfront payment of at least $200 million net of debt repayment and transaction costs.  That money would be used to bring the funded ratio of the plans to above 50 percent. 

Here's the problem. It is not clear the lease will generate a net of $200 million and even if it did, the level of current liabilities has not been updated and $200 million, if achievable, might not lift the funding ratio above 50 percent. Moreover, simply reaching 50 percent funded still leaves a giant hole in the pension plans' ability to meet obligations.

And still worse, what if neither plan is capable of restoring the City's pensions to good financial health? Could the possibility of bankruptcy be in the offing?

For certain, the state and the City will do everything in their power to avoid going forward with bankruptcy, formally known as a Municipal Debt Adjustment under Chapter 9 of the U.S. Bankruptcy Code.  The Code defines a municipality as a "public agency or instrumentality of a state", language broad enough to include cities, counties, school districts, and special purpose governments (authorities). 

Under amendments made to Chapter 9 in 1994, municipalities must be specifically authorized by their state to be a debtor under the law.  Pennsylvania is one of nineteen states that do have such an authorization, and states are free to attach as many pre-conditions on filing as they wish.  Pennsylvania uses Act 47 as a temporizing program, and the Act 47 statute lays out the stipulations for a Chapter 9 filing (coordinator has to sign off on it, creditors don't like the recovery plan, etc.). Then too, Pittsburgh is more strictly limited by the law creating the oversight board that prohibits a Chapter 9 action without the direct consent of the Governor.  Note that unless renewed by the Legislature, the oversight board goes away in 2011. 

Other provisions in the Bankruptcy Code require the municipality: (a) to be insolvent, (b)  to want to put together a plan to adjust their debts, and (c) to have an agreement from the majority of their creditors that a Chapter 9 filing would be appropriate. 

Given these restrictions and, given the fact that bankruptcy is seen as a "last resort" for local governments, it is understandable that, despite having the force of law since 1937, municipal bankruptcies across the nation are quite rare (only 566 in 72 years, an average of 8 per year).  Since 1980 (about a third of all municipal bankruptcies have occurred since then) 60 percent of the municipal bankruptcies have occurred in four states; CA, CO, NE, and TX. Bankruptcy filings by general purpose governments (counties, cities, and towns) constituted about one-fifth of the filings.  The majority of filings are accounted for by municipal utilities and special district governments.

That's not to say that large cities and counties have not gone down the road of municipal bankruptcy.  Orange County (CA), Bridgeport (CT), and the recent case of Vallejo (CA) are examples of larger governing bodies that have filed for Chapter 9 bankruptcy.  Pennsylvania saw two local governments file for Chapter 9 in the 1980s (prior to the passage of Act 47) and both cases were dismissed. 

Should Pittsburgh or another municipality enter a bankruptcy proceeding the court is limited in its power to "interfere with the political or government powers of the debtor" and instead is focused on adjusting debts and trying to get a reasonable and fair settlement. This can include dismissing collective bargaining agreements that are deemed burdensome. A rejection of these agreements would necessitate renegotiating contracts.  Meanwhile, the municipality cannot be forced to liquidate its assets and distribute the proceeds to creditors. 

Five years after the oversight board raised the possibility of bankruptcy and the belief that such an action would be unacceptable, the state continues its supervision of the City's finances and could soon be the caretaker of the pension funds. Along with as much as $600 million in unfunded pension liabilities, there looms a large unfunded liability for post-retirement health care ($360 million), workers' compensation ($124 million), and general obligation debt ($723 million).   Officials likely believe that they can undertake steps sufficient to enable the City to climb out of the hole created by legacy costs while avoiding having to file for Chapter 9 bankruptcy.

The burning question of the next few years will certainly be; "Can they muster the political will to solve their legacy cost problems?"  History tells us the odds of that occurring are quite low-not without even stricter state oversight than we have seen over the last five years.

If the health of Pittsburgh's three pension plans doesn't soon improve and if pending municipal pension reform legislation becomes state law, the City will see its oversight and administration of the plans transferred to the state and all future employees will become members of a new, uniform system of pension recipients.

The legislation would establish a Municipal Pension Recovery Program and the plans in the worst shape-a funded ratio (assets/liabilities) of less than 50 percent-would be classified as "severely distressed" and taken over by the state's Municipal Retirement System (PMRS).  The legislation would not affect counties or the City of Philadelphia. 

But that does not mean the slate is wiped clean for Pittsburgh and other troubled pension plans. The City would still have to pay its minimum municipal obligation to meet annual obligations (currently a $44 million expense) and possibly more (anywhere from $29 to $66 million additional by the City's estimates) to handle its pension expense under the new program. 

It is clear why the Mayor does not like the provisions of the legislation: not only could it require the City to contribute more money and remove its control over contract bargaining, it contains none of the four ideas he has put forward in past presentations to the General Assembly including, revising the state pension aid formula, eliminating the "spiking" of pensions by accumulating overtime, allowing for 401k type plans, or consolidating some or all of the state's local government plans.  It is also clear that since Philadelphia would be exempt from the program (it is seeking a separate package of reforms including an additional percentage point increase to its sales tax rate) the Mayor probably feels that Pittsburgh should not serve as the poster child for pension problems in Pennsylvania. 

As of the most recent pension valuation (2007) by the Public Employee Retirement Commission (PERC) the aggregate unfunded liabilities (assets-liabilities) of the 3,088 municipal pension plans was $4.8 billion.  Philadelphia accounted for $3.7 billion (77%) of this total.  Removing the state's only first class city from the pension overhaul leaves a $1.1 billion shortfall to be dealt with. Pittsburgh-with $523 million in liabilities as reported by PERC, an amount that has grown to $600 million since 2007-represents about half of the remaining statewide unfunded amount.  Should both Philadelphia and Pittsburgh secure exemptions from the legislation, nearly 90 percent of the state's total municipal pension underfunding problem would not be included in the reform package.  

A very small share of plans comprising the remaining $577 million in unfunded liabilities would actually fall under state control because they are "severely distressed"-a funded ratio (assets/actuarial liabilities) below 50 percent-as Philadelphia and Pittsburgh are.  Our analysis of the state's ten largest cities shows that only Scranton's funded ratio of 57 percent comes close to the low level of funding in Pittsburgh and Philadelphia.  A recent PERC estimate noted "there may be around 30 municipalities in that category", that is, having pension plans below 50 percent funded.

Stated another way, the municipal pension problem will not be meaningfully addressed unless the underfunding in Philadelphia and Pittsburgh is dealt with.  Pittsburgh obviously prefers to go it alone as opposed to being pulled into a statewide reform.  The lynchpin of the Pittsburgh plan is to lease or sell parking garages and lots to generate a huge lump sum payment to put into the pensions. 

Recently a published report noted that the City "could conceivably net $200 million" from the proposed deal.  That would be the absolute minimum to get the pension funds to a 50 percent threshold (based on $251 million in assets and $899 million in liabilities) and possibly place the City out of the "severely distressed" category.  An amount less than that would provide a boost but not enough for the City to escape the mandates placed on them by reform.  And no one can say for sure what an actual lease or sale would bring in. As of yet no proposals have been received.

If Pittsburgh is exempted or the legislation does not become law, the City still needs to pursue the parking deal and will live under the dictates of the Act 47 plan, and that means having to contribute an additional $10-$14 million a year to shore up pensions. They might even be tempted to think about another issuance of pension bonds as they did in the late 1990-a gambit that went very sour.

There is no denying Pittsburgh's pension problem has to be addressed in a substantive manner. This is a problem many observers and analysts-including the Act 47 team-believe has grown to "crisis proportions".