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Auditor General Weighs in on Municipal Pensions

Almost a year ago the Auditor General (AG) pointed to two major problems he saw with the local pension system in Pennsylvania: one, there are too many plans and some type of consolidation should be in order, and two, the assumptions of investment rate of return was too optimistic. We wrote a blog on the AG’s work last February.

The release of the latest PERC status report on local pensions is the impetus for the AG to once again look at the issue. The AG’s report notes that “562 municipalities administer pension plans that are distressed and underfunded by at least $7.7 billion”. This is true, however, there are levels of distress under Act 44 of 2009 with cutoff points on funding ratio. So, while a pension plan that is 89% funded is distressed it should be noted that it is in the category of “minimal distress” and one point underneath the “no distress” category. In addition, when the pension plans in Philadelphia and Pittsburgh are removed from the picture the total unfunded liability falls to $1.8 billion.

The AG’s work also outlines plans by the assumed rate of return municipalities attach to them, which the AG notes is defined by state law and must fall between 5% and 9%. Recall Pittsburgh’s debate about lowering the rate of return from 8% to 7.5% and what that would mean for the budget (see here and here and here). Amazingly, 304 defined benefit plans are currently assuming a rate of return greater than 7.5% and about 30% of those have a funding ratio of less than 70%.

Pittsburgh School Enrollment Decline Is Really No Surprise

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In something of a surprise to school officials and the promoters of public schools in Pittsburgh, enrollment in the District fell for the school year just underway. They had forecast enrollment to rise after a decades’ long slide had lowered it to just under 25,000 in the 2012-2013 school year. That’s a far cry from the 37,000 enrolled in the 2000-2001 school year, which itself was already well below the decade earlier level. Continue reading

Pittsburgh Area Job Gains Good—But a Mystery

Over the last twelve months-July 2012 to July 2013 (the latest available figures)-private sector employment in the Pittsburgh seven county metro area climbed by 18,700 jobs, a gain of nearly 2 percent. While slower than the 3 percent annual growth registered during the fall of last year, Pittsburgh regional employment improvement far outpaced the sluggish pace recorded in the Commonwealth.  That means much of the state was experiencing very slow growth, and in the case of the City of Philadelphia, an actual decline.

 

Although the solid increase in employment in Southwest Pennsylvania is somewhat remarkable in the face of statewide weakness and is good news for the region, there is something of a mystery about what is driving the job gains. In the broad categories, gains in financial activities, professional and technical services and leisure and hospitality accounted for 16,000 net new jobs over the last twelve months. Note that both wholesale trade and retail trade along with private colleges posted lower employment figures. Health care and specialty construction enjoyed significant gains as well.

 

But back to the mystery.  Within the financial activities grouping, finance and insurance firms that represented 57,800 of the jobs in this group posted a measured and reported employment rise of 1,600 over the last twelve months. The business categories other than finance and insurance within the broad financial activities group include real estate rental and property management agencies, and firms renting other assets such as cars, equipment and consumer items. Thus, of the 4,300 total job increase in the financial activities sector, 2,700 were accounted for by the smaller financial activities sector components that, taken together, had total employment of just 14,500 a year ago. That means these businesses had an employment jump of almost 20 percent. 

 

This is not to argue that the spectacular growth did not happen but it would be reassuring to know which of the smaller sectors enjoyed such massive gains.  Otherwise there is a fear that benchmarking changes next year will find the originally reported numbers were too high.

 

A similar pattern exists in leisure and hospitality. Of the 5,700 employment rise over the last twelve months 1,700 net new jobs were added in accommodations and food services. Note that accommodation and food services accounted for 92,800 of the leisure and hospitality category in July of 2012, 80 percent of all leisure and hospitality employment.  Thus, the arts, entertainment  and recreation components-the other categories within leisure and hospitality-with combined employment of 24,300 in July 2012 accounted for 4,000 of the leisure and hospitality gain of 5,700. The arts, entertainment and recreation jobs increase amounts to 16.4 percent annual growth. 

 

Again, this not to say the jobs are not really there. It could be earlier measurements were too low and we are now getting more accurate readings. But it would be nice to know which firms or sub-sectors were adding jobs at such a tremendous rate. It would also be nice to know whether the job growth reflects the weekly hours worked reduction phenomenon brought about the Obamacare provisions whereby firms hire more people but at reduced hours in order to get the work done.  Such behavior could go a long way to explain what is happening. Time will tell.

 

Finally, professional and technical services employment continued its far above average growth by recording a rise of 6,100 jobs over the last twelve months-an 8 percent jump.  Unfortunately, the Labor Department reports jobs numbers for only two sub-sectors-architecture and engineering along with scientific research and development services. Together these two categories accounted for only 900 of the total professional and technical services sector gain of 6,100. So, here we are again wondering where the job strength is coming from.  The professional and technical services sector covers a wide variety of services including legal, accounting, advertising, computer services, design, consulting, photography, and veterinary services and others.

 

Since this vast array of services produced 5,200 net new jobs (almost 30 percent of all the net increase in private sector employment) over the last twelve months it would be very helpful to have some idea where the strength lies.  Is it broad based or are there sub-sectors showing tremendous growth? Are there federal, state or local policies boosting the robust growth and is it sustainable?  If so, that would be very useful to know.

 

In total, some 12,000 of the 18,700 private sector job gain over the last twelve months occurred in categories that are not individually measured leaving us to scratch our heads trying to figure out where those jobs actually are and why the growth is so rapid.

Three Teacher Strikes Open the Year

Residents in the Allegheny County school district Shaler Area had a strong inkling back in June that there would likely be a teacher strike if negotiations did not produce a new contract. We suggested that teachers demonstrate over the summer to show they were serious: it is doubtful that they actually did that, but today the picket lines were manned and the start of school delayed. The issues related to education, pay, benefits, whether or not Pennsylvania should allow strikes, replacement teachers, etc., etc., arise again after a relatively quiet year on the labor front and those in the district and others in southwestern Pennsylvania are going to hear a lot about it in the media.

Based on data from the Pennsylvania School Boards Association-who collects and disseminates data on strikes in the state which we used to produce our most recent report on the topic-Shaler teachers last went on strike in the 1997-98 school year for three days.

While the Shaler strike is obviously dominating the news locally, there are other strikes that are occurring in northeastern Pennsylvania to start the school year. Teachers in the Wyoming Area District and the Old Forge District have walked off the job this week.

Pittsburgh Area Job Gains Good—But a Mystery

Over the last 12 months-July 2012 to July 2013 (the latest available figures)-private sector employment in the Pittsburgh seven county metro area climbed by 18,700 jobs, a gain of nearly 2 percent. While slower than the 3 percent annual growth registered during the fall of last year, Pittsburgh regional employment improvement far outpaced the sluggish pace recorded in the Commonwealth. That means much of the state was experiencing very slow growth and in the case of the City of Philadelphia an actual decline.

Although the solid increase in employment in Southwest Pennsylvania is somewhat remarkable in the face of statewide weakness and is good news for the region, there is something of a mystery about what is driving the job gains. In the broad categories, gains in financial activities, professional and technical services and leisure and hospitality accounted for 16,000 net new jobs over the last 12 months. Note that both wholesale trade and retail trade along with private colleges posted lower employment figures. Health care and specialty construction enjoyed significant gains as well.

But back to the mystery. Within the financial activities grouping, finance and insurance firms that represented 57,800 of the jobs in this group posted a measured and reported employment rise of 1,600 over the last 12 months. The business categories other than finance and insurance within the broad financial activities group include real estate rental and property management agencies, and firms renting other assets such as cars, equipment and consumer items. Thus, of the 4,300 total job increase in the financial activities sector, 2,700 were accounted for by the smaller financial activities sector components that taken together had total employment of just 14,500 a year ago. That means these businesses had an employment jump of almost 20 percent.

This is not to argue that the spectacular growth did not happen but it would be reassuring to know which of the smaller sectors enjoyed such massive gains. Otherwise there is a fear that benchmarking changes next year will find the originally reported numbers were too high.

A similar pattern exists in leisure and hospitality. Of the 5,700 employment rise over the last 12 months 1,700 net new jobs were added in accommodations and food services. Note that accommodation and food services accounted for 92,800 of the leisure and hospitality category in July of 2012, 80 percent of all leisure and hospitality employment. Thus, the arts, entertainment and recreation components-the other categories within leisure and hospitality-with combined employment of 24,300 in July 2012 accounted for 4,000 of the leisure and hospitality gain of 5,700. The arts, entertainment and recreation jobs increase amounts to 16.4 percent annual growth.

Again, this not to say the jobs are not really there. It could be earlier measurements were too low and we are now getting more accurate readings. But it would be nice to know which firms or sub-sectors were adding jobs at such a tremendous rate. It would also be nice to know whether the job growth reflects the weekly work hours reduction phenomenon brought about the Obamacare provisions whereby firms hire more people but at reduced hours in order to get the work done. Such behavior could go a long way to explain what is happening. Time will tell.

Finally, professional and technical services employment continued its far above average growth by recording a rise of 6,100 jobs over the last 12 months-an 8 percent jump. Unfortunately, the Labor Department reports jobs numbers for only two sub-sectors-architecture and engineering along with scientific research and development services. Together these two categories accounted for only 900 of the total professional and technical services sector gain of 6,100. So, here we are again wondering where the job strength is coming from. The professional and technical services sector covers a wide variety of services including legal, accounting, advertising, computer services, design, consulting, photography, and veterinary services and others.

Since this vast array of services produced 5,200 net new jobs (almost 30 perent of all the net increase in private sector employment) over the last 12 months it would be very helpful to have some idea where the strength lies. Is it broad based or are there sub-sectors showing tremendous growth? Are there federal, state or local policies boosting the robust growth and is it sustainable? If so, that would be very useful to know.

In total, some 12,000 of the 18,700 private sector job gain over the last 12 months occurred in categories that are not individually measured leaving us to scratch our heads trying to figure out where those jobs actually are and why the growth is so rapid.

Familiar Threads Woven in Harrisburg Recovery Plan

Over three years ago, in February 2010, we asked if the debt related to a trash incinerator was pervasive enough to cause a municipal bankruptcy filing-colloquially, that the City of Harrisburg’s finances could possibly end “up in ashes”. 

 

After the City was placed into Act 47 status, saw the General Assembly make changes to the statute as it applied to Harrisburg, and operating under the direction of an appointed receiver, a plan, somewhat pretentiously titled “Harrisburg Strong”, has come together for placing the City on the path to a solid financial future.

 

Readers of our reports, especially as they pertain to Pittsburgh, will notice some familiar themes and one very different situation; namely, the presence of the aforementioned dollar devouring trash incinerator. That facility is slated to be sold-to another public authority-and some of the proceeds will go to satisfy creditors (but only partially satisfy since negotiations have produced settlements for less than owed) and reimburse Dauphin County.  That won’t pay all the bills, so a 40 year lease of parking garages, lots, and street spaces to a public-private partnership is expected to yield enough money to pay off parking debt, the rest of the incinerator debt, for the City itself, and for funds related to economic development, infrastructure development, and a trust fund for retiree health care obligations.

 

That last point is a good starting place to assess how the City and its employees are partnering up at this critical juncture.  As the February 2012 recovery plan pointed out, Harrisburg is similar to many municipal governments in that it is a very labor intensive undertaking and the lion’s share of costs are attributable to employee compensation.  Three bargaining units represent the majority of the workforce covering police, fire, and non-uniformed staff (461 employees total including non-represented staff) and all negotiated early-bird contract extensions that limited the City’s and the receiver’s ability to make changes.  Compared to other cities of the third class in Pennsylvania (Reading, York, Allentown, etc.) the plan found that Harrisburg public safety minimum salary ran about $10,000 higher. The recovery plan projected workforce costs to rise from $45 million to $52 million from 2012 through 2016. 

 

As described in the “Harrisburg Strong” plan, two of the three bargaining units (police and non-uniformed) have agreed to concessions during the lives of the existing contracts to move the City toward its goal of getting $4 to $4.8 million in savings.  There are tradeoffs for both the City and the bargaining units: for police, what were to be 3 percent annual wage increases through 2016 are now 0 rising to 1 percent in the final year.  Payments toward health care coverage for current employees will be made with variations based on the number of people covered on an employee’s plan with the percentage of income paid for insurance rising throughout the duration of the agreement.  Current employees who retire after the ratification of contract changes are treated the same as active employees and, as is almost always the case when it comes to legacy cost changes, new hires will not be eligible for post-retirement health care benefits. The police contract opens up the possibility that certain positions might be offered to civilian employees and that booking could be transferred to Dauphin County. Most of those same terms will apply to the adjustment for non-uniformed employees.  

 

So what sweeteners do the employees get in return for these concessions? For one thing they are asking for elimination of the residency requirement. This issue has been bandied about in Pittsburgh over the summer and will no doubt intensify closer to Election Day. In Harrisburg, the proposed amendments for both police and non-uniformed contracts contain language stating “…the residency requirement contained in prior collective bargaining agreements between the parties is eliminated, and employees, regardless of hiring date, shall not be required to establish or maintain a residence within the corporate limits of Harrisburg”.  Could that be a deal breaker for City officials who must pass some of the necessary ordinances to make “Harrisburg Strong”? 

 

Overall approval for the plan falls to the Commonwealth Court, which plans to review the proposal in mid-September. 

Lobbyists as State Pensioners

Want an inkling of how the government leviathan grows and builds protective barriers around its ever expanding reach and power over taxpayers and citizens? Thanks to an AP story this morning the public has learned something we should have known long ago. In at least 20 states, lobbyists for school districts, cities and counties are eligible for taxpayer funded and guaranteed pensions.

How utterly absurd but how easily predicable. The practice ought to be viewed as a major scandal but in these times of Benghazi, the NSA, the IRS, a New York mayoral candidate, Fast and Furious, Solyndra and illegal Justice Department harassment of a Fox reporter, the revelation that people who have spent all or most of their careers helping governments and school districts get more taxpayer money and favorable legislation out of state legislative bodies will garner hardly any notice beyond a one day story.

It is another example of what the Founders were so concerned about with representative government. To wit, the creation of close ties between elected officials and special interests with the power to help them get re-elected. And working together they abuse the public interest and taxpayers (many of whom, sadly, are perfectly content to let it happen or are part of the group getting the favored treatment). Labor unions are long since major beneficiaries of this type of corruption of representative government.

Lobbyists-who are by definition not government employees-working for private or non-profit agencies whose primary, if not exclusive, source of revenue comes from governments and therefore taxpayers, should never be allowed to double dip and get a taxpayer funded pension. Their compensation package with the employer should be the provider of any and all employee benefits. Only employees of governments and government entities should be eligible for taxpayer guaranteed pensions. A government pension for these non-government employees extends status to them they should not have since they are subject to the same rules as government employees.

This situation extends to Pennsylvania where the Pennsylvania School Boards Association (PSBA) employees have been ruled eligible for taxpayer funded and guaranteed pensions. The ruling is decades old and was handed down by an attorney general who viewed the association as an extension of the school districts. It is time that ruling was reversed. School districts should not be allowed to basically hire an outside firm, regardless of its name or affiliations, and then make its employees the equivalent of school employees when it comes to pensions. The practice ought to be stopped for future hires and current Board employees should not be able accrue further pension benefits beyond the end of 2013.

If the legislature wants to do something easy about pensions, they should fix this outrage. But the PSBA in collusion with the teachers unions has its tentacles deep into the legislative process and will no doubt fight any such change.

Let’s Make Deal on a Transportation Bill

Democrats and liberal op-ed writers are busy beating up Republicans for refusing to do what Republicans are supposed to always do, shut and vote for higher taxes to fund roads, bridges and public transit.

Republicans should agree on some revenue enhancements when Democrats are ready to make two key concessions. First, Democrats will agree to unlink highway funding from transit funding. The issues need separate priority and have many differences when it comes to the best way to fund them and at what level they should be funded. Second, Democrats will stop opposing the elimination of prevailing wage requirements.

Simply having Republicans hold their noses and vote for revenue enhancements for transportation will not serve the Commonwealth’s long term best interests. Savings opportunities will have been foregone and needed structural changes will not be enacted.

There is a reason Pennsylvania is now facing a multiplicity of serious financial problems. The state government-for too long-has kicked cans down the road as it kowtows to the power and influence of unions. Teachers, transit workers and other government workers have had their way with legislation regarding strikes, prevailing wages, pensions, layoff rules, and so on for decades. Every problem is met with demands for more money to feed the monster that has been created. Especially noteworthy are the Port Authority of Allegheny County as well the largest school districts in the state.

Previous governors have redirected highway funds to keep the Port Authority from going on strike robbing Southwest Pennsylvania of dollars needed to keep roads and bridges maintained. Why do the complainers about Republican inaction not want to hear about that abuse of power? Then too, tens of millions of Federal highway funds were redirected to the North Shore Connector in Pittsburgh. Where was the outrage over that? Likewise, almost a hundred million in state and local tax dollars were required to build the Connector. That’s a lot of road and bridge work. But as always the supporters of public transit were 100 percent behind building the tunnel regardless of costs: one that provides free rides to users.

The mindlessness encapsulated by this venture is the single greatest argument for Republicans to demand some concessions from Democrat and transit supporters before folding and voting for the higher revenue status quo fans want.

First Appointment to Revamped PAT Board

Under Act 72 of 2013, the size of the Port Authority (PAT) board of directors is to increase and the appointment power to the board is to shift from nine appointed by one official to eleven appointed by six officials. Readers can get details here.

It was announced recently that the first appointment to the new board has been made by the Senate Minority Leader. Per the statute, the term of this appointee is to be a four year term with opportunity to be reappointed twice. Other appointments will have shorter first terms so as to stagger times of reappointment going forward.

While much has been written and discussed about the diminished power of the office of County Executive vis-à-vis the makeup of the board-dropping from nine appointments to six, with four of those being "free" selections and two being drawn from lists submitted by community groups-it is worth mentioning the position of the County’s legislative body, the fifteen member County Council, as it relates to the PAT board.

Prior to Act 72, the Council confirmed appointments and was guaranteed one seat on the board. Earlier versions of the Act would have given appointments to the Council, but that was omitted during the legislative process. Now Council will only confirm the two Executive appointments drawn from lists. There is nothing that prevents any of the appointing officials from choosing a Council member to serve on the board. They are all County residents (required of all appointees with the exception of the Governor’s choice) and would seem to meet the background requirements of having experience in finance, transportation, or economic development as a prerequisite for serving on the board. It could even be possible that now or in the future more than one member of Council could end up on the board.