Garage Privatization in Pittsburgh Should Remain an Option

With City Council’s final vote and the Mayor’s pronouncement that it is “time to move on” to other issues, the stage appears to be set for the troubled pension plans to move from City administration to that of the Pennsylvania Municipal Retirement System (PMRS) under the terms of Act 44.  After the vote on the Mayor’s lease plan the Council and Controller rolled out yet another plan to raise the $220 million needed to avoid the state takeover of the pension funds. The Mayor’s office indicated the Council-Controller plan is a non-starter and would not get his approval.


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Pension Debate Heating up in Pittsburgh

Now that Council has apparently pronounced the Mayor’s lease proposal DOA, what next? Only two possibilities remain. Allow the state to take it over and be subject to the demands of the state pension managers or try to find $220 million by December 31.

Owing to the years of neglect and mismanagement the City’s pensions are underfunded to the tune of around $650 million with current assets of less than $300 million. What’s worse, the funds have been paying out about $85 million per year to retirees while the City has been adding only $45 million–$60 million was added last year. But even if the $60 million could be maintained, the fund would still deplete rapidly. At least $25 million more annually will be required to stop the declining fund assets. Counting on supersized investment returns is not an option.

So, if the state takes over, the City will undoubtedly face a huge bump in required contributions to keep the pension funds solvent and to move the funded ratio to at least 70 percent. This is a tall order indeed.

Some Council members still believe there is a free lunch to be had. Follow Controller Lamb’s plan and sell parking meters to the Parking Authority for $150 million and throw in $60 million of City reserves to get the necessary funds by December 31. As we showed in an earlier blog, that plan will not work because of the low limits on parking rates it imposes and the difficulty the Authority will have in borrowing $150 million at an attractive rate given its limited assets and cash flow. And using City reserves poses its own problems. Any complex transaction involving the Parking Authority buying parking meters from the City that would raise $200 million will require much higher parking rates than envisioned in the Lamb plan.

Indeed, any borrowing plan the City comes up with to raise $220 million will have to show dedicated revenue of $17 to $20 million per year. In light of the City’s financial situation, it would appear unlikely bond underwriters will be eager to raise that amount for a City bond issue, certainly not before December 31. And if it borrows money for the pensions, it will cripple its ability to raise capital funds in the future. It already had an enormous overhang of debt-one of the highest, if not the highest, debt per resident ratios of any city.

And even if the City could borrow enough to stave off a state take over in January, the imbalance in outflow and inflow of money into the pension funds will necessitate the City coming up with much higher annual payments to prevent the pension assets from sliding back under the 50 percent assets to liability ratio.

In short, the City is heading into a period of either much higher taxes or finally facing up to the need to start making serious cuts in spending to save $30 million a year until pensions are shored up. There are no easy answers or cheap fixes to the problem.

Lamb Plan Falls Short

Controller Michael Lamb has proposed a plan to fund Pittsburgh pensions that would meet the requirement of reaching 50 percent funded by December 31st in order to avoid state takeover of the management of the City’s pensions. His plan is designed to keep the parking assets under government control as opposed to leasing to a private company as the Mayor is trying to do.

Under the Controller’s plan the Parking Authority would purchase the City’s parking meters and any City owned lots or garages for $150 million and dip into the City’s reserve funds for $60 million to reach the $200+ million the City will need to put into the pension funds by year’s end.

Sounds okay so far. The garages and meters remain under government control (although the Authority is not strictly City government, it does have City appointed directors) and the state takeover is avoided. But there are serious problems with the Controller’s plan.

How does the Authority raise the money necessary to service the $150 million in new debt? Under conservative terms and, given the fact that the Authority has $100 million in debt and has net assets of only $63 million, it is likely that borrowing costs for the $150 million will be at least $9 million per year for 30 years. To generate added revenues for the Authority, the plan calls for Authority parking rates to rise 3.5 percent per year for five years-far lower than the planned parking rate increases under the Mayor’s lease proposal.

The problem with the smaller rate increases is that after five years they provide only 19 percent more gross revenue per year than currently collected and that assumes no loss in usage levels stemming from higher rates. Unfortunately for the plan, a 19 percent hike will produce only $6 million to $7 million more in revenue by year five and, because of higher taxes and other expenses, will produce a net revenue gain of only $2 to $3 million. This is certainly insufficient to pay the debt service on $150 million. Indeed, under assumptions of modest inflation for parking rates and expenses, it will take about 15 years before annual net revenue is able to cover a $9 million debt service payment.

In short, it appears unlikely the Authority will be able to get $150 million in bond financing under this plan. And even if the Authority could get very favorable bond rates the gain in net revenue for the first ten years would be inadequate to cover the added debt service costs. A net present value calculation of the plan estimates the Authority’s 30 year net revenue stream under the Controller’s plan to be less than $90 million-well below the $150 million in new debt that is being sought.

Beyond the funding concern is the Controller’s plan to dip into reserves for $60 million to supplement the $150 million in order to meet the December 31st deadline. The plan calls for the City not to make its next payment to the pension fund in order to restore the reserve. But that would push the funding level back under 50 percent and is likely to cause the state to reject the plan. Clearly, the notion of withholding any future contribution to the pension fund has to be off the table.

All things considered, the Controller’s plan faces a very steep uphill battle. Even if it has a chance of working, there is virtually no possibility of getting it done by December 31st in light of all the questions bond underwriters will have and the time needed to draft the legal documents necessary to arrange the sale of parking facilities to the Authority. Many details would have to be worked out before drafting the legal documents can even get started.