As we have written on previous occasions, the City of Pittsburgh’s legacy cost issue is multi-faceted-although little attention is given to some important parts of the problem. Heavy focusing of time and effort on one part of the problem can allow others to worsen.
No, this is not an advertisement from the City of Pittsburgh, who spent much of 2010 debating a long-term lease of Public Parking Authority assets to solve its pension woes. Instead, it is a recommendation made by the Act 47 coordinator for the state’s capital city, Harrisburg, which faces a significant debt burden due largely due to its involvement with a trash incinerator. Annual debt service is $18 million a year and there is $220 million outstanding on the facility.
Avoiding a Chapter 9 bankruptcy filing, according to the Recovery Plan, requires the patience of the parties the City owes money to, a consensual debt solution, and a reopening of the three labor contracts the City has.
With a structural operating deficit 19 jobs are slated for elimination and the only way out of the debt problem is to sell the incinerator and sell or lease the assets of the Harrisburg Parking Authority. We wrote in a blog last October about a plan for Harrisburg that would have involved issuing new debt to help the City with its incinerator issue. Now it appears the 8,300 plus spaces and possibly 1,200 metered spots could go up for sale or lease. That’s about half the spaces that would have been involved in a Pittsburgh lease proposal. Harrisburg also has a revenue sharing arrangement with its Parking Authority akin to the one here in Pittsburgh, with the HPA transferring anywhere from $3.5 million to $4.0 million per year to the City in the past few years.
A city with budget woes, many of them related to long-term debt, comes up with a plan: why not lease or sell the parking structures owned by the city (or a related city authority) and use the proceeds to pay off the debt?
This sure sounds a lot like Pittsburgh, but as we’ve chronicled in earlier blogs and a Policy Brief it is Harrisburg that is looking around for dollars. After this past week in which the Mayor vetoed a revised budget and still has to contend with a $4 million shortfall but did nothing to address the debt related to an incinerator owned by the Harrisburg Authority but guaranteed by the City of Harrisburg the possibility of asset sales became more real.
According to published reports the Mayor of Harrisburg "has supported looking into the sale or lease of certain city assets – including parking garages, City Island and McCormicks Island – to help retire the debt." Now the City seems prepared to hire outside experts to see how much money the assets could bring in.
There will likely be more cities and local government that might be hoping that their parking structures can deliver quick fix savings for debt and legacy cost problems that are staring them in the face. Unfortunately, this will be happening in retrospect (looking for money to close budget gaps) instead of prospectively (making a judgment as to whether parking or other municipal functions are a core function that ought to be moved to the private sector).
Could a decision to guarantee an authority’s debt on an incinerator turn Harrisburg’s finances to ashes? It seems to be the case as the state’s capital (population 47k) is in such a pickle that elected officials including the city’s controllerare suggesting Harrisburg needs to "…decide which way to go, in bankruptcy or Act 47". Much hinges on debt service payments that the City agreed to make for a waste-to-energy incinerator owned by a separate authority.
The Mayor stated that finances are so bad that they "might not be able to meet payroll this month". Tax increases, asset sales, and an exploration of takeover remedies are on the table.
At least it does not appear that pension costs are what plague the city, at least not yet. Harrisburg showed a very healthy fund ratio in 2007 with more than enough assets to meet its liabilities (118% funded).
As our 2009 report on Chapter 9 bankruptcy pointed out, the U.S. Constitution allows Congress to write uniform bankruptcy laws and municipalities are permitted to file for bankruptcy protection (debt adjustment may be more appropriate). In order to preserve the Federal-state balance of power, states are free to prohibit their municipalities from filing and those that do can place as many restrictions on filing as they wish. In Pennsylvania authorities cannot file for bankruptcy and the only statutory language on municipal filings flow through Act 47. Thus, a municipality would have to be in Act 47 status and meet certain criteria in the Act 47 statute to proceed to bankruptcy. No community in Act 47 has yet to file for Chapter 9 bankruptcy.
Maybe communities that are faced with a sudden catastrophe of an economic kind ought to have a quicker route to Chapter 9 than first entering into Act 47. Consider that Harrisburg is in a really bad spot: the Act 47 process has to play out, then a recovery plan has to be written, and then one of the criteria related to a Federal filing has to be satisfied. There may be some cases that require swifter action.
The House could consider legislation that would prescribe a remedy for troubled municipal pensions (the degree of trouble measured by the ratio of assets to liabilities, and being under 50% is troublesome) by folding them under the auspices of the Municipal Retirement System and taking the power of administering benefits away from municipalities grouped under the System in the new set-up. There could be other reform pieces in the mix-defined contribution options, more local control, etc.-but the head of the Retirement Commission does not seem optimistic that asset sales alone, like the one Pittsburgh has proposed for parking garages, could solve the problem.
If we are to believe the published report that an analyst told the City they could "conceivably net $200 million" from leasing parking garages and lots then there could be some validity to the Commission director’s statement. Recall that earlier in the year we examined the Mayor’s proposal to sell or lease parking structures (owned and run by the Parking Authority) and take the proceeds to retire the Parking Authority’s $100 million debt and use the remainder for the pension shortfall. The last official valuation (January 2007) pegged the gap at $524 million; but recent reports show that the gap could have grown to over $630 million. An infusion of $200 million-with a hard line on liability growth-would put the funded ratio at just over 51%, just barely meeting the litmus test for pension health under the new reform model.
But that is if the analyst’s estimates are accurate and if the $200 million means after the Parking Authority’s debt is satisfied. Then too there needs to be a plan for what happens to the Authority if its debt is paid off. At that point, the City’s overall parking function would be limited to enforcement, permitting, revenue collection, and traffic adjudication. It should be wholly out of the business of trying to build and operate parking structures and lots. That could be left to the private sector.