PAT in RAD Mix Again

"The Port Authority presents today as an eligible applicant with significant regional impact and an urgent and unmet need. Fortunately, revenue growth this year allows RAD to respond to this need on a one year basis without detriment to other program areas. Since this may not be the case next year, we urge state and county leaders to continue their efforts to find alternate, reliable transit funding sources." —Regional Asset District final budget for 2013

Last year, the Port Authority (PAT) asked for and received $3 million from the Regional Asset District as an annual grant. The Authority is making the same request again for 2014. While we know that no comprehensive transportation plan came out of the legislative session, and that PAT passed a budget for 2013-14 that is not yet on the Authority’s website, there are competing outlooks over how long PAT should get money from RAD.

The County Executive-who currently appoints all nine members of the Port Authority and 3 of the 7 members of the RAD board-said last August that he did not want the 2013 disbursement to be "…just a one time grant". An op-ed piece soon after argued against that line of thinking, stating the request "…should be a one-time thing". At least one leader in the arts/cultural community expressed reservations about the precedent the request would make, echoing a state senator who raised similar issues when it was decided that RAD would be able to help the Sports and Exhibition Authority (SEA) for a few years while it waited on gaming money.

Like the County Executive argued that he could think of no bigger regional asset than mass transit, the Executive Director of the SEA likewise opined a handful of years earlier that the convention center met "the definition of a regional asset". Yet the SEA no longer gets RAD money as it now gets gaming money-so it was really a temporary regional asset until a new source of revenue came along. Will that be the same for PAT? Recall that in some versions of the state transportation bill that would be more emphasis on local funding, with possible new and higher revenue options. Who knows if that will make it into a new transportation plan should one be debated in the fall. Is it possible that local officials could make the case that the RAD funded PAT without any hardship to other organizations so that, rather than creating new taxes again the Authority should be made a permanent beneficiary?

RAD Creates New Category for PAT

In the 2013 preliminary budget for the Regional Asset District (RAD), total proposed spending would top $88 million: $85.5 million from the half of the sales tax proceeds that go to the District to fund cultural, recreational, and sports facilities; close to $3 million from reserves; and the rest from interest.

The District allocates money to contractual assets (the zoo, libraries, the aviary etc.), multi year assets (money to the Sports and Exhibition Authority for debt service), annual assets (a group that includes a variety of organizations that make annual petitions) and a small share for administration. Next year marks the beginning of a new category-provisional-for $3 million requested by the Port Authority (PAT) as part of an agreement brokered by state, local, PAT officials and PAT employees to avoid service cuts in September. Recall that we pointed out in a Brief earlier this year that RAD had come to the aid of another authority from 2007 through 2010 (the SEA) but the SEA was lumped in with the annual grants along side groups like the Pittsburgh Symphony and the Civic Light Opera.

It is not clear if, by creating this new category, PAT will be required to be put in line for budgetary consideration each year or if the $3 million is guaranteed for a certain number of years. The preliminary budget, which was put together by the District’s allocations committee, notes that "the decision on this unique request needs to be made by the full board after review of the information that has been provided by [PAT] since the [initial] hearing and after public input is received". The committee pointed out that inclusion in the budget did not constitute endorsement, but to show what the budget would look like with it in.

Contractual assets are slated to get $1.8 million more in operating money next year than this year; the multi year debt service payments to the SEA are expected to go down slightly (by $44k due to a drop in arena debt service); annual operating grants are up by $209k, but there was some churn from 2012. This year, 77 organizations received annual RAD operating support; in next year’s preliminary budget six of those organizations are gone (they received a total of $74k in 2012), leaving 71 organizations that received 2012 operating support in consideration for 2013. Of those, 45 are to receive more money than they are in 2012 (increases vary considerably) and the other 26 are slated to receive the same as they did in 2012. There are three organizations that appear in the 2013 preliminary budget that did not get annual operating support in 2012 (the three combined will get less than $10k).

What Does the Future Hold for Allegheny County’s Pensions?

The audited data for Allegheny County’s Retirement System shows that from 2005 until 2011 the system has slipped in health and the County is putting in a smaller percentage of what is required to keep the pension system on track for a strong funded position.

 

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Smooth Operators

A new article from the American Enterprise Institute tackles the thorny issues of assumptions on rates of return for public sector pensions and the practice of asset smoothing to level out variation of plans. These issues are critical in light of where things stand in the Commonwealth right now.

First, Act 44 of 2009-which aimed to reform local government pensions and made special provisions for the City of Pittsburgh-says that the determination for the City’s pension health "shall utilize an actuarial assumption as to investment earnings equal to the regular interest rate fixed by the [Pennsylvania Municipal Retirement System] board plus 1.5%". What does this mean? It means that when the state analyzes the actuarial tables and data for the City’s plans the rate of growth for assets will be 7.5% instead of the traditional 8%. It may seem miniscule, but as AEI points out "some analysts believe these returns are overestimated. Wilshire Consulting, for instance, argues that most plans will receive only around 6.5 percent average returns going forward. If this turns out to be the case, the typical plans’ costs will rise by almost 80 percent. Pension funding is very sensitive to rates of return".

Keep in mind that three weeks from today, on September 1st, the biannual valuation report for the City, using that 7.5% rate, is due to be filed with the Public Employee Retirement Commission. Recall that the end of 2010 bailout plan crafted by City Council, which dedicates a portion of parking tax revenue over the next thirty years, was done to bring the pension funds to 50% funded or better in order to avoid a takeover of the pensions by PMRS. The PERC valuation will determine if that threshold was met.

Second, to the smoothing provision, both Act 44 and Act 120 (which changed things for state workers and school employees) had provisions in it for stretching out when gains and losses were realized. Act 44 increased the time period from fifteen to twenty years and Act 120 changed the asset smoothing for the public school employees’ system (PSERS) from five to ten years. Both PSERS and the state system (SERS) received "fresh start re-amortization of unfunded accrued liability".

City’s Retiree Benefits Problem Getting Worse Fast

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. 

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Surveying the Pension Landscape in Allegheny County

Allegheny County is home to nearly 300 pension plans that cover the gamut of local government employees: from police officers and firefighters to bus drivers, clerks and garbage collectors, from elected and appointed officials to various white- and blue-collar classifications.  Not counting school employees (who are part of a statewide pension plan), the local government pension “system” in the County covers more than 18,000 active workers and pays out benefits to over 14,000 retirees and/or their beneficiaries.

 

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Another Pension Transition Hits Home

A pension fund that went from a healthy fund ratio (assets/liabilities) to one where there is now $0.79 in assets for every $1 in liabilities. A contract negotiation involving a labor union that represents a third of the work force. A desire to move away from defined benefit pensions to a defined contribution system under a 403b.

While this sounds like a description of the pension situation that is faced by any number of municipal governments in southwestern Pennsylvania, it is the one that one of the region’s largest health care providers, Jefferson Regional Medical Center, grapples with rising costs and renegotiates labor contracts.

The head of the labor union said that the preference to move to a 403b was limited to professionals and that hourly workers would be less likely to invest in a defined contribution system. "That becomes a problem in negotiations" he said.

True, and the union is free to go on strike over the pension issue. But unlike their public sector counterparts in the schools or transit systems there is a chance that the employer can bring in replacement workers. And the union likely does not enjoy the same leverage with lawmakers to forestall pension changes as happened when Act 44 was being formulated. Will the medical center become part of the larger trend in the private sector where the defined benefit pension is becoming extinct?

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.

City Officials Rest Easy

Here’s what the most recent actuarial valuation (reflecting data as of January 1, 2009) shows for the health of the City’s pension funds in aggregate (the police, fire, and non-uniformed funds): $334 million in assets for $989 million in liabilities. That translates into a shortfall of $655 million and a funded ratio of 34%. City officials are somewhat relieved that the liabilities did not top $1 billion, which means the unfunded liability total was about $50 million less than expected.

Don’t pop the champagne corks yet.

Comparing these numbers to the previous actuarial valuation as of January 1, 2007 reveals that assets have fallen by $41 million, liabilities have grown $90 million, and thus the unfunded liability has grown by $131 million. The funded ratio was 42% then.

Of course, the real picture could be worse since the valuation reflects the values from the start of 2009. Let’s assume that the 2009 valuation has held as of now. What does that mean for the parking garage lease plan? Recall that the City has to demonstrate that the pensions are 50% funded in order to avoid a state takeover of the funds. With $989 million in liabilities, the lease plan would have to net $160 million and, when combined with the $334 million in reported assets, the funded ratio would attain the 50% target ($494 million/$989 million).

The 50% level would save Pittsburgh from a takeover, but it would not change the fact that Pittsburgh’s pensions are still among the lowest funded in the country. In 2008 the Center for State and Local Government Excellence ranked Pittsburgh 82nd out of 84 locally administered pension plans, and found only two others with a funded ratio of 50% or lower.