Tag Archives: Bailout

A Bailout of Unfunded Municipal Retiree Health Benefits?

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Detroit and Chicago have announced plans to off load their unfunded retiree health plans onto the Affordable Care Act exchanges. The Detroit announcement predates the July 18 filing for bankruptcy protection. These cities believe they will save tens if not hundreds of millions in expenditures annually if they are successful in their intentions.

For the 61 largest cities, Pew Research has found that retiree health obligations under current contract or policies are only 6 percent funded. In Detroit that number is close to zero.

While the Affordable Care Act requires employers with 50 or more employees to offer health insurance or pay a fine (presumably municipalities are covered, but it does not matter, they almost all provide insurance anyway), the Act does not cover retirees. So cities-and perhaps states-might look at what Detroit is planning and decide to follow suit. Many private companies and some governments stopped paying for retiree health care years ago.

There are two levels of the issue. Retirees and employees who have worked under contracts promising the health benefits in their retirement presumably cannot willy-nilly be deprived of those benefits by a unilateral cancelation by the employer. Of course, at will or contract employees would not have that protection. For future retirees, the city could announce that any new contract would not contain retiree health benefits for hires after the date new contract is signed. But for employees already covered and retirees already covered under earlier contracts, it would seem a renegotiation of the terms of earlier contracts would be required to end the benefits. Folks already retired would have little incentive to make large concessions since they cannot lose their jobs if they refuse. Therefore, for these groups, it would appear bankruptcy of the city might be the only way to have the promised benefits nullified.

Government employee pension benefits are in many states sacrosanct and are constitutionally protected. That is certainly the case in Pennsylvania and Michigan. Whether Federal bankruptcy judges will use Federal law to set aside state constitutions in the pension issue remains to be seen. At the same time, health benefits for retirees could be more easily dealt with in bankruptcy. But, for cities looking to dump retiree health benefits for employees and retirees working under contracts containing such provisions, get ready for lawsuit and labor unrest.

This problem is even worse for city employees who were not covered under Medicare until 1986. They are completely dependent on the municipality for their retiree health care. Being forced into an exchange could pose serious difficulties for them.

While the offloading of retiree health care onto Obamacare exchanges might be appealing to many hard pressed cities and towns, it might be more complicated than they think. On the other hand, if they have a strong enough case to file bankruptcy, retiree health costs might be the trigger to file.

In the larger picture, if cities are able to offload their retiree health promises to the Affordable Care Act, then US taxpayers will get a big share of the tab. Watching 58 year olds enjoy retirement from Detroit or Chicago city jobs and get Federally subsidized health care until they reach 65 might not sit well with 60 year olds in the private sector who have no retiree health care until eligible for Medicare and have to keep working and keep paying taxes to subsidize the Detroit retiree’s health benefits. Further, if this strategy turns into a flood of unexpected exchange participants, what happens to the projected Obamacare expenditures? Undoubtedly, they will be off. And what if a bunch of private sector companies follow suit?

This is another unforeseen consequence of a health care law with ramifications and complications beyond comprehension.

Inevitable Chain of Events Leading to RAD Funds for PAT

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Back in the early 1990s the state Legislature granted Allegheny County authority to establish a Regional Asset District (RAD) and to impose a one percent County add-on sales tax to fund the district. The County Commissioners quickly voted to do so. There was no referendum asking the voters to approve the tax. This outrage was not repeated when it came to the plans to impose a sales tax for stadiums in 1997. That tax was roundly defeated by the voters and in all likelihood so would the RAD tax have been if it had been put to the voters.

But it is the law and the RAD tax has been collected for 18 years funding all sorts of things including new stadiums and propping up the Civic Arena. It was used to fund the Pittsburgh Development Fund that helped underwrite such memorable debacles as the Lazarus Department store. The Pittsburgh Schools also received a dollop of the tax revenue but that is now being sent to the City.

Now we have the spectacle of the RAD board approving $3 million for the Port Authority (PAT) to help fund the County’s matching contribution in order to receive additional state funds to fill a $64 million dollar deficit at PAT. Note that reserves had to be tapped to get the $3 million. Of course that means some other applicants or potential applicants could have gotten more money if the dollars were not going to PAT.

And why does PAT need the RAD money in the first place? In brief, because the state Legislature and the Governors over the years have done a remarkably inept job at controlling PAT by giving it a monopoly in the County and then giving the union employees the right to strike-something only three states permit. The right to strike a mass transit system is the most powerful bargaining chip any union can hold. Just the threat of a strike sends management into flights of terror and riders into paroxysms of anxiety about they will get to work. Businesses then join the chorus of pleading to give the union what it wants. Anything but a strike. So using the kryptonite equivalent of a bargaining advantage the unions have been able to extract one of the best, if not the best, compensation package and union favoring work rules in the nation.

Thus it was that PAT became an extraordinarily expensive transit operation, inefficient and destined to go bankrupt. If only state law would permit bankruptcy of PAT-which unfortunately it does not. So for a decade or more PAT kept sliding deeper into the ravine of financial chaos only to be temporarily bailed out again and again by the Governor riding to the rescue with highway money to fill the budget holes. Only this time, the hole was too big for the state to fill by itself. After all, the state is not flush with cash lying around to be redirected to PAT. Moreover, there are many in the Legislature from other parts of the state who are repulsed by the idea of tossing more of their constituents’ tax dollars at the outrageously expensive and inefficient PAT.

In this latest iteration of asking for state money, the Governor was far less generous than previous Governors and forced the County, the unions and the management to come up with a big chunk of the $64 million projected deficit. Of course the union share was a pittance relative to their share of the cost structure. The County, to raise its share, went immediately to the pot of money at RAD, asking for $3 million a year for ten years. The argument being that transit is too important to allow the major cuts that could be required if the state money is not forthcoming.

Dutifully, the RAD board agreed to hand over $3 million, no doubt under enormous pressure from the County Exec, PAT board members and the business community.

There it is. In short, the Legislature allows the County to create a revenue stream with one hand and then gives a "take all you want card" to the transit workers union with the other hand. Guess what was inevitable as the robins in spring? Eventually, the RAD money bags would be tapped for PAT. And so it goes.

At the very least the Legislature should have prohibited RAD money from being used to fund entities other than educational, recreational or cultural. There are some who will say this grab of RAD dollars for PAT could not have been foreseen. But they would be wrong.

Smooth Operators

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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".

No Magic Bullets for Harrisburg

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That’s the word from the team that is preparing the Act 47 recovery plan for the state’s capital city. Harrisburg was declared financially distressed in December of 2010, much of the City’s problem linked to its interrelationship with a trash incinerator and the massive amount of debt piled up from that facility.

Don’t forget, however, that the former Governor also said that there was no Santa Claus riding in to aid the City, and soon after did exactly that by delivering millions of dollars so the City would not miss a bond payment.

Ironically, one of the tools that usually comes with a financial distress plan-viewed as a magic bullet or perhaps a trump card by many-may be unavailable to Harrisburg. The statute allows an Act 47 municipality to petition the courts for an increase in its earned income tax so that non-residents that work in the municipality would pay a "commuter tax". However, the director of the Governor’s Center for Local Government Services noted "…the big problem with that for Harrisburg is that so many of the city’sneighboring municipalities raised their own wage taxes several years ago to eliminate the archaic occupation assessment tax".

Under state law a non-resident would only be subject for the difference between the earned income tax in his own home municipality and the place where the earned income tax is higher. It is a complication we pointed out in 2003 for Pittsburgh prior to its entrance into Act 47 given the presence of home rule communities that could raise their wage taxes.

According to the newspaper report there is even a suggestion of a countywide local option sales tax, which would presumably make Dauphin County the third such county in Pennsylvania to have a higher sales tax rate than the rest of the state. That would be quite a stretch if County officials had to approve the tax if the revenues were going to flow disproportionately to the City of Harrisburg. It would also require a separate state law since Act 47 only mentions property and wage taxes. In that case Harrisburg’s tax plan would be similar to Pittsburgh’s where separate state laws like Act 222 (which created the payroll tax and allowed the Local Services Tax to increase) and Act 187 (which reformed the wage tax sharing between the City and the Pittsburgh Schools) defined the tax structure.

Another 11th Hour Plan

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Roughly three months after citizens were treated to Pittsburgh City Council embarking on a series of pension solutions that stretched until New Years’ Eve (hours before a state-imposed deadline) we now have the events that transpired at today’s Port Authority board meeting.

In sum, service cuts amounting to 15% of service were to go into effect Sunday the 27th; the board was set to discuss an offer by a private operator to take over two routes that the Authority was vacating as part of those service cuts.

Then came a late-minute plan by the transit union: they would forego next year’s 3% wage increase, take a 10% pay cut now, and in exchange avert the service cuts (and by extension, the opportunity for PAT to contract with the outside vendor). The union’s proposal amounts to $18 million, some $12 million short of what the County Executive insisted was necessary to bridge the gap. As of this writing the PAT board is considering the offer and is supposed to determine this evening if the offer is palatable. If it is, the union will vote on the concessions tomorrow.

This messy episode (it is not the first last minute plan hatched to avert cuts or financial problems at PAT) could have been handled differently. The board could have not entertained any concessions of less than $30 million; they could have told the union to feel free to make concessions but they were going to go forward with their cuts and, if concessions proved solid, would consider restoring service and employees. Instead, they, like City Council and City staff in December, are under a ticking clock trying to rush and determine if the plan is viable.

Whose Bluff is Council Calling?

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At last night’s County Council meeting a resolution to amend the 2011 County budget was proposed and sent to committee for further discussion. There is nothing too unique about the fact that Council wants to make an budget amendment, as the Home Rule Charter sets out the requirements for doing so (a 2/3rd vote and the approval of the Executive, and the amendment cannot unbalance the budget) but the subject and the timing of the proposal are quite peculiar.

The County’s 2011 budget (its fiscal year is the calendar year) approved $27.6 million for the Port Authority: that amount shows up under "miscellaneous agencies" in the operating budget. It constituted the County’s local match under Act 44, a 15% requirement that was based on what PAT was to receive from the state for its 2010-11 budget (PAT’s fiscal year is July-June).

Because the state money was predicated upon the ill-fated I-80 tolling plan, PAT’s state allocation for this coming fiscal year was reduced. According to the resolution, Council was told "in November 2010 the Authority’s state funding derived from Act 44 was reduced by an additional $6.8 million for FY2011-12", bringing PAT’s state allocation to $150.3 million. On December 6th Council approved their 2011 budget with the $27.6 million for PAT intact. Based on the state funding the County match would be 18%.

Now, three months after passing its budget, Council proposes reopening the issue and revising its match to $22.5 million, making it 15% of the amount they knew about before they adopted the budget. What’s changed? For one thing, there is a pitched battle over the bailout money funneled through SPC: the transit union is advocating for all the money to be spent now to avoid any of the planned service cuts and layoffs at the end of March, while the PAT management wants to spread the money over 18 months as per the sentiment expressed by the SPC. In addition, the PAT board is set to decide in about a week on allowing a private company to operate service PAT wants to abandon in the North Hills. This measure is too opposed by the transit union and its allies.

So who is Council trying to bluff in this latest standoff? Do they want PAT to capitulate on the bailout money and the competitive service offer in order to keep the $5 million? Do they want the state to intervene and come through with more money for PAT? In either case, Council is playing a losing game as they are trying to bluff with a weak hand, not realizing that the other players likely know it is a bluff. And what does Council plan on doing with the rescinded $5 million if the amendment is successful? Hold it in escrow until PAT and/or the state meets their demands? Maybe the state will react by lowering the top rates at which the drink and car rental taxes are levied. That will create a standoff no one wants to see.

County Council Continues Its Irresponsible Voting

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Hard on the heels of its repugnant and indefensible vote to smear W and K Steel by designating it as a “sweatshop”, County Council has added to its irresponsible record by voting unanimously for a resolution urging the Port Authority (PAT) to spend all the recently received bailout money by June 30 to avoid impending service cuts and layoffs.

 

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Will PAT Board Snub SPC?

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The board of the Port Authority (PAT) will meet to decide how to spend the $45 million bailout recently approved by the Southwest Planning Commission (SPC). Will it succumb to demands by the union to spend it all over the next six months and thereby avoid significant service and job cuts? Or will it spread the money over the next 18 months as the SPC required as a condition to approving the fund transfer to PAT?

Normally, it would be reasonable to expect the board would honor the conditions imposed by the SPC. However, given the past behavior of the board and its unwillingness to deal forcefully with the union there is some question about what the board will do.

If the board accedes to union demands, it will be a slap in the face of the SPC members from outside Allegheny County who voted for the transfer of funds to PAT. But no one should feel any sympathy for those members. They made a huge mistake in voting for the transfer in the first place and accomplished two things, both unfortunate.

First, they granted a postponement of the day of reckoning for the Authority and the union to confront its runaway legacy cost problem and its very high labor cost and inefficiency issues. Second, the SPC’s action has further cemented the union’s conviction that state government will always provide bailout funding to reward the union’s intransigence.

The fact there is a discussion of an option to snub the SPC is a sure indication of the need for the state to take dramatic steps to correct PAT’s problems and to rein in the union’s power.

Council’s Last Minute Pension Funding Plan Raises Many Questions

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As the proverbial clock moved close to midnight on December 31st Pittsburgh City Council finalized a plan it believed would be sufficient to avoid a state takeover of the City’s underfunded pensions. Instead of a long term lease of assets that would have produced a lump sum of upfront cash for the pensions, the Council’s plan promises to dedicate thirty years of parking tax revenues along with what the City already pays in as its minimum obligation to the pension system.

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Looking a SPC Gift Horse in the Mouth

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The Amalgamated Transit Union’s bottomless pit of ingratitude is on display once again. A union that was granted a reprieve from massive layoffs in March through an ill-advised approval by the SPC to become a conduit for Federal money intended for other purposes is now complaining that PAT should spend all the $45 million immediately to avoid any layoffs rather than spread it out over a year so as to minimize necessary cuts later. Predictably, the union spokesman says spend it all now and thereby force the Legislature to come up with a plan to provide more money for the Port Authority next year and the years following.

This is the same union that has garnered for itself (through threat of strikes) some of the best pay and benefit packages in the nation and yet refuses to make any concessions to help the Authority become more cost effective and operationally efficient.

And it now has the audacity to expect the state government to bend to its demands and come up with more money for the Authority. Why would anyone be surprised at this audacious behavior? The union’s intransigence has always been rewarded with more funding from one source or another. They hold the public and transit users hostage because they can and Harrisburg or Washington has always capitulated. Why would they believe the present situation is any different?

But, this time it might very well be different. The state has no money to give the Port Authority to solve its endless financial mess and, given the recent election results, there is a strong likelihood that some many members of the Legislature will be looking for solutions to the Port Authority’s high cost, inefficient service that do not require ever increasing expenditure of taxpayer dollars.

By its latest complaint about how the gift of $45 million will be spent the union leadership has made it perfectly clear that it is incapable of gratitude and is hopelessly selfish and greedy with no concern for anyone but themselves. That will definitely not play well in a financially strapped Harrisburg. Perhaps it’s just as well. Even previously sympathetic legislators must be taken aback and concerned over this blatant display of union narcissism.