Tag Archives: bankruptcy

Familiar Threads Woven in Harrisburg Recovery Plan

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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. 

A New Federal Urban Agenda?

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A Pittsburgh newspaper whose op-ed writers are hopelessly enamored of Federal government programs to solve any and all problems now think it would be just grand if the Federal government would launch a new urban agenda. One has to wonder where the writers have been.

Does anyone need a reminder of all the efforts the Federal government has launched over the decades to help cities? Public housing funding, block grants, all sorts of welfare programs, dollars for education programs, major financial assistance for mass transit infrastructure, and so on and so on.

Did all those programs stop Detroit or Philadelphia or Stockton, California and countless other cities from developing very serious or crisis proportion financial problems and massive loss of population? No. The cause of the problems can largely be laid at the feet of horrendously counterproductive policies by the local, state, and national governments. Public sector unions, a breakdown of law and order (in many cities), a collapse in public education quality as a result of educational folly masquerading as reforms (including a refusal to allow publicly funded voucher programs) and political correctness run amok.

The argument that people moved out of cities for greener pastures because they were induced to by Federal policies is getting stale. People left because living in the suburbs was more attractive than staying in the cities. Lower crime, better schools and all the reasons people want to be safe and comfortable.

Perhaps the original exodus was initiated by demographic and social phenomena, but there can be little doubt that the headlong rush toward public sector unionization, the attendant sharp rise in expenditures and tax burdens, runaway crime problems and rapidly decreasing academic performance in public schools encouraged more people to leave. Many cities became increasingly dominated by one party rule-the party being one of statist and government growth inclination and a party with practically no patience with free market capitalism. An almost guaranteed slow downward spiral began in many of the currently worse off cities. The worse they became the more Federal and state financial assistance was forthcoming in some form or other. Economic development, redevelopment, infrastructure, housing, education, social welfare payments, early childhood education, learning programs, jobs programs-the mind boggles.

And still, Detroit bankruptcy happened, Philadelphia is scrambling to open schools this fall because of a lack of money, Pittsburgh is under state oversight and is likely to remain so for a long time, Chicago is closing schools at a breakneck pace because students have abandoned city schools and it has gigantic pension problems looming.

These wounds have been self-inflicted by politicians and policies that can only be described as progressive, liberal, statist, and politically correct. Politically correct is a polite term for trying to force adherence to certain acceptable behaviors and thoughts through intimidation, ostracizing, or attempting to shame or embarrass anyone not subscribing to the latest fad in liberal dogma-dogma that gets more bizarre by the month. Little wonder thinking people want no part in it.

The worst part: calling for a new Urban Agenda is just a dreamed up politically correct scheme to avoid dealing with disasters created by earlier statist schemes.

Will ACA Bail Out Unfunded Municipal Retiree Health Benefits?

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Detroit and Chicago have announced plans to offload their unfunded retiree health plans onto the Affordable Care Act exchanges. The Detroit announcement predated the July 18th 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 in the nation, 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 to employees 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. Folks already retired would have little incentive to make large concessions since they cannot lose their jobs if they refuse.  Eliminating future retiree health benefits for current employees would require contract renegotiation.  Therefore, for these groups, it would appear bankruptcy of the city might be the only way to have the promised benefits nullified.  Health benefits for retirees and current employees who have no protection of a contract might be offloaded with or without filing bankruptcy.

 

For new employees who will be on labor contracts, the city could negotiate to eliminate retiree health benefits. And for non-contract employees it could simply adopt a no retiree health benefit policy. There are local Pennsylvania examples.  In the City of Pittsburgh, police and fire personnel hired after 2005 do not get retiree health care the way employees working in those departments and employed prior to 2005 do.  The Port Authority’s largest union (its 2008 contract called for the union and the Authority to “jointly issue a statement with regard to their support for national health care”) has language in its 2012 contract stating that employees hired on or after July 1, 2012 would be eligible for three years of retiree medical coverage, as opposed to previous stipulations that allowed coverage until Medicare eligibility if the employee had 25 years of service or had reached age 55 and had ten years of service.

 

Government employee pension benefits are sacrosanct in many states to the point of being 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 lawsuits and labor unrest. Bankruptcy or threats of massive layoffs will almost certainly be needed to get meaningful results.

While the offloading of retiree health care onto the 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 expenditures?  Undoubtedly, they will be off. And what if a bunch of private sector companies follow suit?

 

If a few large municipalities such as Detroit and Chicago are successful in reducing their expenses substantially by pushing retirees into the exchanges, there will undoubtedly be a flood of other municipalities around the country rushing to do the same. Moreover, there could be a number of school districts that could benefit from dumping retiree health benefits.  In short, taxpayers might find themselves on the hook for funding much more health care than Affordable Care Act drafters imagined. 

 

This is another unforeseen consequence of a health care law with seemingly unlimited ramifications and complications.

Could Pittsburgh Be Following Detroit to Bankruptcy?

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While Pittsburgh has some similarities with the problems in Detroit (albeit nowhere near the same magnitude) and there is cause for concern about Pittsburgh’s financial wellbeing, there is little chance that on its present course the City will face bankruptcy. That is not to say that it can be allowed to return to the spendthrift, reckless behavior that had the City headed toward financial collapse and brought it to the point of being placed under two state financial overseeing groups-the ICA board and the Act 47 financial coordinator team-a decade ago.

 

 

There was period in 2009 when the legacy cost issue reared its head and prompted renewed speculation of a possible bankruptcy. See our Policy Brief Vol.9 no. 51 for a full discussion of that period and an explanation of some of the technicalities involved in a Pennsylvania municipality seeking to file for bankruptcy.

 

Without question Pittsburgh has made significant progress under state oversight and under legislative edict to lower spending, reduce debt levels, cut employment and address the City’s massively underfunded pensions.  Still, there is no denying that fairly large problems remain and there must be no backsliding that would aggravate them. Based on the Allegheny Institute’s work in constructing a benchmark city to compare Pittsburgh’s financial performance indicators, it is clear that the City government continues to spend more per capita, taxes more per capita, and has more employees per 1,000 residents than a composite of similarly sized and situated cities from across the country.

 

Moreover, Pittsburgh’s debt per resident remains very high compared to the typical, well run city despite having dropped significantly from the 2004-05 level when it exceeded $2,000 per citizen.  Then too, even though the pension funding level has been raised above 50 percent, as required by the state to avoid having the state takeover management of the pension plans, it is still far below the 80 percent level where it needs to be and its rate of return calculation assumption for the investment portfolio is by all accounts too generous. By pledging parking tax revenues for decades to shore up the pensions, the City averted a takeover and a period of dangerously low funding of the pensions.  

 

Finally, it must be noted that Pittsburgh’s public schools are, by and large, a major obstacle to population growth in the City. This is especially true for the 30 to 50 age group, the age group having families and raising school age children.  The last census showed continued decline in that group while the college and the 20 to 25 age groups expanded. The desire to be attractive to young people has paid off but the City cannot thrive when parents in high percentages abandon the City because of poor schools.

 

In certain respects Pittsburgh appears to have some of the problems Detroit faces. However, Pittsburgh has a number of factors going for it that Detroit does not have.  First, the City of Pittsburgh has a much smaller population than Detroit and has far less deep seated and widespread social problems including markedly lower crime rates. Pittsburgh has a large, strong, and recession resistant employment base in medicine, post-secondary education, government and the financial sector.  Pittsburgh weathered the 2008-10 recession well because of its favorable industry structure and the fact that the absence of a construction boom in the years prior to the recession reduced the need for a major correction.

 

Pittsburgh is also very fortunate in having a disproportionately large charitable foundation community that supports education, welfare, and cultural activities in the City. And for a city its size it has an unsurpassed aggregation of top quality museums, performing arts, music, cultural amenities and major league sports.

 

The City’s small population compared to its home County and the metropolitan region means it derives enormous benefits from its hub status in terms of commuters, visitors, attendees at cultural and sports events.  An excellent symbiotic relationship exists between the City and the region.   

 

In short, with continued oversight from the ICA board and Act 47, and a commitment by the City’s government to avoid the fiscal and management mistakes of the past, the City will be able to stay far away from the need to file bankruptcy.  Quite unlike the situation in Detroit which was allowed by the state to descend into a hopeless morass.

 

Nonetheless, there are danger signs posted in the City that it cannot afford to ignore-and the oversight teams should not permit it to ignore. A growing, dynamic Pittsburgh will require a major overhaul of the k-12 education system.  The current failed system is depriving far too many young people of a decent chance at a good, productive and satisfying life.  And until that system is substantially reformed, parents of child rearing age and children will become increasingly hard to find in Pittsburgh. In the long term, that is probably the biggest negative in the outlook and cannot be left unaddressed much longer.

 

The other cautionary warning is that the Pittsburgh government must move away from the heavily statist mentality with regard to business and the economy that has for so long dominated its decision and policy making processes. And it must begin to reduce the number of employees per 1,000 residents and bring itself into alignment with other well managed and prospering cities in this key measure of management and financial efficiency.

Detroit’s Bankruptcy Could Hold Unforeseen Dangers

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The announcement of Detroit’s bankruptcy filing was not unexpected.  After all, the city has been running huge deficits for years, has built up almost $20 billion in unfunded pension liabilities and debt, has abysmally poor public services including inadequate policing, has been hemorrhaging population and has high crime rates.  In financial terms the city has been bankrupt for years. And it has benefitted from major federal assistance in the form of a bailout of GM that preserved jobs, pensions and health benefits for union employees.

 

 

Normally, when a deeply financially stressed private entity goes through bankruptcy it can be positive if it results in a restructuring that preserves the entity, saves jobs, etc. Of course in really bad cases, the only option could be liquidation and the end of the organization.  For large municipalities, liquidation is not an option, so any restructuring must be effective if bankruptcy is to accomplish meaningful financial improvements.

 

Indeed, if the bankruptcy judge makes good rulings, a municipality could be given a new lease on its financial life. To do that the rulings must firmly address the underlying causes of the problem. That means dealing with extravagant and excessively generous legacy labor costs. It means forcing the municipality to shed programs it cannot afford, to outsource where private vendors can perform the function cheaper. And the rulings must ensure that taxpayers and businesses are not burdened to the point they are driven to abandon the community. 

 

But it is also true that government bankruptcy presents potential outcomes that vary widely from the typical private sector bankruptcy.

 

Assuming the Federal courts proceed with the Detroit bankruptcy there will be some real pain dealt to creditors. If it proceeds is a necessary qualification at this point because a Michigan state appellate judge has ruled the bankruptcy is unconstitutional under Michigan’s constitution.  In all likelihood, Federal bankruptcy laws will supersede the state constitution and the Detroit bankruptcy will proceed as municipal bankruptcies have done in other states.  When it does, there will be major hits for bond holders and other creditors, unpaid vendors and so forth.

 

Beyond the effects on Detroit, some analysts have expressed concerns that the Detroit filing could be a harbinger of other municipal bankruptcies. Some have mentioned the possibility that municipal bond rates will rise as lenders demand higher yields in the face of greater risks. That will bear watching as the terms of a settlement unfold.

 

Besides the likelihood of more bankruptcy filings by municipalities across the country, there are two possible great dangers surrounding the Detroit bankruptcy and its resolution.  First, is the danger that massively unfunded pensions are not seriously addressed leaving the city heavily burdened going forward after the settlement. And if pension funding is not addressed, other creditors could be forced to take even harsher cuts in payouts than would otherwise have been the case.  Then too, if pensions are not addressed, there is a strong likelihood taxpayers will see tax hikes or citizens and businesses will see further reductions in service. This is an all too real possibility in light of the settlements in California that did not deal with pension problems.

 

The second big danger is that the federal government will step in with financial assistance.  Bear in mind that with the federal government’s huge deficits, $17 trillion in debt along with tens of trillions in unfunded liabilities, vast and growing numbers of people on public assistance and a precarious economy that could succumb to the effects of Obamacare or some international shock, the ability of the federal government to fund municipal governments is severely constrained.  But even worse than the Fed’s lack of financial wherewithal to undertake more spending is the damage that will result if the federal government decides to start aiding municipalities.

 

There are a large number of cities and towns across the country in serious financial straits. A few in California have already opted to declare bankruptcy.  And Pennsylvania has its share of cities under state financial oversight, including Philadelphia, Pittsburgh and Harrisburg. Once the precedent is set for the federal government to bail out bankrupt municipalities or those threatening to file bankruptcy papers, there will be a flood of aid seekers. And how can they be turned away?

 

The federal government’s ubiquitous reach into almost every nook and cranny of U.S. society would finally have the leverage it needs to effectively vacate the vestiges of federalism still remaining. If the government in Detroit can turn to Uncle Sam for the money they need to continue their profligate kowtowing to the unions, why would they care about what Lansing thinks?  If the federal government  provides funds, those funds will come with strings as to how the money is spent, what taxes can be levied and what rates to set, social services that must be provided, educational policies that must be adopted, environmental regulations that must be followed, ad nausea.  

 

Is this too pessimistic? A casual review of the ever expanding reach and role the federal government has arrogated to itself argues it is not unreasonable.  Take education for example. The constitution makes no provision for the Congress to pass laws or the president to issue directives concerning education. Yet we have a massive department doing just that. Health care?  The commerce clause says people cannot be forced to buy a product, but a wayward, contorted ruling by a Chief Justice keeps the takeover of U.S. health care in place. The federal government does not enforce immigration laws or protect the borders but when a state tries to protect its citizens, the Court denies the state any such right.

 

The long run effect of the federal government bailing out bankrupt cities such as Detroit and the flood that will inevitably follow is to put local governments completely in the hands of the public sector unions forever along with the elected officials who will be handpicked and elected by them. The very same public unions and their friendly elected officials who have given them all the expensive and now unaffordable compensation, and favorable work rules, etc., have been the major driving force behind the financial calamity many municipalities have become. But for those looking for an ever expanding federal government, this is an opportunity not to be missed.

 

Any effort by the federal government to prevent the consequences of Detroit’s bad behavior from falling on the city will simply ensure more and worse behavior in the future.  Experience should be a teacher here and Congress should never agree to allow municipal bankruptcy bailouts.

Bankruptcy Will Test Pension Promise

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Stockton, CA is similar to Pittsburgh, PA in terms of population (2010 Census showed the former with 291k, the latter with 305k) and land area (61 square miles and 55 square miles) but while Pittsburgh waits to see if its nearly decade long existence under Act 47 recovery status and oversight will be lightened by at least one Stockton has been given permission to declare bankruptcy. When Act 47 was on the horizon for the Steel City in 2003, many observers felt that the City was indeed entering bankruptcy (see footnotes on page 3 of our 2009 report on municipal bankruptcy) but the reason municipal distress and oversight were put into place was to stave off a Chapter 9 filing.

But Stockton has entered, following a filing by Vallejo in 2009 and one newspaper report on the filing notes "At issue will be whether U.S. bankruptcy law trumps California law, which says the pension plan must be funded". It is interesting to note that a memorandum on the Vallejo filing stated that once in a bankruptcy court-since the municipality cannot be forced there, and the state is free to place as many hoops for the municipality to jump through, even outright prohibiting a filing-"presumably, state constitutional provisions [on the abrogating of contracts, such as pensions for current employees] would yield".

Note that the article points out the City of Stockton has done a considerable amount of action: cutting employees, stopping bond payments, cut employee benefits (presumably other than pensions) and enacted an emergency spending plan but it keeps depositing money into the state pension system. It is almost the reverse situation of a Pennsylvania municipality that enters Act 47 and then drags its feet on agreeing to a recovery plan: the state will withhold money, but not if it is for pensions (natural disasters and redevelopment projects already underway also qualify).

But it makes the point that we made nearly three years ago to the day that asked what municipalities are to do if they can’t get out from under bad pension promises: cut services and tax themselves out of existence in order to pay pensions? Is that not what appears to be happening in Stockton?

Governor’s Pension Reform: Does It Have a Chance?

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Well, it is here; the Governor’s plan to stop the impending budget calamity created by unfunded pension liabilities.  To be sure, the far reaching proposals face a very uncertain future in the Legislature.

 

 

A little background.  In the fall of 2012 the Pennsylvania Office of the Budget released “The Keystone Pension Report” detailing the steps that have produced a $41 billion unfunded liability for the state’s pension plans covering state workers (SERS) and school employees (PSERS). The report also offered suggestions as to how the state might begin a process of addressing the enormous unfunded liability.

 

Although no specific reforms were recommended by the report-a pension reform proposal was to come, and did, as part of the FY 2013-14 budget address-there was a five point framework for change:

  1. Taxpayers would be put first.
  2. Retirees who had earned their pension would see no changes.
  3. Current employees would not have their accrued benefits touched but “components of current employee’s prospective benefit” could be altered.
  4. The costs should not be shifted to the future.
  5. Experience from other states should be studied.

 

The Governor’s reform proposals, as spelled out in the 2013-2014 Executive Budget, match up fairly closely with the framework set out by the Keystone Report. Explicitly, there was no mention of a tax increase to fund pensions, so point one was clearly satisfied.  The benefits earned by retirees would remain unchanged and the benefit plan for current SERS and PSERS members would remain the same until 2015.  However, at that point, a lower multiplier for pension benefits, 2 percent times years of service, would be used instead of 2.5 percent unless the employee elected to contribute an amount sufficient to keep the multiplier at 2.5. An average of the last five years of compensation would determine the basis of pension payments. Further, pensionable compensation would be capped at 110 percent of the average salary of the prior four years when determining final average earnings. Then too, the Governor’s proposal would place a cap on the pensionable income at the maximum Social Security income on which contributions are made and benefits calculated. Thus, the reform plan has largely adopted points two and three of the framework with much detail on the changes to future pension benefits for current employees.

 

To point four, the Keystone Report stated “…any short-term prospective budget relief should be paid for by long-term reforms…” The same year when the alterations to future benefits for SERS and PSERS members are to go into effect all new hires will be enrolled in a defined contribution plan with SERS members contributing 6.25 percent of pay and PSERS members putting in 7.5 percent.  Basically, the state would be closing enrollment in the defined benefit plans offered by the systems (as of 2011 there were a combined 589,000 active, retired, and vested but inactive members) and placing new hires in a 401(a) system.  As members of the defined benefit plan retire and new employees come in the hope is that the costs of the pension system come down, albeit gradually. 

 

Lastly, the Keystone Report looked at reforms made in other states in 2010, 2011, and 2012 and classified them along the lines of “strategy” (whether the state was asking for higher employee contributions, raising retirement age or service time, and switching from a defined benefit plan to a defined contribution or hybrid plan) and who the reform(s) affected: new employees or both new and current employees.  Much of that analysis came from the National Conference of State Legislatures which has for many years detailed statewide pension reform plans.  In 2012,   Louisiana, Kansas, and Wyoming among others set into motion plans that would close existing defined benefit plans to new employees or create new tiers with higher age and service requirements for new hires.

 

Interestingly, not all change is happening at the state level.  In 2012, the California cities of San Diego and San Jose both had local ballot measures to amend their city charters’ language on retirement benefits.  In San Diego, voters approved a ballot question that (1) would put all new hires, with the exception of police officers, into a defined contribution plan, (2) permit the City to seek limits on what constitutes employee compensation (through bargaining and negotiation) for pension calculations, and (3) eliminate the ability of current and former employees to vote to change their benefits.  The San Diego Councilman who spearheaded the reform movement argues strongly that only base salary should figure in pension benefit calculations while factors such as overtime, longevity pay, etc., should play no role in pension benefits.

 

In San Jose, voters approved a question that would require employees to pay more into their pensions or voluntarily move to a plan with reduced benefits, limit benefits for new hires, and require voter approval for increases to future pension benefits.  The reforms, even though receiving a comfortable majority, face court challenges.

 

Keep in mind that this is just the proposal stage and that the Governor has stayed true to the ideas laid out in the Keystone Report.  It is up to the General Assembly to debate, modify and possibly enact the proposals. Then Pennsylvanians will see what, if any, the reforms can look like.  Would the General Assembly decide to put the issue of pension reform in front of Pennsylvania voters such as happened in cities in California?  The last time a ballot question related to pensions went before the voters was in 1981 when voters were asked if the state Constitution should be amended to allow spouses to partake of increases to benefits so long as the finances of each system extending the benefits were actuarially sound. It was defeated. 

 

And how will members react when hearing from public sector unions, who, not surprisingly, have decried the proposals in the strongest terms? A state employee union stated in a press release that by proposing a defined contribution system for new hires the Governor is “…trading the promise of retirement security for retirement insecurity” and wants to give the Act 120 legislation more time to work.  The teachers’ union stated that the “…proposal includes costly, unconstitutional changes that won’t solve the pension crisis, but will reduce your pension benefits and weaken the retirement security that you earned and you paid for.” That statement is quite ironic in that the entire motivation for the reform effort is the huge increase in taxpayer funding that will be required to meet the pension obligations.

 

At this point it is important to ask whether the Constitution’s language means that something passed in a prior legislative session can create a suicide pact for future ones.  According to the Keystone Report the causes of the massive pension problem can be traced to promises made by laws passed in 2001, 2002 and 2003. What does the Constitution say about this predicament? Article 1, Section 17 prohibits the General Assembly from passing laws impairing contracts. Further language in Article 3, Section 26 says that “…nothing in this Constitution shall be construed to prohibit the General Assembly from authorizing the increase of retirement allowances or pensions of members of a retirement or pension system now in effect or hereafter legally constituted by the Commonwealth…”

 

So what does that mean?  To the first section, the state’s Municipal Pension Handbook notes that “the Pennsylvania Supreme Court has applied [this principle] to the rights of public employees in their pensions…as such, once a public employee has worked even a single day, he or she has not only earned that day’s pay but a guaranteed right to such future pay that formed part of the employer’s promise of compensation”.  On the second, the implication is that when times are good the Legislature could increase pensions but there is no language that allows for a decrease or a cut in a situation like the one faced by SERS and PSERS now. Obviously, the richer benefits should never have been granted because when the bill comes due as it has, the difficulties in undoing the damage will prove virtually insurmountable.

 

The question is: if it comes to a court battle, how will the judiciary interpret a plan in which the benefits earned up to a certain point are not reduced, but the pension benefits accruing based on future earnings beyond that point are reduced?  Would the courts rule that the Constitutional sanctity of contracts has been trampled?  If so, where do taxpayers go for relief from the ill-considered actions of earlier Legislatures?  Protection of employees is important, but in the private sector, when the pension benefit costs are threatening a company’s survival, relief can be sought through bankruptcy. State and local governments as well as school districts in Pennsylvania are effectively denied that option.

 

Moreover, if a Constitutional amendment becomes necessary to overcome the problem, it will almost certainly never get the required votes in the General Assembly to go on a ballot and voters have no right to petition the Commonwealth for a referendum.  And even if the Constitution were to be amended, could the new language ex post facto overturn provisions in currently existing contracts or “employer promises”?

 

If the pension reform fails, the “Pac-Man” or “tapeworm”, as the Governor’s report characterizes the increasing share of the budget going to cover unfunded pension fund liabilities, will eat away at other portions of the state budget.  If the reforms are enacted the proposal envisions that the employer contribution rates will be lowered from an expected 4.5 percent to 2.25 percent in 2013-14, rising by a half a percent per year thereafter. This is instead of rising 4.5 percent per year to top out at close to 30 percent by fiscal year 2016-17. 

 

It should be incumbent on those persons and groups who view pensions as sacrosanct and inviolate to suggest areas of the budget that can be cut substantially in order to satisfy the pension plans’ need for ever more finding. 

 

One thing is certain, with the crucial funding requirements for highways and bridges demanding more tax dollars, and with the state’s taxpayers already taxed heavily by state and local governments and school districts, asking for additional billions of dollars in revenue to cover pensions is simply not politically or economically prudent. If all meaningful reforms in the state’s two big pension plans are blocked and no significant reductions in costs are forthcoming, there will be no choice for the state and school districts but to begin slashing other personnel costs. 

 

Fewer employees, lower contributions to the generous health care benefits, fewer sick day allowances, heavier workloads, pay freezes, etc., will have to be on the table. Employees with the least seniority will take the brunt of the hits given the rules governing layoffs in most contracts. 

 

There is no free lunch.  Taxpayers cannot afford the massive additional pension burden that is coming and some relaxation of objections to all attempts to stem the tide of increasing pension fund allocations must be in the offing.  Insistence on the status quo will lead to a raft of problems the opponents of reform will not like.  The divisions between government employees and taxpayers will almost certainly widen and grow increasingly bitter.

The Scranton Fix, and Changes to Chapter 9 Bankruptcy

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Last October we wrote in a blog about the Supreme Court decision that said an "arbitration award" was not the same thing as an "arbitration settlement" and the impact that small distinction would have on communities in Act 47 distressed status. Language in the act stated "a collective bargaining agreement or arbitration settlement executed after the adoption of a [Act 47] plan shall not in any manner violate, expand, or diminish its provisions".

Under Act 111 of 1968, the collective bargaining law that outlines binding arbitration procedures for police and fire employees, the Court’s decision would have far-reaching consequences for communities in Act 47. Left unchanged, there would have been an incentive for combing over old arbitration proceedings to see if anything retroactive could be awarded. There would also be motivation for public sector unions to get to arbitration so as to fall into this grey area.

In the blog we noted "the onus is on the General Assembly and the Governor to act quickly to amend Act 47 language so that ‘awards’ are covered as well as ‘settlements’…A few word changes should do the job…The need for the Legislature to move as rapidly as possible cannot be more clear."

Legislation that has been signed into law does just that, adding language that defines an "arbitration settlement" to include that a "final or binding arbitration award or other determination" would be covered by the definition. The act allows for an arbitration award to deviate from the plan as long as it does not jeopardize the stability of the municipality and does not prevent relieving the distress (note that only six municipalities have emerged from Act 47 status, 21 are currently in). Deviation requires an evidentiary hearing.

Another significant change as a result of the act is on municipal filings for Chapter 9 bankruptcy. Now municipalities that want to file will have to apply to the Department of Community and Economic Development (DCED) and the Secretary will make a "yes" or "no" recommendation on filing after weighing the criteria contained in the statute. As we noted in our 2009 report, states are free to place as many restrictions on their local governments when it comes to filing for Chapter 9 bankruptcy, including prohibiting them from filing.

Golden State Municipality Hopes Chapter 9 Brightens Future

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Stockton, CA has a population of just over 291,000 people, making it slightly smaller than Pittsburgh. Located in the central part of the state, the city has just filed for Chapter 9 municipal bankruptcy. Unlike Pennsylvania, which has Act 47, oversight boards, and a receiver in the capital city of Harrisburg, California allows for bankruptcy filings without many conditions. California has a mediation process, and that is what just wrapped up for the City of Stockton.

Satisfying the various criteria to file (state has to explicitly authorize, filing must be done by a municipality, filing has to be voluntary, has to be insolvent, and has to have explored other options) Stockton has approved a "pendency plan" that describes how operations will continue during the filing. That plan states "…the city is insolvent. Now, only the difficult process of restructuring its long term financial obligations and personnel costs will enable the City Council to protect the community and make sure the City emerges from this financial crisis as a viable, sustainable institution".

Stockton has made significant reductions in headcount, with public safety employment falling 25% and non-public safety positions down 43%, bringing total general fund employment to 930, down from 1,350 in the 2008-09 fiscal year. In comparison, from the first Act 47 plan in 2004 to the revised plan in 2009, Pittsburgh’s headcount fell 10% (there were over 400 layoffs in 2003, prior to the Act 47 declaration).

PAT Retiree and Employee Concessions Are Critical

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Right on cue, the Port Authority has rolled out the latest doomsday scenario of service cuts and layoffs. No doubt the huge projected budget shortfall, if unaddressed, will require enormous cutbacks. But as sure as robins returning in the spring, there is no talk of addressing the underlying causes of the financial disaster that PAT has become.

Whipping up rider and business sentiment in an effort to persuade Harrisburg to increase its subsidy-despite the looming $700 million state revenue shortfall for the current budget year-is the overused and cynical modus operandi. Where are the brave elected leader voices demanding that retirees with their enormous legacy costs and current employees with their $25 per hourjobs with Cadillac benefits and efficiency killing work rules make some sacrifice to save jobs and bus service?

That’s not how the game is played in Pennsylvania. Rather, it’s lobby for more money to feed the voracious maw of employees, past and present. And when Governors and County Execs manage to get more money from the state as happened so many times in the past, especially under the previous Governor, what is the lesson learned by employees and retirees? Hold out, make no concessions, more money will be coming from the state or Feds. If the state blinks in the current round, the unions will have their convictions reinforced and the game of chicken will be repeated next year.

The state should set an amount of subsidy per rider, adjusted for inflation of no more than the 2011 level and keep it there permanently.

On the other hand, the state shares a lot of responsibility for PAT’s financial condition by caving in to union demands in the past, by refusing to eliminate the right to strike and being far too deferential to requests for funding for money pits such as the North Shore Connector and by permitting the monopoly status of PAT to continue when competition was sorely needed. It can begin to take some responsibility for its failure to prevent the problems that have being brewing for years. Change the law so the Port Authority can declare bankruptcy-the only way it can deal with its massive and growing legacy costs. Appoint an independent board including several non-Allegheny County members to oversee the organization. Remove the monopoly to allow other carriers access to the County and eliminate the transit workers right to strike.

In the meantime, concessions must be forthcoming and permanent. Some additional monetary help might be granted on a temporary basis if the retirees and employees make a strong, good faith effort. But the additional help must be accompanied by other legislative actions including those recommended above. The Commonwealth needs to take bold steps to deal with PAT and not kick this can down the road again.