Getting Serious About Public Sector Pensions

A Tribune Review article of November 8 reminds once again just how desperate the unfunded pension plan situation is for many Pennsylvania communities, including the two largest cities as well as several midsized cities. With assets to liabilities ratios below 50 percent in Pittsburgh, Philadelphia and Scranton and others below 65 percent, there can be little doubt that a crisis is at hand.

Legislators are saying it is time to get serious. But if the plans being contemplated are not more forceful than the municipal legislation passed in 2009 or the legislation dealing with the state’s own pension difficulties already drafted, we can expect little correction of the underlying problems and no lasting improvement in the underfunding situation.

Drastic steps need to be taken and very soon.

Dealing with the pension difficulties will require legislators to face up to the real problem. Simply put, public sector pension plans are too generous. Municipalities, the Commonwealth, and school districts are saddled with long term obligations to retired and current employees that cannot be met without: (1) diverting large amounts of revenues from fundamental, core functions of those governing bodies or (2) raising taxes to such a punitive level that the affected economies and tax bases stagnate or shrink and populations decline.

Attempts to fix this legacy cost problem by having the state assume more of the responsibility to fund municipal pensions as well as its own will choke off any efforts to reduce the size of state spending and to lower the business tax burden that has been so detrimental to the Commonwealth’s ability to grow economically.

Search for effective and meaningful answers must address the size and growth in pension liabilities-what is owed to retirees and eligible employees. Several proposals have been discussed such as having new employees put in 401 (k) or similar defined contribution plans. Clearly, that is a major initial step but unfortunately will not make a significant dent in the problem for many years.

It is time to tackle the issue head on. Pennsylvania needs to make two fundamental legislative and constitutional changes. First, the legislature must make it easier for municipalities to enter into Chapter 9 bankruptcy to deal specifically with massive unfunded pension obligations for which there is no solution other than ruinous tax hikes or crippling service cuts. Second, the state needs to amend the Constitution to remove the requirement that public sector employees must receive all money they have been granted contractually for any municipality that has entered into bankruptcy because of its legacy cost difficulties. Private sector employees enjoy no such guarantee. If their employer fails and cannot maintain contractual benefits to current or retired employees, adjustments can be made through bankruptcy.

Obviously, legislative language must be very careful to avoid permitting capricious misuse of the bankruptcy provisions. Employees and retirees deserve to be and must be protected to the greatest extent possible consistent with the level of financial distress of a community filing for bankruptcy. At the same time there must be recognition of responsibility. Cities that have made overly generous commitments and now cannot meet their obligations cannot reasonably expect taxpayers in other municipalities who have been more prudent to provide the funds necessary to solve the legacy cost problems of irresponsible communities. Retirees enjoying handsome pension and other benefits in a city that cannot provide for current basic services have no ethical or moral claim on taxpayers in other communities.

Obviously, many hearings and debates will be necessary before these dramatic proposals can move toward legislative language and bill enactment. Still, the very process of entertaining the possibility of forceful steps could engender some meaningful, voluntary compromise that would help ease the crisis substantially.

At the very least, bankruptcy should offer an opportunity to renegotiate the terms of pension plans for future retirees so as to increase the number of years needed to be eligible for full benefits; limitations on the use of overtime or other non-standard pay in the calculation of retirement benefits; and reductions in the percentage of pay received for each year of service.

When dire situations such as the pension crisis arrive, it is necessary to confront the real causes of the problem and not kick the problem down the road for someone else to deal with when it will surely be much worse. Adequate provision of core government services without wrecking the economy with higher taxes must not be held hostage to decisions made by previous governing bodies to be excessively generous to public employees.

A Case Study for Chapter 9 Reform?

Westfall Township, a community of just over 2,800 people in northeastern Pennsylvania’s Pike County, might be the tiny engine that could prompt some thinking about the process through which municipalities proceed to bankruptcy (debt readjustment is likely more appropriate) under Chapter 9 of the U.S. Code.

As we pointed out in earlier Policy Briefs and a full-length report, Chapter 9 filings are very rare and, under the national-state division of power in the U.S., under the discretion of the states. Due to amendments passed in 1994, a state must specifically authorize its local governments to enter into Chapter 9. If they grant permission, they are free to attach as many pre-conditions as they like. In Pennsylvania the requirements are spelled out in Act 47, the fiscal distress statute.

Westfall Township faced a $20 million bill due to a developer and could not pay it. They filed for Chapter 9 bankruptcy, four days later were placed into Act 47 status, and after going to court the bill was renegotiated to something more manageable ($6 million).

The municipality’s bankruptcy counsel pointed out that "filing for Chapter 9 should be the last resort for municipalities. The ideal option is to negotiate with the creditors. If that fails, the second alternative is to go through a financially distressed municipality proceeding under Pennsylvania’s Act 47…if those options fail, or if there is an emergency, then Chapter 9 should be considered" (emphasis added).

Perhaps the General Assembly will look to this recent example and ponder whether there should be an alternative way to enter Chapter 9 if there is a sudden catastrophe or fiscal emergency that cannot wait for the Act 47 process to play out. Then too, in light of the massive pension bill that is coming due for school districts in the near term it ought to be considered if school districts should have the right to pursue Chapter 9 filings (Act 47 applies to municipalities only, so school districts have no avenue by which to pursue debt adjustment under Chapter 9).

State won’t Bailout its Host City

Regarding the tangled web of debt between the City of Harrisburg, Dauphin County, and the Harrisburg Authority over obligations on a trash incinerator and whether those obligations could lead Harrisburg into Act 47 distressed status or Chapter 9 municipal bankruptcy, the Governor of Pennsylvania offered this statement:

"There’s no easy, pain free way out…there is no Santa Claus riding into the aid of the City".

Maybe not as harsh as the 1975 headline "Feds to New York: Drop Dead" but clearly a message that the Commonwealth won’t advance funds or bailout Harrisburg over the debt. Instead, a meeting between the Governor, the Mayor of Harrisburg, and other officials produced a consensus that technical advice from the state would be available, but the City should look to sell assets and increase disposal fees to County residents.

The Mayor wants to avoid Act 47, and said that "bankruptcy would be the last option". With some $17 million in debt coming due in four months, that last option might be approaching rapidly.

What Happens in a Chapter 9 Bankruptcy?

In a previous Policy Brief (Volume 9, Number 51) we raised the question of whether Pittsburgh’s legacy costs could force the City to seek relief under Chapter 9 of the U.S. Bankruptcy Code. Under Chapter 9 a judge would oversee a readjustment of debts.  Pennsylvania’s Act 47 permits a municipality in financial distress to pursue a Chapter 9 filing if one of the following conditions is present:

 

  • The Act 47 coordinator recommends filing
  • There is imminent action by a creditor that would threaten the ability of the municipality to provide services
  • A creditor has rejected the Act 47 plan and the rejection cannot be resolved
  • A condition causing financial distress could be solved by filing
  • The governing body has failed to adopt an Act 47 plan or carry out the recommendations of the coordinator

 

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Will Legacy Costs Force Pittsburgh Into Chapter 9 Bankruptcy?

“…the notion that the second largest city of this Commonwealth would record the unprecedented status of bankruptcy is simply an unacceptable alternative”-

Report of the Intergovernmental Cooperation Authority, April 12, 2004

 

Five years ago when the City was new to Act 47 status and the oversight board was getting its bearings there had to be some inkling of a very real possibility Pittsburgh could find itself in front of a bankruptcy judge.  The City was characterized as being saddled with an outmoded tax structure and out of budgetary gimmicks to meet its spending needs.  Per capita debt was far out of line with other U.S. cities. To forestall a worsening situation, the state had approved the City’s petition for Act 47 status, created a new, separate oversight board, and enacted a tax reform package for the City.   

 

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