The Recovery Road Show

Friday marked the release of what will likely become the final Act 47 recovery plan for the City of Harrisburg and a lot of work lies ahead on debt levels, worker benefits, and financial management for the state’s capital community.

Is there anything Harrisburg can take from the largest city in Act 47 status, western Pennsylvania’s own Pittsburgh? A lot of the situation is going to be unique. But Harrisburg, like many local governments, is a labor-intense enterprise so much of the change on the cost side is going to be focused on headcount, salaries, and benefits. Based on the employee headcount and Census population, Harrisburg has 10.7 employees per 1,000 people this year. Five years ago the rate was 13.4; the City’s headcount fell while population bumped up. By comparison in Pittsburgh, where population fell and headcount went up a tiny amount over that same time frame, the per 1,000 person employee count stands at 10.9, up slightly from 10.6.

The similarity in employee to population right now is likely to diverge as the Act 47 plan comes into effect. As with many changes to employee benefits like post-retirement health care, change often comes to new hires. That’s what Pittsburgh did in 2005 when post-retirement health care coverage was ended for police and fire coming into the employment ranks and those retiring after the adoption of the plan would have higher coverage obligations. That too, is what is proposed for Harrisburg under their Act 47 plan.

Finally, on pensions the ability to collect benefits is virtually identical between the cities (50 years of age, 20 years of service for police and fire, though non-uniformed employees in Pittsburgh can retire with benefits at age 60 where in Harrisburg it is 65) but there is a big difference in the funding health of the plans. Pittsburgh has a funded ratio (AA/AAL) of 34% on average for its three plans, while Harrisburg has more assets than liabilities and has a funded ratio of 116%.

A Day of Bad News for Pittsburgh

Friday the 13th was not a propitious day for Pittsburgh judging from the negative news stories. The Tribune Review reported comments from James McAneny, who is very concerned about the City’s last ditch effort to avoid a state takeover of its pension plans. According to Mr. McAneny, head of the agency that will determine if the scheme meets the 50 percent funded requirement the state imposed on the City, the plan was put together without professional assistance and he needs to see what the City has done well before September if he is to do a proper evaluation.

The City’s plan is based heavily on its promise to dedicate large amounts of its parking tax revenue to the pensions for the next thirty years and to compel authorities to contribute more in payments in lieu of taxes, especially the Parking Authority, which will be asked for massive increases that it does not currently have or expect to have.

As we noted at the time of its adoption in late December, the City’s pledge to dedicate thirty years of large chunks of parking tax revenue cannot be seriously considered as a solid asset. There is no contractual obligation-such as a bank loan or bond repayment-that will force the City to honor their pledge if the financial picture gets tight or some future Council arbitrarily and capriciously decides not to make the payments. The City certainly has no enforceable contract with the state pension agencies that would solidify the present value calculations and make the alleged asset viable. The City’s past failures to live up to its obligations to the pension funds and its ongoing financial difficulties should disqualify the scheme.

A second Tribune Review report offers an account of the military’s assessment of Pittsburgh’s youth in terms of their fitness to be accepted into the armed forces. An amazingly high 90 percent of 18 to 24 year olds in the city are deemed unfit for reasons of obesity, physical condition, criminal records, drug addictions, and inadequate educational preparation. This is what comes of being America’s most livable city?

The Air Force Colonel in charge of the study believes more early age intervention will solve the problem. One may suppose the Colonel is unaware of the vast sums being spent on early childhood programs already. As we noted in the Policy Brief this week, it is not what kids know at age 5 or 6 or even 7 that tells us what they will be like at age 17. It is all the stuff they do and what happens to them in the intervening years. Without discipline at home or in the schools, without a culture that values academic achievement and without an environment that teaches manners, respect and decency, no amount of handwringing and monetary expenditures will solve what ails our youth.

And finally, on a somewhat less momentous note, the Bishop’s Pope-blessed cross was stolen. One can hope the cross will have an enlightening effect on the thief and he will return it. It is unlikely the Pope’s blessing will be transferred to him if he is simply planning to make a sizable financial gain from the theft- nor to anyone who buys it. And so it goes in the Burgh.

PMRS Wants Details ASAP

Under Act 44 of 2009 Pittsburgh had to get its underfunded pensions to 50% funded (enough assets to cover 50% of accrued liabilities) or face a state takeover by having its pensions turned over to the Pennsylvania Municipal Retirement System (PMRS). As of now, every pension plan administered by PMRS has ended up there voluntarily.

The head of PMRS recently saidthe organization"is concerned about the financial health of Pittsburgh’s pensions and how a takeover could affect the agency’s $1.5 billion in assets" and that officials "are not going to do anything to jeopardize the assets for our (nearly) 4,000 retirees." With a decision from another state pension agency due in September as to whether the City met the Act 44 goal, PMRS would be responsible for quickly folding Pittsburgh into its pension system. So either the City begins turning over data and documents or there might have to be a delay via state legislation should the takeover go into action.

We pointed out in a Brief last year (Volume 10, Number 57) about how a takeover would change PMRS’s balance sheet. As of 2009 audited data, PMRS had a surplus with assets exceeding liabilities by $88 million. Pittsburgh had unfunded liabilities of $650 million, meaning a "new" PMRS balance sheet would reflect a negative balance if Pittsburgh’s pensions were lumped together with PMRS’ current plans. In addition Pittsburgh had 1.3 retirees for every 1 active member, while PMRS had 0.39 retirees for every 1 active member.

In that same piece we wrote "it will be interesting to see the reaction of the PMRS board and other member municipalities to the way Pittsburgh’s plans are treated since any action affecting Pittsburgh’s plans will have significant effect on the aggregate health of the PMRS system." That reaction is apparently forthcoming some three months after the late-in-the-game bailout plan by City Council.

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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And the Healthiest Pension Fund is…

Pennsylvania has three pension systems, though only two of them can really be considered as unified systems which cover all employees by type. There is the state employees’ system (SERS), the school employees’ system (PSERS), and then there is the local employees’ system-a collection of over 3,000 plans housed at the local level for police, fire, blue- and white-collar workers at counties, municipalities, authorities, and associations. Some are administered through the PA Municipal Retirement System by local governments that voluntary place them there. When considered in aggregate, the local system has 136k employees, placing it in between PSERS (282k) and SERS (100k).

Recent actuarial data shows how healthy these three systems are in terms of funded ratio-that’s the actuarial value of the assets divided by the actuarial value of the liabilities to produce a percentage. A funded ratio of 100% means the plan has sufficient assets set aside to pay for the promised liabilities. A funded ratio between 80-100% would be considered healthy, a funded ratio of 50% or below like that of the cities of Pittsburgh and Philadelphia mean drastic measures are needed, as evidenced here by the events of 2010 and the debates over a parking lease as a way to avoid a state takeover of Pittsburgh’s pensions.

The funded ratios for the plans are as follows: SERS, 84% funded; PSERS, 75% funded, and aggregate local, 72% funded. Again, there is significant influence on the funded ratio of the local system because of the poor condition of the state’s two biggest cities. Removing the six plans hosted in each city (1 each for police, fire, and non-uniformed employees) radically changes the actuarial picture of the remaining local plans and increases the aggregate funding ratio from 72% to 90%.

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.

What Will a State Pension Takeover Mean for Pittsburgh?

“A City of the Second Class that is determined to be in Level III distress based upon the required actuarial valuation reports for a plan year beginning on January 1, 2011, shall transfer all existing benefit plans established by the City to the Pennsylvania Municipal Retirement Board solely for administration…Pension benefits and eligibility requirements shall continue to be subject to collective bargaining”-Act 44 of 2009, Section 902C

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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?

The $452 Million Question

After opening the two high bids yesterday afternoon a partnership of LAZ Parking/JP Morgan emerged as the winner with a bid of $451.7 million for a 50 year lease of the City’s parking system-a combination of garages, surface lots, and metered spaces that the Mayor has viewed as the way out of the pension morass.

As of the last actuarial statement the three pension funds contained $339 million for $989 million, a funded ratio of 34%. Under the terms of Act 44, the state required the City to get the funds to a 50% funded level. As part of the deal from the inception of the idea the Mayor wanted to retire the Parking Authority’s $108 million debt.

So let’s assume that $452 millionis handed over to the City. After taking $108 million to pay the Authority’s debt, there is $344 million remaining. In order to get to the bare minimum 50% level under Act 44, the City would need to take $160 million which leaves $184 million. Plowing all of the money after paying off the Authority’s debt would mean the pension funds would have $683 million in assets. Measured against current liabilities the funding level would reach 69% under this scenario.

Clearly City officials are pleased that the bids came in well above what they expected. What the City needs to do is have a twofold realization: one, there will be endless demands and suggestions for what to do with $184 million if the City only aims to get the pension funded at the 50% level (that is, taking $160 million of the $344 million and putting it to the pensions). Realize that that the $184 million overage basically equates to two years of debt service payments for the City. Two, the City needs to look at short term history to know that in the mid to late 1990s (after selling pension bonds) that the funding level did reach 70%. That was frittered away by benefit enhancements, stock market losses, etc. The City still needs to pursue pension reform and has to cut costs. What does the above expectation bid do for those goals?

Pittsburgh’s Pension Solution: Between a Rock and Hard Place

In last week’s Policy Brief (Volume 10, Number 37) we showed that the proposal to lease Parking Authority facilities as a means to raise $200 million for Pittsburgh’s pension funds would require-at a minimum-a near doubling of the cost to park at the lessee’s garages, lots and meters.  Factoring in inflation, the hikes in cost to park necessary to make the lease a break even situation for the lessee could exceed 100 percent in four to five years.  Clearly, there is a high probability such large increases in parking rates at the Parking Authority’s spaces will be a major deterrent to parking in the City.  Many businesses would suffer, creating further, and possibly irreparable, economic damage to Pittsburgh’s already beleaguered private sector.  And that in turn will reduce the City’s tax base, something it can absolutely not afford.

 

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