What Doomed Council’s Second 11th Hour Plan

OK readers, grab your scorecards.

After a three hour session, City Council passed a plan to boost the pension fund to 50% by using the future revenue stream of the Local Services Tax (LST) the $52 tax that falls on every person who works within the City’s limits. This replaced the plan (let’s call it Council plan A of December)that would have used parking meter revenues as the pledged source to get the funded ratio of pensions up to the legislatively acceptable level under Act 44. The Mayor did not like that one, so soon after, the LST plan (that would be Council plan B of December) was put together and then that was scrapped in favor of dedicating a portion of parking tax revenue to the pensions (yep, Council plan C of December).

What happened to the LST plan (B), you ask? Here’s likely the answer. Act 222, the law that originally raised the tax from $10 to $52 and renamed it the Emergency and Municipal Services Tax from the Occupational Privilege Tax and Act 7, which subsequently renamed the tax the Local Services Tax, contain language that restrict the use of the tax.

Section 22.6 of Act 7 states "any municipality deriving funds from the local services tax may only use the funds for (1) emergency services (2) road construction and/or maintenance (3) reduction of property taxes (4) property tax relief through a homestead or farmstead exclusion". The act further states that 25% of the money must be used for emergency services such as police, fire, and medical services.

Using the LST revenue stream as a pledge to fund pensions was not going to fly. So the next act was to identify another revenue source, and that’s where the parking tax revenues come in. Right now that tax generates about $44 million for the City’s general operations, and dedicating $13 million as is the plan would require cuts or another revenue source to fill the hole.

Parking and Politics, Part Deux

A previous blog entry pointed out the eerie similarities between the cities of Pittsburgh and Harrisburg and their recent struggles with looming legacy cost bills and how the parking authorities in each city were key components in working toward solutions on those costs.

Under the state’s Parking Authority law, board members are appointed by the chief executive and serve at the pleasure of the chief executive. They can be removed by the chief executive at any time.

So when Pittsburgh’s Parking Authority voted 3-2 to oppose a study of an alternative to the recently defeated long-term lease of parking assets, the Mayor appeared at that hearing and stated "I thought it was important for me to let you know personally my position" in opposing the alternative. A Council member who was in support of the alternative stated "the mayor showed up at a public meeting, and he told board members to their faces, ‘I do not support this.’"

In the state’s capital city the Mayor there forced three members off of the Authority board and replaced them with three others when the details of an alternative plan to help the City through a financial tough spot garnered attention before being vetted by the Mayor. The Mayor’s spokesman noted "The mayor feels that its board has an obligation to communicate with the administration about these important matters and wanted to ensure a board that understood the importance of that communication". The City’s financial condition is currently being heard by DCED, who will make a determination as to whether Act 47 distressed status will be granted to Harrisburg.

Tale of Two Cities, Two Parking Authorities

Stop us if you have heard this one. A private interest make a cash offer for a parking system, and the Council turns it down. Then there is a new plan hatched whereby the assets of the Parking Authority, the assets that were not sold, are pledged as collateral in order to help the host city through difficult financial times.

It is happening in Pittsburgh, as we have documented in our last three Policy Briefs, but it is also occurring in the capital city of Pennsylvania, Harrisburg. We have written previously about the debt issues plaguing the City of Harrisburg and how bankruptcy and Act 47 have been mentioned as real possibilities.

Now there is a plan for the Harrisburg Parking Authority to issue new bonds and refinance existing debt (there is an uncanny, almost eerie similarity between that Authority and Pittsburgh’s where existing debt is just over $100 million and plans on the table call for issuing $200 million in new debt) to help the City. According to one news report "…up to $60 million in new money to be used for ‘certain qualified purposes.’ The authority could make a payment to the city to help it pay down some $288 million in incinerator debt."

The solicitor from the Harrisburg Parking Authority also said that any parking rate increases would be smaller than those imposed by a private owner and would keep a public asset public, much like the sentiments expressed by Pittsburgh City Council and the Controller with their alternative plan.

Are these two cities and their parking authorities flattering each other through imitation?

Lamb Plan Falls Short

Controller Michael Lamb has proposed a plan to fund Pittsburgh pensions that would meet the requirement of reaching 50 percent funded by December 31st in order to avoid state takeover of the management of the City’s pensions. His plan is designed to keep the parking assets under government control as opposed to leasing to a private company as the Mayor is trying to do.

Under the Controller’s plan the Parking Authority would purchase the City’s parking meters and any City owned lots or garages for $150 million and dip into the City’s reserve funds for $60 million to reach the $200+ million the City will need to put into the pension funds by year’s end.

Sounds okay so far. The garages and meters remain under government control (although the Authority is not strictly City government, it does have City appointed directors) and the state takeover is avoided. But there are serious problems with the Controller’s plan.

How does the Authority raise the money necessary to service the $150 million in new debt? Under conservative terms and, given the fact that the Authority has $100 million in debt and has net assets of only $63 million, it is likely that borrowing costs for the $150 million will be at least $9 million per year for 30 years. To generate added revenues for the Authority, the plan calls for Authority parking rates to rise 3.5 percent per year for five years-far lower than the planned parking rate increases under the Mayor’s lease proposal.

The problem with the smaller rate increases is that after five years they provide only 19 percent more gross revenue per year than currently collected and that assumes no loss in usage levels stemming from higher rates. Unfortunately for the plan, a 19 percent hike will produce only $6 million to $7 million more in revenue by year five and, because of higher taxes and other expenses, will produce a net revenue gain of only $2 to $3 million. This is certainly insufficient to pay the debt service on $150 million. Indeed, under assumptions of modest inflation for parking rates and expenses, it will take about 15 years before annual net revenue is able to cover a $9 million debt service payment.

In short, it appears unlikely the Authority will be able to get $150 million in bond financing under this plan. And even if the Authority could get very favorable bond rates the gain in net revenue for the first ten years would be inadequate to cover the added debt service costs. A net present value calculation of the plan estimates the Authority’s 30 year net revenue stream under the Controller’s plan to be less than $90 million-well below the $150 million in new debt that is being sought.

Beyond the funding concern is the Controller’s plan to dip into reserves for $60 million to supplement the $150 million in order to meet the December 31st deadline. The plan calls for the City not to make its next payment to the pension fund in order to restore the reserve. But that would push the funding level back under 50 percent and is likely to cause the state to reject the plan. Clearly, the notion of withholding any future contribution to the pension fund has to be off the table.

All things considered, the Controller’s plan faces a very steep uphill battle. Even if it has a chance of working, there is virtually no possibility of getting it done by December 31st in light of all the questions bond underwriters will have and the time needed to draft the legal documents necessary to arrange the sale of parking facilities to the Authority. Many details would have to be worked out before drafting the legal documents can even get started.

“P” Day in the ‘Burgh

Today is the day that City and Parking Authority officials open the envelopes containing the bids that they hope will be sufficient to retire the Authority’s debt (around $100 million) and bring the pension fund to a 50% funded level ($200 million needed to accomplish this).

It is the high point of the process that began in January of 2009 when the Mayor viewed it as "another piece of the ultimate…plan for the long-term legacy costs of the city of Pittsburgh…clearly, in order to have a fully funded pension fund we’re going to need some sort of influx of cash." The idea germinated and advanced through 2009 and received endorsement from the state last September when what became Act 44 was amended to give Pittsburgh the time to pursue the lease.

So what’s up for grabs? Close to 18k spaces in garages, lots, and on-street metered spaces, most in the Golden Triangle. Seven bidders were pre-qualified to bid on the package, and the City clarified some of the stipulations on rate increases, areas where the City and other government agencies could not compete for the life of the lease, and the responsibilities of the Authority and the lessee.

According to newspaper reports the bids will be opened behind closed doors and if the high bids are close then those firms will have until Monday to give a final and best offer. If one of the bidders comes with what the City views as far and away a best offer today that will be announced this evening. Then it will be in City Council’s hands for approval.

City Double Parking on Lease Idea

Under the timeline contained in the "Request for Concessionaire Qualifications" released by the Pittsburgh Public Parking Authority earlier this year, prospective bidders interested in entering into a long-term lease for the publicly owned parking assets were to submit responses to the RFQ by March, due diligence on the applicants would be done through June, final proposals would be due in July, and a close of the deal would occur in November.

That timeline is predicated on the fact that the purpose of the lease is to turn an up front lump sum into a deposit for the anemic pension funds. Under existing state law, if the City can show a 50% minimum funded ratio (assets/liabilities) by the valuation taken in January 2011 then it is business as usual. If that 50% is not met, then the state is going to take over administration of the plans.

So one has to wonder what, if anything, the proposed action by City Council to spend $250k by amending the Capital Budget and Community Block Grant Budget to engage a consultant to study the lease idea does to that timeline and the plan. Presumably, Council is going to have to sign off on the lease idea in the end (notwithstanding any complicated financial arrangements, the Authority owns the assets up for lease consideration) and wants to have the best information available. But what happens if their analysis stretches past the established period of due diligence that is supposed to wrap up this month? What if it even goes into the dog days of July when the pool of bidders (11 parties as of March) is submitting final proposals?

Pool of Parking Bidders Could Shrink

By this past Friday parties interested in the proposal to lease parking garages, lots, and meters had to submit a response to an RFQ. Today’s news accounts show that eleven bids were received. The Mayor is very pleased, according to his spokeswoman with "not only by the number of responses, but, as you will see soon, the amount of expertise we’ve seen in the bidders."

Since the city on the cutting edge of leases and public-private partnerships of late has been Chicago, it is instructive to look at their level of response to a bid for a concession on parking meters. In a 2009 Reason Foundation piece, the CFO for the City of Chicago described the meter bid as such:

  • In March of 2008 the City received qualifications statements from ten bidders
  • Of those ten, six were deemed qualified and offered an opportunity to bid on the concession package
  • Two placed bids
  • One bidder, who submitted the highest responsible bid, was selected

The City of Chicago eventually netted $1.157 billion for the meters.

So while nearly a dozen bidders are showing their interest in Pittsburgh’s garages, if Chicago’s experience is any guide Pittsburgh won’t be choosing between eleven bids this coming November.

Parking Employees Receive a Guarantee

In announcing that not one, but two, law firms will help guide the City is leasing its garages, lots, and meters in order to find a bundle of money for its ailing pensions, the new chair of the Parking Authority board stated "authority employees…would not lose their jobs due to the lease deal."

That likely means the Authority-with administrative employees as well as those that staff garages and lots-will likely be part of the City government landscape for years to come. That’s surprising in that the Mayor wanted the Authority’s $108 million debt to be erased as part of the lease deal. With no debt to retire and no garages to manage and staff, why keep the Authority around?

Perhaps the chair meant that employees-at least the administrative ones-will become part of the City’s organizational chart to oversee compliance with the lease. Or maybe he meant that the successful lessee will have to hire garage and lot employees to take care of maintenance. Of course pay and benefit levels will be sacrosanct.

What’s the next assurance-that rates won’t go too high or that rate increases cannot happen too close to one another?