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.