Garage Privatization in Pittsburgh Should Remain an Option

With City Council’s final vote and the Mayor’s pronouncement that it is “time to move on” to other issues, the stage appears to be set for the troubled pension plans to move from City administration to that of the Pennsylvania Municipal Retirement System (PMRS) under the terms of Act 44.  After the vote on the Mayor’s lease plan the Council and Controller rolled out yet another plan to raise the $220 million needed to avoid the state takeover of the pension funds. The Mayor’s office indicated the Council-Controller plan is a non-starter and would not get his approval.


Continue reading

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

Continue reading

Pension Debate Heating up in Pittsburgh

Now that Council has apparently pronounced the Mayor’s lease proposal DOA, what next? Only two possibilities remain. Allow the state to take it over and be subject to the demands of the state pension managers or try to find $220 million by December 31.

Owing to the years of neglect and mismanagement the City’s pensions are underfunded to the tune of around $650 million with current assets of less than $300 million. What’s worse, the funds have been paying out about $85 million per year to retirees while the City has been adding only $45 million–$60 million was added last year. But even if the $60 million could be maintained, the fund would still deplete rapidly. At least $25 million more annually will be required to stop the declining fund assets. Counting on supersized investment returns is not an option.

So, if the state takes over, the City will undoubtedly face a huge bump in required contributions to keep the pension funds solvent and to move the funded ratio to at least 70 percent. This is a tall order indeed.

Some Council members still believe there is a free lunch to be had. Follow Controller Lamb’s plan and sell parking meters to the Parking Authority for $150 million and throw in $60 million of City reserves to get the necessary funds by December 31. As we showed in an earlier blog, that plan will not work because of the low limits on parking rates it imposes and the difficulty the Authority will have in borrowing $150 million at an attractive rate given its limited assets and cash flow. And using City reserves poses its own problems. Any complex transaction involving the Parking Authority buying parking meters from the City that would raise $200 million will require much higher parking rates than envisioned in the Lamb plan.

Indeed, any borrowing plan the City comes up with to raise $220 million will have to show dedicated revenue of $17 to $20 million per year. In light of the City’s financial situation, it would appear unlikely bond underwriters will be eager to raise that amount for a City bond issue, certainly not before December 31. And if it borrows money for the pensions, it will cripple its ability to raise capital funds in the future. It already had an enormous overhang of debt-one of the highest, if not the highest, debt per resident ratios of any city.

And even if the City could borrow enough to stave off a state take over in January, the imbalance in outflow and inflow of money into the pension funds will necessitate the City coming up with much higher annual payments to prevent the pension assets from sliding back under the 50 percent assets to liability ratio.

In short, the City is heading into a period of either much higher taxes or finally facing up to the need to start making serious cuts in spending to save $30 million a year until pensions are shored up. There are no easy answers or cheap fixes to the problem.

Will Leased Parking Garages be a Tax Shelter?

Pittsburgh is contemplating a lease of its publicly owned parking to the high bidder for a sum of $452 million. The lease of nearly 18,000 spaces in garages or lots and on-street metered spots owned by the City of Pittsburgh and the Parking Authority, if consummated, will alter the concept of public property.


Continue reading

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.

How Many Bidders in the Mix?

Back in March of this year we wrote a Blog entry that discussed the initial pool of bidders interested in competing for the right to win a 50 year lease for the City’s parking system. Initially, 11 groups responded to the Parking Authority’s RFQ. A few weeks later 7 of those groups were deemed to have "the financial and operational wherewithal to compete for a long-term lease".

As of last Wednesday an unspecified number of those 7 groups submitted bids. What we know is that two of the bidders on the high side were within 10 percent of each other and that’s why the City and the Authority moved to the "final and best offer" phase where there is supposed to be a clear winner emerge today.

If and when we find out how many firms actually submitted bids (whether it was just the two that came close to each other or more) it seems as though the pattern here has almost followed the same as it did in Chicago: there the eventual winner came originally from a group of 10 that responded to an RFQ, a group of 6 that were invited to bid, and one other firm that moved to the "final and best offer" phase.

“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.

Airport Plan Does Not Launch

The plan was simple enough: find out what the 13k parking spaces at Pittsburgh International Airport could net in a lease deal and, if the numbers were attractive enough (in the neighborhood of $400 million) sign an agreement and take the up front cash to settle the airport’s outstanding debt of $500 million, all of which is related to the construction of the facility in the 1990s.

By paying off the debt it was hoped that the airport’s fees (cost per enplanement) would fall from one of the highest, $15.80, to less than $1. The fees drop and airlines would then be enticed to add new or expand existing service at the airport (though in a May 2009 newspaper article industry observers and airline officials were tepid on the pull lower fees would have, characterizing cuts as "no airline saying we’ll fly there if it’s really cheap", "It’s going to help, but it’s not a panacea", and "There are too many other factors at play that we look at in making those types of decisions").

That’s why news over the weekend that the privatization deal is dead because it would have not brought in the desired amount, would have led to rate increases to customers and employees, and the airport would have given up the revenue stream it enjoys from parking means that the hopes for a debt free airport and drastically lower fees is not going to come quickly or easily. The Authority did not like what they heard-that a potential deal could have gone as high as $400 million according to their consultant-so the plan is off of the table. As the Authority’s executive director noted in December "we will not give it away…But if it’s a very attractive number that does the intent as far as reducing the cost per passenger, then we’ve done our job."

Now the Airport Authority will continue to pay about $62 million in annual debt service through 2018 when the debt is expected to be retired. The Authority is also entitled to $107 million from gaming money for debt reduction (it was $150 million but the County grabbed $42 million for debt it claimed it was owed on the airport’s construction).

It is curious as to why the Authority would not have combined the gaming money with what they could have fetched in a lease deal to at least take a big bite out of the outstanding debt. Presumably that would have shortened the time period to retirement by a few years.

Could the Water Authority Evaporate?

Tucked into the discussion on the City of Pittsburgh’s finances was a mention that part of the overall wish list could involve privatization of the Water and Sewer Authority, the public agency that is responsible "for the operation and improvement of the City’s water distribution and wastewater collection systems".

This responsibility was housed within the City water department for many years; the Authority was created in 1984 and in 1995 entered into a Cooperation Agreement and a Capital Lease Agreement that transferred Water Department employees to the Authority and the Authority agreed to lease the water system for a period of thirty years. Under the terms of the agreements the Authority assumed workers’ comp liabilities, provides the City with up to 600 million gallons of water free of charge, subsidizes the water rates of South Hills residents who are served by a private operator, pays the City $101 million annually under the lease, and, in the year 2025 can purchase the system for the nominal fee of $1.

Water and sewage systems are popular options for privatization-after all, providing drinking water is not a core public service and much of it is supplied by private interests currently. According to the Reason Foundation’s most recent privatization report, some 1,300 local, state, and Federal agencies contracted out some part of water service in 2008. Six privately operated plants reverted to municipal control the same year.

Much like the proposed parking lease deal, the attractiveness of selling/leasing the water system hinges upon opportunities for profit and much of that is tied to debt load and the City’s audited financial statements show that the Authority has $881 million in outstanding net debt, about $150 million more than the general obligation debt of the City itself.

The Parking Lease: What’s Included?

The City will arrive at a critical juncture in the next ten days: that because parties interested in pursuing a lease of the City’s parking facilities have until 5 PM on March 19th to reply to the Request for Qualifications proposal. The lease (or concession, as it is described in the RFQ) will "grant certain operating management, and revenue collection rights for a certain period of time in exchange for an upfront, lump sum payment".

That lump sum payment is expected to be used to pay off the Parking Authority’s debt and the remainder for helping the City’s ailing pension funds. At least $200 million would be needed to bring the funds to a level of health necessary to avoid a state takeover of the pensions.

So what exactly is to be included in the lease?

  • 8,987 spaces in 11 garages and 1 attended lot in Downtown, Oakland, and Shadyside
  • 6,931 spaces served by on street meters
  • 1,776 spaces in metered surface lots

All in all, some 17,694 spaces are up for grabs, but the RFQ points out that "certain facilities, assets, and elements may be added or removed during the process and will be further detailed in the subsequent RFP". Much of that continues to play out as Council debates as to how the deal will be structured.