Familiar Threads Woven in Harrisburg Recovery Plan

Over three years ago, in February 2010, we asked if the debt related to a trash incinerator was pervasive enough to cause a municipal bankruptcy filing-colloquially, that the City of Harrisburg’s finances could possibly end “up in ashes”. 


After the City was placed into Act 47 status, saw the General Assembly make changes to the statute as it applied to Harrisburg, and operating under the direction of an appointed receiver, a plan, somewhat pretentiously titled “Harrisburg Strong”, has come together for placing the City on the path to a solid financial future.


Readers of our reports, especially as they pertain to Pittsburgh, will notice some familiar themes and one very different situation; namely, the presence of the aforementioned dollar devouring trash incinerator. That facility is slated to be sold-to another public authority-and some of the proceeds will go to satisfy creditors (but only partially satisfy since negotiations have produced settlements for less than owed) and reimburse Dauphin County.  That won’t pay all the bills, so a 40 year lease of parking garages, lots, and street spaces to a public-private partnership is expected to yield enough money to pay off parking debt, the rest of the incinerator debt, for the City itself, and for funds related to economic development, infrastructure development, and a trust fund for retiree health care obligations.


That last point is a good starting place to assess how the City and its employees are partnering up at this critical juncture.  As the February 2012 recovery plan pointed out, Harrisburg is similar to many municipal governments in that it is a very labor intensive undertaking and the lion’s share of costs are attributable to employee compensation.  Three bargaining units represent the majority of the workforce covering police, fire, and non-uniformed staff (461 employees total including non-represented staff) and all negotiated early-bird contract extensions that limited the City’s and the receiver’s ability to make changes.  Compared to other cities of the third class in Pennsylvania (Reading, York, Allentown, etc.) the plan found that Harrisburg public safety minimum salary ran about $10,000 higher. The recovery plan projected workforce costs to rise from $45 million to $52 million from 2012 through 2016. 


As described in the “Harrisburg Strong” plan, two of the three bargaining units (police and non-uniformed) have agreed to concessions during the lives of the existing contracts to move the City toward its goal of getting $4 to $4.8 million in savings.  There are tradeoffs for both the City and the bargaining units: for police, what were to be 3 percent annual wage increases through 2016 are now 0 rising to 1 percent in the final year.  Payments toward health care coverage for current employees will be made with variations based on the number of people covered on an employee’s plan with the percentage of income paid for insurance rising throughout the duration of the agreement.  Current employees who retire after the ratification of contract changes are treated the same as active employees and, as is almost always the case when it comes to legacy cost changes, new hires will not be eligible for post-retirement health care benefits. The police contract opens up the possibility that certain positions might be offered to civilian employees and that booking could be transferred to Dauphin County. Most of those same terms will apply to the adjustment for non-uniformed employees.  


So what sweeteners do the employees get in return for these concessions? For one thing they are asking for elimination of the residency requirement. This issue has been bandied about in Pittsburgh over the summer and will no doubt intensify closer to Election Day. In Harrisburg, the proposed amendments for both police and non-uniformed contracts contain language stating “…the residency requirement contained in prior collective bargaining agreements between the parties is eliminated, and employees, regardless of hiring date, shall not be required to establish or maintain a residence within the corporate limits of Harrisburg”.  Could that be a deal breaker for City officials who must pass some of the necessary ordinances to make “Harrisburg Strong”? 


Overall approval for the plan falls to the Commonwealth Court, which plans to review the proposal in mid-September. 

Multi-City Look at OPEB Funding

As touched upon by our Brief this week the Pew Center for the States looked at the funding of retiree health care in 61 cities. The data, which reflects fiscal year 2009, shows how much money the city is required to put in (ARC), how much they actually put in, the total liability, and the percentage at which the other post-employment benefits (OPEB) are funded.

Let’s start with the last point first. It was only a few years ago that cities were required by accounting standards to begin showing an actuarial statement on OPEB, and there is no requirement to pre-fund or set aside assets for OPEB the way things are done for pensions. That’s why only 23 cities of the 61 showed a greater than zero balance in terms of percent funded. Los Angeles was the highest at 55% and Denver was close behind at 51%.

Total liability ranged from a high of $73 billion in New York City to $3 million in Cheyenne. Eighteen other cities besides New York had OPEB liabilities of $1 billion or more.

Several cities-including Charlotte, Little Rock, Phoenix, and Virginia Beach-paid in more than 100% of what was required under the terms of the annual required contribution.

One city that was not included in the measurement? Our very own Pittsburgh, PA. It takes OPEB measurements every other even year (2008, 2010, 2012); in 2008 its total (unfunded, as there are no assets set aside) liability was $359 million and by 2010 it had climbed to $488 million. In 2009 it was required to pay in $29 million but put in 70% of that ($20 million).

Is PAT a Burden on Taxpayers?

In a remarkably inept attempt to invalidate the State Senate Pro Tempore’s assertion that the Port Authority of Allegheny County (PAT) has been a long-time burden on taxpayers, an editorial writer says the Senator’s claim is a flawed premise and misses the significant role mass transit plays in a region like Pittsburgh.



Clearly, anyone who takes the time to think about the editorial writer’s comment can see the faulty logic of the attempted refutation.  The Senator’s comment neither explicitly nor implicitly claims that mass transit has played no role, important or otherwise, in the region. If he believed that he would more likely be pushing to eliminate state subsidies altogether as opposed to wanting to reform PAT to make it more cost effective and efficient.  Note that state operating assistance and grants provided a combined $205 million (55%) of PAT’s total revenue in FY13, while farebox revenues accounted for $84 million, or 23 percent, of total revenue. 


But the larger issue is whether the Senator was right about PAT being a burden on taxpayers. There are a number of ways to look at the burden issue.  For example, are PAT’s costs in line with benefits it produces for the county, region and state? Or, are PAT’s costs in line with other comparable transit agencies around the country? 


Well, let’s go back a ways to assess the Senator’s claim that PAT has been long-time burden on taxpayers. In November 2006, Governor Rendell’s Commission on Transportation Funding and Reform issued a report containing the following findings (among others) regarding PAT.


  • Needs to focus on financial performance indicators to better align service needs and effectiveness. The Commission wanted PAT to meet industry best practices.
  • Has the highest wage rates in the country adjusted for cost of living.  At the time of the report PAT wage rates averaged $20.50, 40 percent higher than the average of 60 transit agencies studied by the Commission. 
  • Is challenged by high labor, health care and pension costs for current and retired employees. From 1999 through 2005 these line items grew at an annual rate of close to 14 percent.
  • Focused effort on fixed guideway development and service expansion rather than basic asset replacement maintenance. The Commission said that PAT was going after new starts and expansions instead of focusing on existing needs.


So where is the agency now?  The National Transit Database’s profile of the largest 50 public transit agencies in the U.S. showed that in 2011 PAT provided 54 million annual unlinked bus trips over a service area of 775 square miles with a per passenger expense of $5.31.  If one looks at agencies in the top 50 that ran the same range of bus trips (44 million to 64 million) which covered areas such as Atlanta, Milwaukee, San Antonio, and Houston only Houston came within $1 of the expense by PAT ($4.95 per bus trip).  If one looks at agencies covering a similar service area (570 square miles to 868 square miles) which included Portland, Philadelphia, Minneapolis, San Diego, and Dallas, all with the exception of Dallas ($6.40 per bus passenger trip) had costs below PAT. 


For 2009 (the latest data available) the American Public Transportation Association examined transit wages and average bus operator wages.  In FTA region 3 (PA, WV, DE, DC, MD, and VA) the average agency wage was $17.12: the average PAT wage was $24.25, which was the highest of all transit agencies in region 3.  Adjusted for cost of living, the 2009 average PAT bus operator wage was higher than those of Atlanta, Chicago, Cleveland, and Milwaukee. Bear in mind that drivers at other regional transit agencies in southwestern Pennsylvania earn $8 less per hour and have nowhere near the benefit package PAT drivers have.


PAT’s net expenditures for pension, active healthcare, and retiree healthcare stands at $103.3 million in FY2013, 6 percent above the audited 2010 amount of $97 million.  Contract after contract has made changes to fringe benefits as new hires (depending on bargaining unit) come under defined contribution pensions or have age and service requirements to make them eligible for retiree health care.  With a long-term liability of $890 million on retiree health care those are changes that have to be made. As a percentage of PAT’s covered payroll, the unfunded liability stood at 559 percent as of 2012.  By way of comparison, the larger SEPTA system’s unfunded liability to payroll percentage was 299 percent in 2009. 


Bear in mind too that the concerns about excessive spending on guideways expressed in the Governor’s report predated the $520 million North Shore Connector project. This project required tens of millions of state and local tax dollars as well as the diversion of millions of Federal dollars that could have been used for other traffic improvement projects in the region.


Over and above the state’s generous annual allocations to PAT for operations and capital expenditures, enormous sums of highway money have been “flexed” by Governors and the SPC to fill budget holes at PAT. In 2005 alone, PAT received over $140 million to plug budget holes. Another $47 million was flexed in 2011-12 to avoid shortfalls.


Much of this comes down to the issue of contract bargaining that was tilted heavily in the unions favor by their right to strike. “Transit strike” are the two most frightening words transit managers and riders can hear. Because of the threat of strikes, PAT boards have not been able or willing to stand up to union demands, no matter how outrageous or threatening to the Authority’s long term financial viability.


The right to strike is granted by the state, which therefore bears some responsibility for the excessive cost structure at PAT and the resulting need for the state to heavily subsidize its operations. But that does not obviate the Senator’s point.  Because PAT’s cost are so high compared to similar sized agencies and because the state’s subsidy keeps expanding in the face of relatively stagnant paying riders, there can be little doubt that PAT is a burden on taxpayers.  That situation must be corrected. And substantial corrective reforms ought to and must receive broad support from taxpayers and businesses if the burden is ever going to be reduced.

OPEB Trust Fund Moves Ahead

"Despite an estimated $320 million of other post-employment benefit liabilities for health care and life insurance as of January 1, 2006, the City has only funded these benefits on an annual basis when they are actually due to former employees who have already retired". That is how Recommendation PN03 of the 2009 amended Act 47 recovery plan began.

The recommendation was for the City to "establish and begin to fund an OPEB Trust Fund" by FY2011. City Council is scheduled to debate the characteristics of the Fund, members to oversee it, and the initial contribution ($2.2 million in 2012) to the Fund. Both the creation of the fund and thus the initial amount are a year behind schedule.

The fact that the OPEB liability is a massive one and the fact that the City has moved slowly on creating the fund are unchanged; what has changed is the size of the obligation. Whereas the Act 47 plan used the 2006 valuation, two subsequent ones have been made and are publicly available in the Controller’s CAFR. By 2008 the liability was $359 million and by 2010 it was $488 million.

When the Act 47 team pointed out in its recommendation that "OPEB liabilities threaten the City’s long term financial health by committing the City to pay increasing amounts into the future for services rendered in the past". Retiree health care was eliminated for police and fire personnel who were hired on or after January 1, 2005, so all of the obligation is tied to employees employed before that date.

Creating the fund was one of the requirements set up by the oversight board when it informed the City its approval of the 2012 budget was changed to "conditional" status.

Pittsburgh to State: “Please Release Us” from Oversight

Amid the 2012 budget deliberations comes a not-too-subtle plea from certain City officials that they are ready for the state to remove itself from watching over the City’s shoulders and inspecting its finances. The Mayor’s spokesperson stated "We feel like we can start functioning on our own". The Act 47 coordinator said he "couldn’t put an absolute timeline on [leaving Act 47]" and, by extension, the existence of the separate oversight board.

Recall that in November of 2007 the City petitioned the Secretary of DCED to remove them from Act 47 status. An evidentiary hearing followed and in July or 2008 the decision was rendered to keep the City under supervision. It was agreed that, due to the City’s massive legacy cost problem, an amended recovery plan was needed and that is the plan the City is currently operating under.

With an official DCED designation date of December 29, 2003, Pittsburgh will soon have been in Act 47 for eight years. Twelve other municipalities currently in distressed status have been in longer. Of the six communities that have been removed four came out in less than eight years. Ambridge, in neighboring Beaver County, was in for just three years. The boroughs of East Pittsburgh and North Braddock, both of Allegheny County, made it out in seven and just under eight years, respectively.

In announcing the decision in 2008 the DCED secretary at the time pointed to the City’s pensions, post-retirement health care, debt, and workers’ compensation liabilities as items that needed top priority attention before even considering letting Pittsburgh out of oversight. The City spent all of 2010 focused on the pension part of the equation, and the plan that moved forward was one that beat a state minimum funding threshold, not a long-term solvency plan. They are slowly moving toward a trust fund for retirement health care (there are no assets set aside for that liability), workers’ comp costs are higher than norms, and debt is going to level off so long as the City takes care of capital needs without borrowing. Sounds like there is a lot more work to do prior to release.

City’s Retiree Benefits Problem Getting Worse Fast

As we have written on previous occasions, the City of Pittsburgh’s legacy cost issue is multi-faceted-although little attention is given to some important parts of the problem. Heavy focusing of time and effort on one part of the problem can allow others to worsen. 

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City’s OPEB Liability Grows—Fast

Until the Governmental Accounting Standards Board issued Rule 34 the amount of money governments spent on health care benefits, life insurance benefits, etc. for retirees-known as post-employment benefits other than pensions, or simply OPEB-was recorded as an expense but not on a long-term actuarial basis the way pensions were. The rule made auditing reports state OPEB assets, liabilities, the difference (assets-liabilities), payroll covered, and afforded the opportunity to clearly see the actuarial basis of expenses associated with OPEB.

The GASB rule worked its way down to the smallest governments after the largest ones implemented it first. Pittsburgh’s first valuation was taken on January 1, 2006 and showed unfunded liabilities of $320.3 million. There were, and still are, no assets set aside to pay OPEB liabilities, and there are no requirements for any government at any level to do so.

Four years later the City’s OPEB liability is now $488.6 million-an increase of 52%. For comparison’s sake, the County’s liability grew 32% to $96 million from 2007 to 2009 and the Port Authority’s went up 11% from 2007 to 2009. The unfunded liability for PAT dwarfs both the City and the County with $812 million unfunded as of 2009. For the County to have matched the City’s rate as of 2010 its liability would have to have stood at $111 million.

So while the City waits to see the results of its year end bailout plan for its underfunded pensions worked, it has another huge tab waiting in the background.

City Retiree Health Care Costs Get Clearer

Like layers of an onion being peeled back, the levels of disclosure about the cost of post retirement health care costs for all governments are increasing.

In 2004, Rule 45 from the Governmental Accounting Standards Board (GASB) set in motion changes to how post retirement benefits other than pensions (known in the shorthand OPEB) were accounted for. Rather than being stated as expenses when paid out, OPEB had to be put on an actuarial basis like pensions, with long-term assets, liabilities, and the funded/unfunded status of the plan clearly noted.

Rule 45 was phased in over three years for governments based on revenue collections. The City of Pittsburgh has taken two valuations since January 1, 2006. The most recent recorded valuation on January 1, 2008 showed long-term liabilities of $359 million, up from $320 million two years earlier. There are no assets set aside for these liabilities (there is no requirement for there to be, either by statute or Rule 45) and the City has made contributions at the $20 million level in the past several years on a pay as you go basis.

The OPEB unfunded liability is roughly half of the unfunded liability of the City’s pension plans, and the time and capital spent on the parking lease plan has not included any discussion of the OPEB liability. The Act 47 amended plan from 2009 stated "OPEB liabilities threaten the City’s long-term financial health by committing the City to pay increasing amounts into the future for services rendered in the past".

Just yesterday City Council discussed establishing an OPEB trust fund within the Department of Finance, a recommendation made in that 2009 amended plan. The City is expected to be putting $2.2 million a year into the fund. Recall that since the City ended retiree health care for police and fire employees hired after January 1, 2005 so all of the unfunded liability is tied to current life insurance coverage and the health care liability built up before the benefit ended.

Another Multi-City Attempt to Reform Legacy Costs

Pittsburgh’s most senior member of City Council is reaching out to chief executives, City Councils, and finance officials of other cities across the state to try and band together and lobby Harrisburg for changes to pensions and retiree health care.

Call it the latest version of "Hands Across Pennsylvania" if you will. But the Councilman has to be cognizant that not only did the Mayor try this approach two years ago but that the Legislature just spent a good deal of time this past summer and fall working on a minimal step toward changing the municipal pension system. That effort fell apart when Pittsburgh asked to "go it alone" and be exempted from the legislation. Soon after public sector unions aired their objections to the legislation and the reform movement was nullified.

The Council member noted that "we are all in this together and it is only by working together that we will end this downward spiral." Why would he have any faith or confidence that other cities, many of who might have been in favor of the reforms, would be open to another overture from Pittsburgh? Or that the legislators that worked on the issue would be open to another grass roots movement?

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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