A Spending Freeze Could Have Helped Pension Mess

Unless there are major changes in legislation pending in the General Assembly, it appears that Pittsburgh will turn the administration and management of its pension plans over to the Pennsylvania Municipal Retirement System, who will then be charged with the massive task of restoring them to health.

Because of amendments made in the Senate version, the House has to take up the bill again and the Mayor wants to get the City out of the reform package because he sees either "tax increases or [reduced] services" because the City will have to put in more money to shore up the funds. The Mayor predicts an additional $25 million (on top of the more than $40 million that represents the minimum municipal obligation) will be the amount the City will have to come up with.

But it could have been different. Imagine if the Oversight Board and the Act 47 team-instrumentalities of the state responsible for returning Pittsburgh to solvency-ordered an immediate spending freeze in 2005 and years thereafter. The actual expenditure amount in 2005 was $398.8 million. The budget has grown by 10% from then to now.

Year

Actual Spending ($, millions)

Spending Held Flat ($,millions)

Savings ($,millions)

2005

398.8

398.8

0

2006

410.5

398.8

11.7

2007

442.4

398.8

43.6

2008

416.6

398.8

17.8

2009

437.9

398.8

39.1

Holding the reins on expenditures would have resulted in cumulative savings of $112 million-not enough to fund all the unfunded liability, but plenty to set aside for annual obligations. Based on population estimates (316k in 2005, 310k in 2009), the per capita level of spending would have risen 2% from $1,262 to $1,286 in a model where spending was held constant.

A spending freeze would also force the City and its overseers to explore alternatives for service delivery (contracting out, outsourcing, etc.) and reduce employment to stop the accumulation of additional liabilities. Headcount could have fallen by far more than it has in the oversight years (3,657 in 2004 to 3,294 in 2009) and would undoubtedly gone a long way to getting the pension problem under control.

Public Safety Spending and Bankruptcy

We’ve talked previously about allowing bankruptcy as a possible remedy for municipalities to get out from under pension obligations that have become too burdensome. In fact, this is an option for cities and towns in California: it does not have to stem from pension hardship per se, but any financial difficulty that arises can allow California municipalities to file Chapter 9 bankruptcy and reorganize.

Not so under a new proposal that would require the approval of a state commission, made up of state legislators, to sign off on a bankruptcy filing. The change can be traced to a dispute in the City of Vallejo, where leaders partly blamed work contracts with police and firefighters for pushing the city into bankruptcy, and won permission from a bankruptcy court in March to scrap its contract with the firefighters’ union.

The statewide firefighters’ union was spurred into action following the Vallejo case, obviously wanting to protect their members’ interests. Now the battle will play out in the state legislature.

Sounds eerily familiar to what will happen here should an emerging proposal get traction. That plan, designed by the Public Employee Retirement Commission, would place plans having less than half of the assets needed to meet obligations into the Pennsylvania Municipal Retirement System, currently a voluntary system covering about 800 plans. Plans ending up under state control would have strict limits on benefits to current and future employees.

"We’re opposing this, guys…We’re shutting it down" was the predictable reaction of the Pittsburgh fire union president. Unlike California’s cities, Pennsylvania’s municipalities cannot "shut down" and declare bankruptcy. They can do what Pittsburgh is doing now: exist under Act 47, get incremental contract changes, and hope to eventually emerge from oversight.