No, this is not an advertisement from the City of Pittsburgh, who spent much of 2010 debating a long-term lease of Public Parking Authority assets to solve its pension woes. Instead, it is a recommendation made by the Act 47 coordinator for the state’s capital city, Harrisburg, which faces a significant debt burden due largely due to its involvement with a trash incinerator. Annual debt service is $18 million a year and there is $220 million outstanding on the facility.
Avoiding a Chapter 9 bankruptcy filing, according to the Recovery Plan, requires the patience of the parties the City owes money to, a consensual debt solution, and a reopening of the three labor contracts the City has.
With a structural operating deficit 19 jobs are slated for elimination and the only way out of the debt problem is to sell the incinerator and sell or lease the assets of the Harrisburg Parking Authority. We wrote in a blog last October about a plan for Harrisburg that would have involved issuing new debt to help the City with its incinerator issue. Now it appears the 8,300 plus spaces and possibly 1,200 metered spots could go up for sale or lease. That’s about half the spaces that would have been involved in a Pittsburgh lease proposal. Harrisburg also has a revenue sharing arrangement with its Parking Authority akin to the one here in Pittsburgh, with the HPA transferring anywhere from $3.5 million to $4.0 million per year to the City in the past few years.
Today the Mayor’s spokesperson was quoted as saying that the parking lease for pension relief deal is something the Mayor is being forced into. "Let’s be clear: The mayor doesn’t want to do this" was the exact statement.
Consider for a moment that the state is not (and never was) going to swoop in and rescue troubled pension systems like Pittsburgh; there is no magic wand to wipe away the $650 million in unfunded liabilities; there are few options to generate a lump sum of cash to put into the pension fund; there is no free lunch.
But to imply that the Mayor does not want to do the lease is disingenuous. Recall that the state passed Act 44 last fall as a way to deal with municipal pensions. It even had the makings of moving to a defined contribution system and away from defined benefit plans. But the Mayor wanted no part of it and said, nearly a year ago, "just give us a chance to solve this locally. We can do it. … Give us a two-year window to explore leasing [public] garages".
Out of that came the amendments to Act 44 and the granting of the Mayor’s preferred alternative, the same one we are now told he is lukewarm on.
As we pointed out in yesterday’s Brief part of the expense side of the equation for the successful bidder will be the responsibility of paying real estate taxes on garages and lots owned by the Public Parking Authority presently. That’s because the Authority, as an instrumentality of the City, is exempt from paying real estate taxes on its properties and a lease that is longer than 29 ½ years implies ownership (it is envisioned that the bid will involve a 50 year lease).
Examining the nine garages located in the Golden Triangle and their block and lot numbers from the County’s assessment website shows that the structures have a combined assessed value of around $88 million. The highest valued structure is the First Avenue Garage, located by a trolley stop and PNC Firstside and has the most spaces of any Authority owned garage, at $20 million. The lowest valued garage is the Fort Duquesne/Sixth structure built in 1959 and having a value of $5.4 million.
On that $88 million the City, Pittsburgh Schools, and Allegheny County would share $2.6 million in annual tax revenue from the garages.
Of course, since the County is in the process of reassessing all properties in order to prepare for the 2012 tax year it is likely that some values, and the overall tax tike, will likely increase.
The title might be the calling card for the City’s parking lease plan: reportedly seven bidders for the eleven garages and possibly meters and attended lots, altogether comprising more than 17k spaces in Downtown and other parts of the City.
On March 19th-the day responses to the City’s Request for Qualifications were due-we wrote that when the City heard from eleven bidders that it was likely the number of bidders would fall by the time the City moved toward picking a winner. That was based on the experience of Chicago where the pool of interested parties was eventually reduced so that only two firms actually moved to the final bid stage. According to today’s published reports the seven moving to the next stage (due diligence is to take place from April to June according to the RFQ) "had the financial and operational wherewithal to compete for a long-term lease".
Two New York firms, two Chicago firms, one from Nashville, one from Hartford, and one international firm will move to the next stage and final proposals will be due in July.
Here’s what the most recent actuarial valuation (reflecting data as of January 1, 2009) shows for the health of the City’s pension funds in aggregate (the police, fire, and non-uniformed funds): $334 million in assets for $989 million in liabilities. That translates into a shortfall of $655 million and a funded ratio of 34%. City officials are somewhat relieved that the liabilities did not top $1 billion, which means the unfunded liability total was about $50 million less than expected.
Don’t pop the champagne corks yet.
Comparing these numbers to the previous actuarial valuation as of January 1, 2007 reveals that assets have fallen by $41 million, liabilities have grown $90 million, and thus the unfunded liability has grown by $131 million. The funded ratio was 42% then.
Of course, the real picture could be worse since the valuation reflects the values from the start of 2009. Let’s assume that the 2009 valuation has held as of now. What does that mean for the parking garage lease plan? Recall that the City has to demonstrate that the pensions are 50% funded in order to avoid a state takeover of the funds. With $989 million in liabilities, the lease plan would have to net $160 million and, when combined with the $334 million in reported assets, the funded ratio would attain the 50% target ($494 million/$989 million).
The 50% level would save Pittsburgh from a takeover, but it would not change the fact that Pittsburgh’s pensions are still among the lowest funded in the country. In 2008 the Center for State and Local Government Excellence ranked Pittsburgh 82nd out of 84 locally administered pension plans, and found only two others with a funded ratio of 50% or lower.
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.
This a key week for the debate over how the City will proceed with its garage plan: City Council is expected to vote today on whether to hire its own consultant to study the options on the table (a lease, a revenue bond, a transfer of ownership to the pension fund) and by Friday interested parties in the lease proposal are to submit responses to a RFQ handled by the Parking Authority.
Three legal opinions on the proposed alternative of transferring ownership to the pension fund have come forth, and have argued that there are major problems with the plan. Earlier this month we wrote a blog about questions that this alternative plan raised.
The legal objections? That the Authority cannot give up ownership without first satisfying its debt, that state law on pensions would prohibit it ("operation of a private business is not an investment security and would be a clear violation of the restrictions of the Municipal Pension Recovery Act") and that owning real estate would violate the commitment to investment diversity for the City’s Comprehensive Municipal Trust Fund (the CAFR says that an "allocation of 65% equity, 35% income with a variation of 10% above or below these targets for each classification").
Despite the objections the proponents for the alternative plan have indicated that they will continue to pursue the idea.
A city with budget woes, many of them related to long-term debt, comes up with a plan: why not lease or sell the parking structures owned by the city (or a related city authority) and use the proceeds to pay off the debt?
This sure sounds a lot like Pittsburgh, but as we’ve chronicled in earlier blogs and a Policy Brief it is Harrisburg that is looking around for dollars. After this past week in which the Mayor vetoed a revised budget and still has to contend with a $4 million shortfall but did nothing to address the debt related to an incinerator owned by the Harrisburg Authority but guaranteed by the City of Harrisburg the possibility of asset sales became more real.
According to published reports the Mayor of Harrisburg "has supported looking into the sale or lease of certain city assets – including parking garages, City Island and McCormicks Island – to help retire the debt." Now the City seems prepared to hire outside experts to see how much money the assets could bring in.
There will likely be more cities and local government that might be hoping that their parking structures can deliver quick fix savings for debt and legacy cost problems that are staring them in the face. Unfortunately, this will be happening in retrospect (looking for money to close budget gaps) instead of prospectively (making a judgment as to whether parking or other municipal functions are a core function that ought to be moved to the private sector).
It was heartening to learn Pittsburgh officials are opening up to the idea of looking at outsourcing and other private sector involvement to solve the City’s perennial fiscal problems. The Allegheny Institute has been arguing for such an approach for 15 years only to have our research and recommendations rebuffed by elected officials. Now, according to recent news accounts, the finance director has been telling New York financial players that Pittsburgh is actively exploring public-private partnerships as a way of generating revenue and/or lowering costs.
The time has come-the Mayor now says-to be open to a concept that is widely used already by other state and city governments but one that has been stymied in Pittsburgh. Political and union led opposition toward anything hinting of privatization has been fierce. Therefore, it must be asked; Is this a real epiphany on the part of the Mayor and his staff, or is it just an effort to convince financial markets that Pittsburgh is moving toward a sensible approach to solving deep and longstanding fiscal problems?
Certainly, it is to be hoped that the more open stance is real and sincere. If it is, the Mayor deserves congratulations. If previous mayors and councils had adopted a friendlier position on privatization, outsourcing and public-private partnerships 15 years ago instead of wasting enormous amounts of money pursuing a publicly funded, wrongheaded growth strategy, Pittsburgh would undoubtedly been in better shape than it finds itself today. Unfortunately, delaying the shift toward market based, private sector involvement for so long has almost certainly lowered the potential gains to be had from the new approach.
Still, it is never too late to begin using the private sector to improve the City’s financial situation-the sooner and more extensively the better. Let’s hope for the sake of City’s long term well being the Mayor is serious and the inevitable union and Council opposition can be overcome.
An alternative has arisen to the Mayor’s plan of leasing Parking Authority garages to a private interest in exchange for a lump sum payment (that sum would be used to pay off the Authority’s debt and bring up the asset total of the City’s pension funds): making the pension funds the "owner" of the garages.
News reports describe the transaction as "giving the pension fund ownership of some or all of the city’s 11 parking garages". It is doubtful that the pension funds could buy the garages as that would further deplete the low balance of the funds, and it raises lots of questions about the merit of this proposal versus the lease or sale.
Would the Parking Authority’s bondholders allow such a transfer? Would the Authority board resist "giving ownership" away? Could they be compelled? How would the lump sum needed for the pensions be realized? How would the pension funds-which hold $52 million in debt securities and $207 million in cash and cash equivalents-do owning publicly owned infrastructure? What becomes of the debt elimination plan for the Authority?
The Mayor says he is open to the alternative and that "if this ends up being the proposal, that’s fine" while also noting that the transaction "doesn’t equate to real dollars" the way a lease or sale agreement would. Clearly it is going to take time to explore the proposal, all the while the clock on restoring the pension funds to health continues ticking.