A Blessing or a Curse?

On the subject of City Council’s latest attempt to craft a pension solution that averts a state takeover in two days by using dedicated parking meter revenue over the next three decades, there are dueling news reports over just how supportive the head of the Public Employee Retirement Commission (PERC) was of the plan.

One print report stated "council members last week consulted the state about dedicating future revenue streams to the fund. The concept won approval of [the] executive director of the state Public Employee Retirement Commission, the agency that enforces pension laws."

Another print report quoted the director as saying "It’s too late…even if they got $500 million next year, it wouldn’t change the takeover, unless the General Assembly changes the law." The law in question is Act 44 of 2009, the statute that dealt with municipal pensions and contains the specialized provisions for Pittsburgh.

Obviously there is a big difference between the original lease proposal, which would have given an up-front lump sum payment to show up on the audited books of the pension funds, and a dedicated revenue stream over a thirty year time period. There is apparently a big difference as to how convinced one official is of carrying out the latter plan.

Budget Fantasyland

The Mayor’s recently released budget wanders into the world of fantasy, delusion and denial. A trifecta seldom seen. With the prospect of PMRS taking over the pension plans in January and the failure to lease the Parking Authority assets, Pittsburgh faces a large increase in pension contributions in a year or so.

With the first pass at the budget rejected by the Oversight Board because of inadequate credible revenue prospects, the revised budget for 2011 will make up the difference by using the reserves in the fund balance. No cuts in spending or other revenue enhancements are planned. For 2012, the Mayor projects $20 million in non-profit contributions. Currently the City is receiving $1.7 million. What’s more, the County is also projecting significant revenue from non-profit contributions. In both cases there is no evidence whatsoever the money will be forthcoming. In all likelihood, if the Oversight Board holds firm in its position regarding the need for credible revenue forecasts, the out year budget proposal will be denied.

Moreover, the Act 47 team will undoubtedly be dismayed by plans to use up the City’s reserves in coming years. It too, will-or should-send a very strong denunciation of the Mayor’s budget plans.

Beyond the financial oversight organizations’ justifiable opposition to the reckless nature of the budget proposals, there is a more salient point. Why is there no talk of expenditure cuts? Have the Mayor and Council so poisoned the well of cooperation with the rejection of each other’s proposals to utilize parking assets that further conversation about contracting out, asset sales, and consolidating services with the County are completely off the table? If so, Pittsburgh can expect some very rough sledding and a very probable tightening of state mandated financial control. This is especially true in light of the coming financial crunch at the Pittsburgh School Board where repeated refusals to make substantial operating expenditure cuts are digging a deep fiscal hole.

Using up reserves is nothing more than a delaying tactic in hopes that a miracle will occur and some benevolent Legislature or Congress will bail out the City. Afraid not. The City must get past this fantasy.

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.

 

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Can Lease Be Tweaked?

Last week’s preliminary vote on the parking lease by City Council was not good news for the winners of said lease. So the officials connected with the winning team took the opportunity in the following days to pay visits to the Council members who voted in opposition to offer modifications to their proposal.

One Council member noted "[the bidders] thought is, OK, we probably see a better way of getting this done. Perhaps we should re-evaluate this lease agreement. Is there a way perhaps to lower the initial payment, decrease the length of the lease, find ways to keep the city more involved?"

The problem with that approach is the ramifications of making an ex post facto series of changes that could open the City, the Parking Authority, and the winning bidder to litigation from at least the two other parties that submitted bids based on the 50 year terms outlined for meters and facilities. Couldn’t the two losing bidders claim that changes to the lease agreement now-one that they were within a reasonable bid range after offers were opened-in an effort to appease those opposed to it is essentially akin to a new bid process?

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.

 

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Could an Alternative Bid Method Be Used?

City Council will now have the $452 million offer from JP Morgan/LAZ Parking in front of them and have to consider the short-term and long-term impacts and the foreseeable and the unforeseeable consequences of the lease proposal. They have to think of what the proposed rate increases will do to the City’s business community in particular.

They, like the Mayor and other City officials, are probably surprised at how high the final bid came in and that it was well above the $300 million the Mayor said was needed to retire the Parking Authority’s debt and get the pension funds to 50% funded under the terms of Act 44 of 2009. Much of the debate will be centered around what to do with the overage.

Realizing the balancing act that had to be made to satisfy parkers, pensioners, City residents, City businesses, etc. perhaps the City should have employed a different bidding method: set the price to lease the parking system for the $300 million amount, but have the firms specify what would happen to parking rates under their proposal. Then the City could have selected the firm with the lowest impact on rates would have won the bid. The City’s debt and pension issues would have been satisfied and the impact on parking rates would have been less severe.

The discussion on how to soften the blow of rates and how to resist the numerous demands on how to spend the "extra" money will be quite interesting.

The $452 Million Question

After opening the two high bids yesterday afternoon a partnership of LAZ Parking/JP Morgan emerged as the winner with a bid of $451.7 million for a 50 year lease of the City’s parking system-a combination of garages, surface lots, and metered spaces that the Mayor has viewed as the way out of the pension morass.

As of the last actuarial statement the three pension funds contained $339 million for $989 million, a funded ratio of 34%. Under the terms of Act 44, the state required the City to get the funds to a 50% funded level. As part of the deal from the inception of the idea the Mayor wanted to retire the Parking Authority’s $108 million debt.

So let’s assume that $452 millionis handed over to the City. After taking $108 million to pay the Authority’s debt, there is $344 million remaining. In order to get to the bare minimum 50% level under Act 44, the City would need to take $160 million which leaves $184 million. Plowing all of the money after paying off the Authority’s debt would mean the pension funds would have $683 million in assets. Measured against current liabilities the funding level would reach 69% under this scenario.

Clearly City officials are pleased that the bids came in well above what they expected. What the City needs to do is have a twofold realization: one, there will be endless demands and suggestions for what to do with $184 million if the City only aims to get the pension funded at the 50% level (that is, taking $160 million of the $344 million and putting it to the pensions). Realize that that the $184 million overage basically equates to two years of debt service payments for the City. Two, the City needs to look at short term history to know that in the mid to late 1990s (after selling pension bonds) that the funding level did reach 70%. That was frittered away by benefit enhancements, stock market losses, etc. The City still needs to pursue pension reform and has to cut costs. What does the above expectation bid do for those goals?

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.

Privatization Makes for Strange Bedfellows

Are we to believe our own eyes? The head of the City’s firefighters union and a Councilman who has championed living and prevailing wage mandates are now leading proponents of the Mayor’s parking lease plan.

These longtime anti-privatization zealots are now falling all overthemselves to help the Mayor get the lease done. Why? Becauseit is a way to raise the enormous amounts of money needed to savetheir jobs by sticking it to folks who park in the City. Call it abackdoor tax increase. It could not be for any other reason. When a municipal pension reform plan emerged in the state legislature this time last year, the union head was quick to oppose it saying "we’re opposing this, guys, we’re shutting it down". The legislation contained provisions, such as opening the door to 401k type plans for new hires, which were unpalatable to the unions.

Privatization is supposed to save money by providing more efficientdelivery of government services. If Pittsburgh was not under the gun to come up with a fix for its pensions and had the time to deliberate whether or not it should even be in the parking business, the current proponents would most assuredly be dead set against it.

But since this is about saving the jobs of unionized City employees the plan is being heralded as the only solution. And now it will be used to hammer the employees and customersof Pittsburgh’s businesses.