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.