Pensions Stay in City’s Hands

Nine months following City Council’s December 31st pension bailout plan, which used a one time debt service transfer and pledged three decades of parking tax revenue ($13 million in the next few years, doubling in 2018) from the general fund to the pensions, the state Public Employee Relations Commission (PERC) has ruled that that plan constitutes an asset that satisfied the language of Act 44 of 2009. That language required the City to get its aggregate pension funded ratio (assets divided by liabilities) to a minimum of 50%. PERC’s assessment today puts the ratio at 62%.

Recall that Council vetoed the Mayor’s plan to have a long-term lease of parking assets to a private interest and opted instead for an "infusion of value" which relies on a long-term stream of payments instead of a lump-sum up front payment. If the plan had not worked and the pensions were below 50% funded, administration of the plans would have been transferred to the Pennsylvania Municipal Retirement System (PMRS).

Questions remain: many of these were pointed out in our first Policy Brief of 2011. For instance, since the promise of parking tax money, roughly $3 billion altogether, fell in the mid-range of the scenarios presented by PMRS, why was the City so afraid of a takeover? The state law clearly stated collective bargaining would remain at the City level. Also, where is the binding language that holds future City administrations and Councils to honor the promises of 2010? And, if we are to take the comments of the City Controller at face value when he said the bailout plan "is no long-term solution [but] a mechanism to avoid state takeover", then what is the long-term solution?

Smooth Operators

A new article from the American Enterprise Institute tackles the thorny issues of assumptions on rates of return for public sector pensions and the practice of asset smoothing to level out variation of plans. These issues are critical in light of where things stand in the Commonwealth right now.

First, Act 44 of 2009-which aimed to reform local government pensions and made special provisions for the City of Pittsburgh-says that the determination for the City’s pension health "shall utilize an actuarial assumption as to investment earnings equal to the regular interest rate fixed by the [Pennsylvania Municipal Retirement System] board plus 1.5%". What does this mean? It means that when the state analyzes the actuarial tables and data for the City’s plans the rate of growth for assets will be 7.5% instead of the traditional 8%. It may seem miniscule, but as AEI points out "some analysts believe these returns are overestimated. Wilshire Consulting, for instance, argues that most plans will receive only around 6.5 percent average returns going forward. If this turns out to be the case, the typical plans’ costs will rise by almost 80 percent. Pension funding is very sensitive to rates of return".

Keep in mind that three weeks from today, on September 1st, the biannual valuation report for the City, using that 7.5% rate, is due to be filed with the Public Employee Retirement Commission. Recall that the end of 2010 bailout plan crafted by City Council, which dedicates a portion of parking tax revenue over the next thirty years, was done to bring the pension funds to 50% funded or better in order to avoid a takeover of the pensions by PMRS. The PERC valuation will determine if that threshold was met.

Second, to the smoothing provision, both Act 44 and Act 120 (which changed things for state workers and school employees) had provisions in it for stretching out when gains and losses were realized. Act 44 increased the time period from fifteen to twenty years and Act 120 changed the asset smoothing for the public school employees’ system (PSERS) from five to ten years. Both PSERS and the state system (SERS) received "fresh start re-amortization of unfunded accrued liability".

Grounded PILOT?

A major part of the City’s pension bailout plan hinges upon getting more money from the Parking Authority as a payment in lieu of taxes (PILOT). This year "Authority Payments", which count money from authorities in addition to the Parking Authority, total $11.4 million. Next year the amount is forecast at $20.1 million, an amount projected annually from the current five-year forecast.

A letter from a Councilman to the Mayor stated the Parking PILOT agreement "…currently gives the City $1.3 million dollars…This needs to increase to $2.6 million this year and $9.3 million in 2012 and beyond in order to cover the hole in the City’s budget from diverting parking tax revenue to the pension". Movement on that measure has effectively ground to a halt. The latest incident coming last week when a majority of the board voted against forming a panel to study how the Authority could raise revenue and dedicate some of it to the City. The panel idea was put forth by a board member who is also a City Council member and a proponent of the bailout plan. All of this serves as a way to examine what the proper relationship between the City and its authorities really should be.

The Controller’s CAFR notes that the cooperation agreement between the City and the Parking Authority dates back to February of 1995. It was amended five years later to increase the PILOT payment to where it currently is. That increase was 36%; the current proposal for 2011 to 2012 would be for a more than three fold increase. The payment is made, however, "…only upon the Parking Authority successfully meeting its debt service requirements". The Authority has outstanding debt of around $100 million.

Where was the Oversight on the City’s Last Minute Budget?

Legislate in haste, repent at leisure.  Recent developments indicate that axiom applies to the City’s budget, especially the New Years’ Eve plan aimed at avoiding a state takeover of pensions. The axiom’s admonition applies equally to the other parties involved in the unseemly last minute machinations.


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Mayor’s False Choice Scare Tactics over Pensions

In an effort to promote his plans to lease the Parking Authority facilities, Pittsburgh’s Mayor claims the City will have to take draconian measures if the lease deal is not done. To generate the $30 million the state will require the City to put into pension funds, he says there will 400 police layoffs or massive increases in taxes. On the other hand if the lease is done, parking costs at the Parking Authority facilties will double or more in some cases.

But as we noted in last week’s Brief the Mayor is presenting a false choice. There is a less costly approach but to be sure there will be some pain to the City. There is no free lunch.

Here is a better alternative. Cut the parking tax rate from 40 to 20 percent. That will allow the lease to go forward with parking cost hikes at the lessee’s spaces in the 40 percent range, which would put those parking costs close to privately owned facilities. To make up the lost revenue from the parking tax cut would require a savings of $20 million or less. That could be done with a 5 percent reduction in general fund spending. Outsourcing measures, hiring freezes and productivity enhancements could easily generate 5 percent if Council and the Mayor want to do it and have the will to do it.

An added benefit would be less upward pressure on parking rates due to the tax rate reduction. Private garages might even lower their rates a bit or earn enough profits to warrant building new facilities, something the Downtown area desperately needs.

The Tax That Really Wasn’t

As a quick follow up to our entry earlier this week on the Steel Valley school board’s discussion of a parking space tax, one of the directors argued that "Robinson Township has a similar tax on the books and it looks like Robinson Town Centre is doing just fine".

Well Robinson is doing fine, and it is likely because the township in fact does not have a parking space tax on its tax menu. It was discussed in 2008, which prompted an Allegheny Institute Brief soon after which raised the problems associated with taxing free parking. The tax was never approved, which was confirmed by both the administration office and the tax collector of that municipality. Hopefully the director doesn’t believe that the City of Pittsburgh has a tuition tax just because that tax was briefly entertained.

For now, cooler heads have prevailed in Steel Valley and the tax has been tabled.

Schools to Take Parking Tax for a Test Drive

We’ve written in previous Briefs and blog entries about the efforts of several municipalities in Allegheny County to levy a tax on supposedly free parking spaces where no transaction is carried out. Unlike the parking tax in Pittsburgh and other municipalities around the state where patrons pay for an on-street or garage space and the payment is subject to a tax, this new levy would place a flat fee on a business based on the number of spots they have.

Municipalities have taken this course of action under the presumption that parking is a taxable privilege under Act 511 and, since the Act does not prohibit taxing such a privilege (recall the same argument was made for the tuition tax) then they are free to do so. Someone wronged by the tax would have to bring a lawsuit to determine if the privilege is indeed taxable.

Well the stakes have been raised in the Mon Valley as the Steel Valley School District is prepared to discuss levying a $30 per space tax in the communities of Munhall, Homestead, and West Homestead-all three communities levy a similar tax-after exempting the first 30 spaces. Clearly, the logic for the District is either (1) since Act 511 applies to school districts as well as municipalities and nothing in the law prevents districts from having such a tax they should do it or (2) if no one has yet challenged whether this tax is permissible why leave money on the table?

Is there a limit to taxable privileges for local governments in PA? This instance might give us an a better answer to that still murky question.

Is Two Years Long Enough?

Today a consultant told the Parking Authority that, yes, leasing the parking garages (and possibly metered spots and lots) would be feasible. We’re sure that the Mayor and the Authority breathed a sigh of relief-after all, the legislation passed by the General Assembly last week allows Pittsburgh to increase its parking tax (if it sells all of the garages) and avoid a state takeover of its pensions (not as draconian as it sounds) if it can get its pensions to 50% funded or better by 2011.

Remember that the Mayor first announced the idea of a lease in January. Nowtheconsultant tells the Authority (the agency that actually owns the garages) that it can be done. Then, according to newspaper reports, there are two additional steps: the Authority will issue an RFP to find firms to serve as an advisor for identifying a lessee, then they will actually solicit bids for the lease.

After all that, should a deal materialize, the City then has to notify the DCED that it has sold or leased all of the garages, and the proceeds have been deposited into the PA Municipal Retirement System, and there is notification published in the PA Bulletin, then the City can levy an additional 2.5% parking tax (bringing the rate back up to 40%).

Probably most of this is standard operating procedure: but if there is a genuine sense of urgency (as was displayed by the Mayor and other officials not wanting Pittsburgh to be immediately absorbed into the state system under an earlier incarnation of the legislation) one would think that seeing the legislative requirements the Mayor would urge the Authority to move with some swiftness.

Parking Still a Key Component in Pension Deal

Municipal pension reform is still hurtling forward in Harrisburg as the SenateFinance Committee has signed off on a bill that would classify pensions according to level of distress (the key measure being funded ratio) and outlines discretionary and mandatory remedies for municipalities according to health. The City of Pittsburgh, with an aggregate funded ratio reported at 28%, would fall into Category III.

There are special provisions in the bill that apply to Cities of the Second Class (Pittsburgh is the only one). For instance, the parking tax-now at 37.5% after being reduced incrementally from its 2004 high of 50% by the state reform package-would stay at 37.5%. In addition, the bill notes that if the City nets at least $200 million from a sale or lease of parking facilities then the City would be allowed to raise the parking tax to 40%. The bill then stipulates that 6.75% of the original 37.5% rate (around $2.8 million based on recent financials) and 100% of the additional 2.5% rate (another $2.8 million or so) be put toward the minimum municipal obligation that the City puts into the pension funds.

Should this plan go forward it would change the trajectory the City has been on as far as tax reform goes. Recall that the parking tax would be a maximum of 35% next year based on the ratcheting down of the tax under Act 222. The Act 47 team recommended keeping the tax at 37.5% for this coming year but wanted to use the proceeds for capital projects. And the Mayor stated that part of the parking lease or sale would be used to wipe out the debt for the Parking Authority ($108 million) and the remainder for pensions. It is not clear if the lease or sale would bring in enough to satisfy the Authority debt and reach the $200 million to enable the City to meet the minimum amount the state would want to see to trigger the additional parking tax.