Poor Outlook for City’s Creditworthiness

"Adoption of a budget that continues to rely on outside approvals, unrealistic revenue assumptions, or unachievable savings will result in a downgrade". That’s what one of the "big three" bond rating agencies said about Pittsburgh’s finances. That was in October of 2003, prior to Act 47, prior to an oversight board, prior to a massive parking tax increase, prior to a tax reform package, prior to a new casino, a new hockey arena, etc. And it was before the recent budgetary machinations of a tuition privilege tax, a soda tax, and higher non-profit contributions to the City.

Just yesterday another of the trio of rating firms downgraded their outlook on the City from "stable" to "negative" (joining another who did so in the fall) in light of the ongoing pension problems, which, unless the rating agencies have not been watching, has been prevalent for a long time. The agency’s report said "The negative outlook reflects our view of the city’s increased financial pressures associated with its pension system and the uncertainty regarding the potential takeover of the city’s pension system by the state". Again, even with a state takeover the sunniest of scenarios that have the City meeting the Act 44 funding threshold leave residents, employees, taxpayers, and bond analysts looking at a pension system that will have about half of the assets it needs to pay the promised liabilities.

The revised Act 47 plan contains a recent long-term look at the ratings Pittsburgh received in the decade of the 2000s: regardless of which one of the "big three" ones looks at, the ratings stayed in the "B" level which implies "average", "good", "speculative", "adequate", or "ongoing uncertainty" depending on what letter or numeral followed the letter grade.

The plan contained quotes from the agencies on their most recent rating at the time (January of 2009) and all three were concerned with the high per capita debt burden of the City, much of which is related to the pension bonds issued in the mid- to late-1990s. Pittsburgh ended up with a temporary bump in pension funded ratio and traded that for an addition to long-term debt. Now it has poorly funded pensions to go along with the debt burden, which is supposed to drop off around 2018 if the City issues no new debt and continues to pay for capital needs out of ongoing revenues and other sources.

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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PMRS Wants Details ASAP

Under Act 44 of 2009 Pittsburgh had to get its underfunded pensions to 50% funded (enough assets to cover 50% of accrued liabilities) or face a state takeover by having its pensions turned over to the Pennsylvania Municipal Retirement System (PMRS). As of now, every pension plan administered by PMRS has ended up there voluntarily.

The head of PMRS recently saidthe organization"is concerned about the financial health of Pittsburgh’s pensions and how a takeover could affect the agency’s $1.5 billion in assets" and that officials "are not going to do anything to jeopardize the assets for our (nearly) 4,000 retirees." With a decision from another state pension agency due in September as to whether the City met the Act 44 goal, PMRS would be responsible for quickly folding Pittsburgh into its pension system. So either the City begins turning over data and documents or there might have to be a delay via state legislation should the takeover go into action.

We pointed out in a Brief last year (Volume 10, Number 57) about how a takeover would change PMRS’s balance sheet. As of 2009 audited data, PMRS had a surplus with assets exceeding liabilities by $88 million. Pittsburgh had unfunded liabilities of $650 million, meaning a "new" PMRS balance sheet would reflect a negative balance if Pittsburgh’s pensions were lumped together with PMRS’ current plans. In addition Pittsburgh had 1.3 retirees for every 1 active member, while PMRS had 0.39 retirees for every 1 active member.

In that same piece we wrote "it will be interesting to see the reaction of the PMRS board and other member municipalities to the way Pittsburgh’s plans are treated since any action affecting Pittsburgh’s plans will have significant effect on the aggregate health of the PMRS system." That reaction is apparently forthcoming some three months after the late-in-the-game bailout plan by City Council.