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.

Kick the Can

Or elect to punt, defer, put it off for another day: whatever euphemism works, the Public School Employees Retirement System board voted to reduce the contribution rate for the school pension system from 8.22% to 5.64% this coming year resulting in savings of $349 million and lessening the blow from $11 billion to $761 million.

One of the board’s "no" votes said the action "will make it even harder to deal with the pension funding crisis next year. We can’t continue to push this problem down the road".

But it is interesting to consider the source of where the directive came from.

The state budget contained language that mandated PSERS’ board recertify the contribution rate for FY11. The board actually issued a subsequent resolution (2010-27) that stated the budget’s "…directive to recertify the employer contribution rate undermines the PSERB’s fiduciary responsibility to maintain a properly funded pension plan as required by the PSERC; and the mandated re-certification of the employer contribution rate not only fails to address the serious long-term under-funding of PSERS, but increases the unfunded liability of PSERS".