Firefighters Sue the City over Pensions

In yet another strange but not surprising development the firefighters union is suing Pittsburgh, asking a judge to order the City to come up with $220 million by December 31 and put the money in the pension funds so it can avoid having the state pension agency take over the management of the pensions.

How the City could do that now with only 23 days left in the month is apparently of little concern to the union. It simply does not want the state managing the pensions. Ironic in that the firefighters were all in favor of the 2009 legislation (indeed they were instrumental in forcing the Legislature to back down from immediate takeover) that delayed state takeover until January 2011 if the City could find a way to get pension funding up to 50 percent. Apparently, they were fairly confident they could force the Mayor and Council to get the parking garage lease done. A big miscalculation.

Now the union wants a judge to order something to be done by December 31. Unless the courts have been taken over by judges who do not see the wisdom in careful deliberation and getting all the facts before rendering a decision, there is no reason to expect a judge to hand down the decision requested by the union..

Here’s a better idea for the firefighters union. Offer to make some concessions that will reduce the liabilities of the firefighter pension fund and ask other unions covered by the other funds to do likewise. What a concept. Help the City avoid the bankruptcy they say they are worried about. Truth be told, they are frightened stiff of a bankruptcy. A judge could overturn their entire pension and compensation package and amend them so they are more affordable for the City.

The day of reckoning is getting closer and those who have prospered so greatly at taxpayers’ expense are getting nervous-as they should.

Getting Serious About Public Sector Pensions

A Tribune Review article of November 8 reminds once again just how desperate the unfunded pension plan situation is for many Pennsylvania communities, including the two largest cities as well as several midsized cities. With assets to liabilities ratios below 50 percent in Pittsburgh, Philadelphia and Scranton and others below 65 percent, there can be little doubt that a crisis is at hand.

 

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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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What Will a State Pension Takeover Mean for Pittsburgh?

“A City of the Second Class that is determined to be in Level III distress based upon the required actuarial valuation reports for a plan year beginning on January 1, 2011, shall transfer all existing benefit plans established by the City to the Pennsylvania Municipal Retirement Board solely for administration…Pension benefits and eligibility requirements shall continue to be subject to collective bargaining”-Act 44 of 2009, Section 902C

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Stating the Obvious in Pension Debate

The pension reform train is full speed ahead, and Pittsburgh sees one last opportunity to jump off, at least for a brief time (two years). The legislation before the House would allow Philadelphia to raise an additional 1 percentage point on its sales tax (bringing it to 8 percent) and would outline reform for the remainder of municipal pension plans in the state (discounting Philadelphia’s 3 plans, there would be over 2,500 subject to the reform program), including Pittsburgh’s plans.

Now the political debate is over Philadelphia’s desire to quickly get its sales tax vs. Pittsburgh’s desire to opt out and try its parking garage plan. Some fear that opening up the bill for Pittsburgh will allow for other amendments, thus requiring another read by the Senate, and the possibility for the bill falling apart.

Of course, there are numerous opinions floating around about whether Pittsburgh should get a temporary pass and what the legislation would mean. A sampling:

The Mayor said the reforms "will force this city to make some very difficult decisions…It will be very difficult for us to look at those taxes and to look at those service reductions". Of course it will force difficult decisions: that is the point. The City has to start to decide how to perform services (in house, contracting with the County, bidding out to private vendors, or not at all) if it wants to offer a menu of them and still meet the obligations of promises it made to City employees. The City would be facing a difficult decision under Act 47 if they followed through on the directive to put an additional $10-$15 million into pension by either cutting spending, raising taxes, or privatizing garages.

The head of the fire union said "If it happens, the costs will fall on the backs of the employees of the city." No surprise in his line of argument. But on whom else would he like to see the costs fall on-taxpayers across the state? And what type of solution would he advocate for: a sales tax that just affected the City of Pittsburgh? That would do more damage to the City and would likely make it into an island.

A state legislator said "There’s no reason we can’t give them a period of time to get their house in order." How much more time? The City has been in oversight and Act 47 since 2004 and there have been suggestions of selling assets for just as long. It was only at the beginning of this year that the idea of the parking garage sale/lease moved beyond the trial balloon stage.

We will see how it all plays out early next week.

A Spending Freeze Could Have Helped Pension Mess

Unless there are major changes in legislation pending in the General Assembly, it appears that Pittsburgh will turn the administration and management of its pension plans over to the Pennsylvania Municipal Retirement System, who will then be charged with the massive task of restoring them to health.

Because of amendments made in the Senate version, the House has to take up the bill again and the Mayor wants to get the City out of the reform package because he sees either "tax increases or [reduced] services" because the City will have to put in more money to shore up the funds. The Mayor predicts an additional $25 million (on top of the more than $40 million that represents the minimum municipal obligation) will be the amount the City will have to come up with.

But it could have been different. Imagine if the Oversight Board and the Act 47 team-instrumentalities of the state responsible for returning Pittsburgh to solvency-ordered an immediate spending freeze in 2005 and years thereafter. The actual expenditure amount in 2005 was $398.8 million. The budget has grown by 10% from then to now.

Year

Actual Spending ($, millions)

Spending Held Flat ($,millions)

Savings ($,millions)

2005

398.8

398.8

0

2006

410.5

398.8

11.7

2007

442.4

398.8

43.6

2008

416.6

398.8

17.8

2009

437.9

398.8

39.1

Holding the reins on expenditures would have resulted in cumulative savings of $112 million-not enough to fund all the unfunded liability, but plenty to set aside for annual obligations. Based on population estimates (316k in 2005, 310k in 2009), the per capita level of spending would have risen 2% from $1,262 to $1,286 in a model where spending was held constant.

A spending freeze would also force the City and its overseers to explore alternatives for service delivery (contracting out, outsourcing, etc.) and reduce employment to stop the accumulation of additional liabilities. Headcount could have fallen by far more than it has in the oversight years (3,657 in 2004 to 3,294 in 2009) and would undoubtedly gone a long way to getting the pension problem under control.

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.

Pittsburgh Encounters Pension Reform and Doesn’t Like It

If the health of Pittsburgh’s three pension plans doesn’t soon improve and if pending municipal pension reform legislation becomes state law, the City will see its oversight and administration of the plans transferred to the state and all future employees will become members of a new, uniform system of pension recipients.

 

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Parking, Pensions, and Paths to Reform

The House could consider legislation that would prescribe a remedy for troubled municipal pensions (the degree of trouble measured by the ratio of assets to liabilities, and being under 50% is troublesome) by folding them under the auspices of the Municipal Retirement System and taking the power of administering benefits away from municipalities grouped under the System in the new set-up. There could be other reform pieces in the mix-defined contribution options, more local control, etc.-but the head of the Retirement Commission does not seem optimistic that asset sales alone, like the one Pittsburgh has proposed for parking garages, could solve the problem.

If we are to believe the published report that an analyst told the City they could "conceivably net $200 million" from leasing parking garages and lots then there could be some validity to the Commission director’s statement. Recall that earlier in the year we examined the Mayor’s proposal to sell or lease parking structures (owned and run by the Parking Authority) and take the proceeds to retire the Parking Authority’s $100 million debt and use the remainder for the pension shortfall. The last official valuation (January 2007) pegged the gap at $524 million; but recent reports show that the gap could have grown to over $630 million. An infusion of $200 million-with a hard line on liability growth-would put the funded ratio at just over 51%, just barely meeting the litmus test for pension health under the new reform model.

But that is if the analyst’s estimates are accurate and if the $200 million means after the Parking Authority’s debt is satisfied. Then too there needs to be a plan for what happens to the Authority if its debt is paid off. At that point, the City’s overall parking function would be limited to enforcement, permitting, revenue collection, and traffic adjudication. It should be wholly out of the business of trying to build and operate parking structures and lots. That could be left to the private sector.