Pittsburgh Pension (Penn: leasing, taxes, costs)

[pman]

City acts to curb further pension losses

SO there's lots of maneuvering to try to avoid a state takeover but the grand plan to lease parking garages still only gets to a woefully underfunded 50%. what are the tradeoffs with having a state takeover? is this just to protect the union pensions or are their real financial implications for the city? would leasing the parking garages to raise money for improvements (local match for spine line, etc) be a more effective use fo the money for a state takeover? could the city lower debt using a sale, thus reducing debt service costs, freeing up more cash for payments?

[BrianTH]

As an aside, the state has actually been protecting the pensions in various ways.

Anyway, what a state takeover would mean is mandatory, accelerated payments into the pension fund. My understanding is that the way the state calculates these payments, they would be quite high--much higher, for example, than the anticipated yearly revenues from the parking assets. So that in a nutshell is why it makes sense, at least in the short term, to give up the parking revenues in exchange for avoiding the state's mandatory payments.

Of course presumably you still need to eventually fund the pensions. The idea would be that pushing that burden off farther into the future than the state would allow would work out financially. I think some skepticism about that general idea is well-warranted, but I also happen to think it may be true in this particular case.

Edit: Oh, but if you could really lever the capital from the asset lease into a lot more new money from another source--like federal transportation funding--that might be a better idea even if you then have to figure out how to pay for the state's mandatory payments. But that would likely require raising taxes considerably, and you might be able to do better still by raising the capital for the transportation funding through bonds. In other words, given current borrowing rates and the state's likely actions in a takeover, it does make some sense to try to avoid the takeover.

[pman]

I'd guess froma transportation funding perspective, the line would have to reduce net operating costs at PAT to be worth it. I certainly understand the logic behind avoiding higher payments. OTOH, woudl the state also cap the benefits. I think I read somewhere the state would likely take pensions out of the city's hands to prevent the problem from growing...which would be a long term benefit with a short term cash problem.

[BrianTH]

As I understand the process, the state doesn't reduce the pension obligations. It just takes over management of the fund and mandates the city make certain payments.

[robrobrob]

Originally Posted by BrianTH

As I understand the process, the state doesn't reduce the pension obligations. It just takes over management of the fund and mandates the city make certain payments.

This is the way I read it too. Basically, city leaders don't want to make the necessary and drastic cuts which they would have to do in order to fund the pension property, nor would they want to raise taxes to fund the pension. By pushing it off they hope to make it the next politicians problem. The city leaders are also hoping the state will at some point come in and bail them out so they don't have to make the hard decision about whether to raise taxes or cut services.

[pman]

Originally Posted by BrianTH

As I understand the process, the state doesn't reduce the pension obligations. It just takes over management of the fund and mandates the city make certain payments.

one reason I'm not entirely convinced of that is the unions were against the state law. if full funding were really the only result, wouldn't the unions then be in favor? i suppose, of course, it may also depend on who is governor if and when a state takeover occurred. onorato certainly wouldn't bite the hand that feeds him.

[BrianTH]

Here is an article:

State could take over city's pension fund

Key quote:

Those cities, boroughs and townships would have to turn their pension funds over to the Pennsylvania Municipal Retirement System, a longstanding agency that manages retirement benefits for hundreds of mostly small municipalities. Current employees would get what they're promised, new workers would have uniform benefits and the municipalities would have to pay enough to make up for their underfunded status.

It may be that bit about "new workers would have uniform benefits" that caused union opposition. Right now, state law forces the City into arbitration over contracts, and the City basically always loses. Switching new workers over to this uniform plan instead might be less favorable for them.

[pman]

thanks

[pman]

lots of soft numbers being thrown around

A new report by the city's actuary indicates the city's 2011 pension payment would increase from $45 million to $72 million with a state takeover, the mayor's office said
...
Mr. Peduto took issue with the mayor's $30 million figure, saying the city currently pays $60 million into pension costs, meaning the real budget hit from a state takeover would be less than $15 million.
"It's a scare tactic. It was the same way with the tuition tax last year," Mr. Peduto said. "There are multiple options for saving $15 million without hurting the city and selling this asset."

Read more: Parking lease plan delayed a month

FWIW, last weekend we twice let the meter expire and neither time did we receive a ticket. I'd also note that even if Mr. Peduto is correct about the $15 million, it doesn't make the parking plan bad, since it should reduce the total amount needed to be paid into the plan (the $60 million a year would go further). of course, perhaps the mayor is familiar with an old political phrases, never waste a crisis.
just a side thought on parking, it would be nice if the new PAT smart cards could also be used for parking meters

[BrianTH]

I'm tempted to go with the actuary's numbers, but even "just" a $15 million annual return on $200 million in capital counts as a pretty nice investment opportunity these days.

From what I saw of the proposed lease terms, there shouldn't be any barrier to eventually having the smart cards work on the meters. Of course for now, I'd be thrilled if they actually worked on the buses.