Archive for October, 2010

Why a State Administered Plan Is Needed for Pittsburgh

Monday, October 25th, 2010

holding-piggy-bank-smallSo where do we go from here? The plan to lease our assets for 50 years did not resolve our pension crisis. Like a bucket with a hole in the bottom, the only thing it would have done was to buy us more time. But, with a system that bleeds over $30 million a year, it would only be about a dozen years before we would have spent all the money JP Morgan was offering. We would have been back to where we are now and would have the highest meter rates in the country. Fortunately, we have an opportunity to solve our pension crisis through Act 44 and City Council and City Controller Michael Lamb have worked on an interesting plan that, if done correctly, could address the long term problem.

There are three options that Council is now debating: (1) Utilizing Act 44 and allowing the Pennsylvania Municipal Retirement System (PMRS) to administer our pension funds, (2) Supporting the Controller-Council Plan to turn over meters and a garage to the Parking Authority for $220 million and (3) a hybrid plan that would do both — allow the city to receive the $220 million from the Parking Authority and then allow PMRS to administer our pension plan. I believe that it is imperative that whatever plan is finally approved, we need to have PMRS administer our plan.

sapling-smallIn addition to the obvious reasons explained above, a state administered plan would use conservative estimates and assumptions. Their investment portfolio is not as risky, but has performed at over 8 percent over the past twenty years. They would require us to develop a 30 year plan to get to 100 percent funded and would also require us to have a new plan for our new hires. These critical factors would not be part of our calculations, if we continue to administer our own plan. The Board of PMRS is non-partisan — decisions regarding the financing of plans and benefits are not determined by “election year decision making.” Additionally, it would cost the city less money for PMRS to administer our plan than what we are paying today. Politics would be taken out of the investment process. No more “pay to play” deals between banks, consultants, brokers and law firms. All bids have to be competitively bid under a state plan and lobbyists are prohibited. Also, any firm that bids on the work is prohibited from making political contributions. Only under state administration, will we get this level of good government.

Another critical point: A state administered plan guarantees against investment loss. Through conservative assumptions and the pooling of over 900 other plans, PMRS has been able to guarantee to its clients that their pension funds will not be subject to the roller coaster rides of the market, thereby protecting their investments and guaranteeing their rate of investment will be met.

Finally, unlike our present system, administration of pension plans by PMRS has a proven track record of success. Today, over 900 pension systems are administered by PMRS.They require all their clients to get to 100 percent funded. In 1985, Harrisburg Firefighters Pension Fund had five months left before it went bankrupt — five months until all the money was gone. PMRS took over administration of the pension plan. Today, it is 100 percent funded. The story is the same for the other municipalities that have agreed to work with them. They require us to live within our means — something we have not been able to do on our own.

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FAQs About Pensions

Monday, October 25th, 2010

frequently_asked_questions-small

Thank you for the overwhelming response to our last email which detailed the present parking-pension problem. If you did not have a chance to read it, you can still find it here at Reform Pittsburgh Now (Part I, Part II). Many of you had questions regarding the city’s pension plan and many of your questions were the same. Let me try to address the major questions. Many of you wanted to know why the city is not trying to change the pension plan for present workers. First, I don’t believe you should break a promise and we have promised our present and past employees certain benefits. Secondly, the PA State Constitution prohibits any municipality from changing pension benefits to municipal employees. Many of you were interested in changing future plans to a “defined contribution” plan from our present “defined benefit” plan. Again, state law prohibits any municipality in PA from offering a defined contribution plan — even to future employees. We were asked by many people why we would not change the rules allowing Police Officers and Firefighters from receiving pensions at the age of 50 — again, that law was created for the City of Pittsburgh, by the state. In fact, almost all the rules that we must follow regarding our own city pension plans have been dictated to us by our state legislature. At the end of this email is a chart for you to see many of these laws.

The most popular question was “How did Pittsburgh end up with the worst funded pension plan in the country?” There are several answers. From the chart below, you can see how unfunded mandates from the state caused us to create a plan that was out of our direct control. This is coupled with a state plan (Act 205) that penalizes cities like Pittsburgh that reduce their payroll. Through Act 47, we reduced the number of city employees by nearly 25% — from approximately 4,500 employees to 3,500. However, the state formula for funding is based on the number of present employees, not retirees. With less city employees, the city receives less from the state, but has more retirees. More people take out of the system and less put in, so the problem is compounded. Additionally, the city has made very liberal assumptions when it comes to our pension plan. For years we have assumed our pension investments would return nearly 9%, when most municipalities were assuming a more conservative 6 – 7%. Also, we made risky investments and locked into very high interest rates when we borrowed funds to put into the pension plan. Our interest payments on borrowed money are greater than the rate of return on our investments — not a good way to administer a plan. So, we end up where we are today — with a system where we take out over $80 million every year and put in around $50 million — a broken system.

As Finance Chair, I worked with our budget office to create a PowerPoint discussion of the problem facing our pension plan. It can be found here.

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Preserving Our Pension Plan Through Act 44

Friday, October 8th, 2010

pennsylvania-sealThe state had a plan for us to solve our pension problem, but the Mayor decided to tie pension funding to parking privatization. However, the plan is still on the table. The reason people are opposed to the state plan is because of the cost associated with it. As you know, our pension costs are $80 million per year and we are scheduled to place $45 million into it. The other plans have modest increases to that amount – but, they do NOT solve the problem – they just push it to a later year. The state plan would require us to contribute $72 million per year into the plan in order to solve the problem – an additional $27 million per year. Those who oppose Act 44 try to scare people with claims that we will have to make severe cuts, or raise property taxes – or worse. They say that the state will come in and mandate terrible tax increases and harmful cuts to the city. It is unfortunate and of course it is not true. WE can also find a way to get to the additional $27 million – it is possible. If we do, we will then have a more stable pension plan, will not have to borrow money and will not have given away over $3 billion in revenue over the next 50 years. Guess what plan I support.

Some Good Reading:

Parking Asset Study and Lease Agreement

Scheduled rate increases by neighborhood:

pittsburgh-neighborhoods-rates1

Parking rates from around the country:

cities_parking_chart1

Pittsburgh Post-Gazette, Brian O’Neill, September 26, 2010

Pittsburgh Business Times, Tim Schooley, September 24, 2010

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Understanding the Parking-Pension Problem

Friday, October 8th, 2010

meter_broken_2_smallA lot of folks have asked me to explain to them what is going on down at City Hall with the Parking-Pension issue. I realize that most of you have some understanding from the media, but you still have questions and want to know what each of the different proposals will mean to you. Hopefully, I will be able to give you some information to better understand the issue and to know there are no easy solutions – and most don’t solve anything.
 
Background
Presently, the city only has enough money to pay about 27% of our pension obligations. That is the lowest funded pension plan in the country. In order to help Pittsburgh and other PA towns with severely distressed pension plans, the state legislature created Act 44 last year. Mayor Ravenstahl lobbied the state to exclude Pittsburgh and offered his plan to lease our parking assets as his solution. The state gave Pittsburgh one year to implement a plan that will get the city’s pension to level of 50% funded. We have until January 1, 2011 to find an alternative or to join the state plan under Act 44.

What Are the Options?
The Mayor’s plan calls for the city to privatize all of the city’s garages, surface lots and meters for the next 50 years. Rates would be increased, enforcement would be extended, 900 new meters would be added and improvements would be required – all as part of the agreement. The Mayor’s plan has received a winning bid of $452 million. Another plan calls for the city to raise the rates on its own – not as much as the Mayor’s plan – and to use that new revenue to pay for a loan to get the plan 50% funded. Another plan being discussed by City Controller Michael Lamb would have the city enter into an agreement with the Parking Authority that would dedicate new increases in rates to the pension fund – Controller Lamb will be announcing details of his plan sometime this week. Finally, the fourth option would be to allow the city to become part of the state’s Act 44 pension program for severely distressed municipalities. Each of these plans provides the city with needed cash by raising rates, but each of these plans also has drawbacks.
 
My Analysis
I can’t opine on Controller Lamb’s proposal until the details are released, but the questions I would have are similar to the questions I have regarding the plan to borrow the money. Presently, our annual pension costs are about $80 million per year – yes, that’s right – $80 million per year. We put $45 million into the fund and we take $80 million out. Do you see the problem? Even if we put an additional $220 million into the fund – in order to get it to 50% funded – we will still be taking more out on an annual basis. Within a few years, we will be back to under 50% funded. Within several years, we will be right back to where we are today – except we will have higher parking rates. Also, a pension fund that is 50% funded really isn’t anything to be proud of – actually, it is something to be concerned about.
 
I know what you’re saying – what about the Mayor’s plan, won’t that solve the pension plan? Sorry, but the answer is NO. Yes, it will get us a lot of money. Why? Because it creates parking rates that will be the HIGHEST IN THE COUNTRY. That is why Wall Street is willing to give us $452 million – because they know they will be able to reap $3.2 Billion over the next 50 years. But, the downside of the Mayor’s plan is not the money we would be getting – the problem is what we would be giving up. The costs associated with raising meters from 50 cents an hour to 3 dollars an hour, increasing surface lots and garages to rates as much as four times their present rates come at a cost to Pittsburgh. It goes against our policy of Main Street development and would promote a policy of further sprawl and decline. It would be a disincentive for stores to locate in our neighborhoods or companies to locate in our city. It would put Pittsburgh at a disadvantage for the next 50 years.

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