Wednesday, October 6, 2010

The Four Strategies to Address Pensions

"I don't think it's right that we need to be held accountable for what's been done before."

That sentiment was expressed by one of the two speakers at last night's public hearing, part of Council's extended roadshow exploring all options for addressing the city's public pension burdens. All of the strategies would eventually entail raising the price of parking to some extent. Although that speaker confessed to not knowing yet which option was preferable, she knew which one she opposed.

"$4.50 an hour isn't going to go for Pittsburghers," she said, referring to the Mayor's plan to lease parking assets for 50 years to LAZ Morgan Draper Pryce. The rates for on-street metered parking by 2015 would increase to $4.50 / hour in Downtown, to $3.00 / hour in Oakland, to $2.00 / hour in Squirrel Hill and the North Side, to $1.00 in Lawrenceville and East Liberty and $0.50 in Carrick under that proposal. "This isn't New York."

Councilwoman Theresa Smith, in whose district the meeting was held, said at its conclusion that "No plan is ideal, and rates will go up" under all of them. She repeated what was said by most speakers: that it was going to be a phenomenally difficult decision.

"The only plan I've seen is the Mayor's plan," she said, referring to the paucity of detailed information available as yet on the other options. "I know I always say I'll vote with the community, but this time I'm not only going to listen to the residents, I'm going to do what's best for the city as a whole."


The three options formally presented by Council Budget Director Bill Urbanac were Mayor Ravenstahl's $452 million lease deal, Council President Darlene Harris' $220 million bond issuance, and acquiescence to a state pensions takeover under Act 44 recently championed by Council member Bill Peduto. City Controller Michael Lamb's plan, which includes having the Parking Authority borrow money to purchase parking assets from the City and then cashing out the City's reserve fund, was not part of the presentation.

Harris and Lamb indicated jointly to the Comet that the they will be working together this week to try and consolidate their proposals, as both involve borrowing and/or shifting around enough money for the City to retain direct control over both its parking assets and its pension fund management.

On the subject of "Why?" the state legislature is demanding increased pension funding or a threatened takeover, the council's PowerPoint presentation included images of a tight-lipped, scowling woman wagging a finger at a little boy, and an animated GIF of a man in a black hat with shifty eyes making off with a briefcase full of cash.

Council member Doug Shields urged everyone in attendance to call their state representatives and point out that municipalities like Cranberry and Upper St. Clair receive more generous proportional funding support from the state, whereas Pittsburgh is set aside as the paragon of moral hazard. He urged legislators to "get their calculators out" and come up with a fair and uniform formula. Although he underscored what appeared in bold, red print during the PowerPoint -- that each option "Does Not Solve Pension Problem" -- he murmured darkly that he was not thrilled about leasing assets to a "wonderful company" like JPMorgan, rolling his eyes.


"Large-scale privatization of public assets to some extent began in Chicago," said Tom Morsch of Scott Balice Strategies in an interview with the Comet. We had asked how he responds to criticism that so many of the out-of-town entities involved in the lease deal worked together before, most notably Scott Balice itself and LAZ.

"People that had the most experience in these deals learned in Chicago," Morsch said, citing the Chicago Skyway toll road which he himself once operated as the progenitor. "They really built the technology as to how these transactions occur." He asserts that to that extent it's both coincidental and natural that LAZ was involved with the winning bid.

"There is no financial relationship between these firms -- no relationship whatsoever." He pointed to the inclusion of local law firm K & L Gates as evidence of a lack of insularity.

"Pittsburgh is going to be the new benchmark in how these transactions take place," he said -- and he glanced around the room for what seemed to be a moment of sincere bewilderment. "To have what are basically merger and acquisitions documents circulating around out there -- to be negotiating these deals in the press -- it's just unprecedented."

Morsch said that Aurora Capital Group, LAZ's original partner in the bid process, let it be known that they were dropping out of the contest "a couple months before" the bids were due mid-September. "They decided it was not the right investment for them. The more time you devote to these things -- it can easily cost $1 million plus just to hang around." Since both LAZ and JPMorgan were pre-approved to bid in their own right, the combined entity was accorded the same right to go ahead.

We asked Morsch how he responds to some Council members' frequent criticism that the City would be sacrificing $2.3 billion in revenue over the 50 year course of the lease.

"I say they spent $250,000 on a consultant that told them the present value of the lease package was $50 million less than what is being offered," he answered adroitly. "They're trying to scare everybody with a big number, without looking at anything else." He insisted that the additional $440 million recently announced in promised capital upgrades "is real, is really significant."


One central selling point of Ravenstahl's lease deal is the $120 million which would be earned over and above the amount necessary to avoid the state pensions takeover in two months. Council member Ricky Burgess said he "hopes" $80 million of that would also go into the pension fund, while the remaining $40 million gets invested as community "stimulus".

For the Mayor Ravenstahl's part, it has been reported only that "it looks like the city is pushing much of that extra $120 million (mentioned in the mayor's statement) into long-term capital spending."

On the back of the Comet's own envelope, one clear advantage to depositing $80 million worth of lease overage into the pension fund would be that this very same crisis point would most likely (outside of a ferocious bear market) be averted also in 2013. According to Act 44, the state takes a snapshot of pension funding on January 1 every two years, seizing control if it falls below 50% funding on those occasions. All else being equal, an additional $40 million per year would allow the City to meet that funding requirement while maintaining current annual contribution levels of roughly $40 million itself. The bump which the state oversight boards will allow us in terms of our parking tax (taken out of the operator's cut) which "incentivizes" the lease should help ensure that payment, even while mitigating against transaction fees associated with the lease.

While not putting the issue absolutely to rest, this supplemental pensions deposit would extend the City's lifeline until January 1, 2015. If the City somehow manages not to issue any new debt until 2017, its current debt service levels drop off dramatically, enabling far more flexibility.

Nothing in the bond issuance option or in the Controller's plan yet addresses what to do about 2013. Of course, the chief selling point of those plans is that parking prices would rise only a third to a half as much as under the lease, while still averting the state takeover this year at least.

"God forbid we lose a second time in the stock market," said Council member Bruce Kraus in his concluding remarks, echoing what was also said earlier by Shields. No matter the mechanic, any money deposited into the pension fund gets invested on Wall Street -- which burned us pretty badly when Mayor Tom Murphy issued a $256 million pension bond in 1999 which quickly evaporated after the DotCom bust, the 9/11 attacks and the mortgage crisis.

This aversion to participating in the market could be taken as further evidence of a groundswell in support for submitting to the state "takeover" structure -- which has its own drawbacks, as well as mysteries. No matter how that plan appears right now -- and it appears functionally although tightly manageable together with inevitable parking rate increases -- that plan would leave us at the mercy of state legislators in the future. As currently projected, the state plan would result only in a 39% funding level after 30 years time; 50% is usually considered "critical".

1 comment:

  1. Why do those no good hipsters have cheaper parking than Squirrel Hill?So they have more money for beard grooming?