Wednesday, September 7, 2011

An Asset You Have To Believe In

Now that all of the City’s documentation on pension funding has been sent off to Harrisburg, it seems an excellent time to examine that funding in more detail. Of course, the whole story of this funding scheme is a long one and has as much to do with political enmity as it does with crafting a reasonable solution to the problem. I’d like to address this all, but I tend to be wordy and so it is prudent to divide this labor.

Today then, let us look at the asset which was offered to cover the hole in the pension accounts.

Future posts will deal with the debt itself and the politics of the solution.

On the face of it, the scheme used to bring the underfunded pension up to a reasonable level of funding couldn’t be any less exotic. Our City Council simply dedicated a revenue stream, in this case parking revenue, to the pension account thereby closing a gap.

Dig a little deeper though and this scheme looks less and less like an asset.

Let us start with the initial impetus to fund the pension. It didn’t appear to come from any of our local leaders. The state required that our pension fund be at least 50% funded by the end of the year. While some of the pension fund’s problems can be traced back to the economic downturn and stock market losses, much of it is squarely the fault of local leadership. They chose to kick the can down the road by failing to contribute enough each year to keep the plan funded.

So, to be clear, this drastic response to the underfunded pension system doesn’t look like a spontaneous effort to set things right once and for all, it looks like a response to a potential loss of their own power. If Harrisburg found itself in the position of having to step in and shore up the pension fund, it would have levied additional taxes on the residents of Pittsburgh.

As recently as Aug 23rd Bill Peduto, in his Facebook feed, was asking for patience by pointing out that ‘[the City] did not ask to be required to pay $250 million by the end of the year’.

If I were a recipient of a City pension I might beg to differ.

So what did they do to plug the hole?

They did this. City Council dedicated parking tax revenue to the pension fund for the next 31 years. But this would leave a hole in the operating budget. However, they realized that by increasing the parking rate on City meters, lengthening enforcement hours and increasing the fines for illegal parking they could generate revenue to close that hole without admitting to raising taxes.*

But, strictly speaking, that revenue wasn’t yet theirs to promise. The funds that parking meter revenue and fines get paid into is controlled by the Pittsburgh Parking Authority. True, the Parking Authority shares revenue with the City according to the terms of a joint agreement. But, since the Parking Authority is effectively controlled by the Mayor’s office and the Mayor’s office favored another plan for bailing out the pensions, no new revenue sharing agreement was put in place to send the rewards of the fine and rate increases into the operating budget.

The fact that this scheme turned on securing a future agreement from the Parking Authority didn’t seem to slow this effort at all. Indeed I suspect that this was done as a political calculation. If the agreement from the Parking Authority wasn’t forthcoming, Council could point to the Authority and claim it was holding the City’s pension fund hostage and endangering its ability to continue under the City’s control.

Now this part is the real kicker. The state required an infusion of about 250 Million into the pension fund to ensure that it was at least 50% funded, and so in compliance with the law, to remain under the City’s control. But there was no way of getting 250 Million from parking fines and rate increases. At best those might have added up to 10 Million this year. So the City made a promise that has to be understood as binding any future City Council. The promise says that the City will use parking revenues to pay 1.3 Million into the fund this year, 2.6 Million next year and about 9.3 Million a year for each year after that. When all of that revenue is added up, it totals 735 Million, 31 years from now.

So how do you make 735 Million in 31 years add up to about 250 Million today?

By arguing that since 735 Million in revenue in 2042 will represent a funding level of 62% at that time, then the promise to do this today represents an asset that funds the pensions to a level of 62%.

I wish I could pay my mortgage this way.

Say I go into my bank and give them the following offer.

“Look I know I still owe about 80% of the debt I have with you and I know I haven’t been paying. And if things continue like this you are going to foreclose. But, hey, I have a plan to pay it. Over the next 25 years I will give you 50% of each paycheck I earn. If you do the math you will find that 50% of each check for 25 years adds up to exactly the amount of debt still outstanding. So with this promise of a plan, please call my debt paid and stop the foreclosure.”

Essentially I make good on my promise to pay, by offering another promise to pay.

But if that wasn’t bad enough, it gets worse.

The rate increases and lengthened enforcement pissed a lot of people off.

And that is no surprise: it was poorly considered and rushed through.

So now City Council announced in a letter that it is about to rescind the lengthened enforcement hours and the rate increases. The very source of the revenue needed to plug the gap is now being temporarily removed because it is politically unpopular.

Not only does the promise to pay fail to bind when it is made to our City employees – as evidenced by the fact that the fund has been chronically underfunded. But City Council’s new promise to pay doesn’t even seem to bind the current Council, much less future Councils.

And it isn’t as though these policies will get more popular any time soon. There will be, for the foreseeable future, a need to raise this revenue from the City’s parking infrastructure. This amounts to a tax on driving in the City. As such, there will continue to be pressure to roll back these increases.

Only one person on City Council seems to recognize that when you are selling someone a promise you never let the buyer see how nervous you are – Patrick Dowd.

He remarked, in response to these efforts to roll back the increases –

"We need to be committing ourselves to showing the utmost confidence" in the bailout plan… but the letter "unfortunately casts doubt."

He is right.

What is unfortunate is that the doubt his confidence aims to overcome is not personal to him. To generate confidence he has to be understood as speaking for any future Council. While I might have confidence in Dowd’s sincerity, his promise just doesn’t have the ability to bind future councilors. The doubt that most of us have stems from how the pension fund has been treated in the past. So the basis for confidence in this plan doesn’t turn on the sincerity of anyone today, but on the ability of different people to keep these commitments over the next 31 years.

When you are in the process of breaking your promise to fund the pensions of those who worked for the city, you don’t buy yourself anything by making another promise.

If retired employees can’t take the city at their word, why would Harrisburg?

Bonus question: What happens if, in five years time, council removes this revenue stream? Are we under constant threat of takeover if we tamper with the parking fund over the next 31 years?

*Correction: This paragraph has been altered to reflect the fact that parking tax revenue was being pledged to the pension fund and that the hole which was created was expected to be filled by a new revenue sharing agreement with the Parking Authority. This new agreement is expected to tap the increased fines and enforcement hours revenue to permit the Parking Authority to make a greater contribution to the City. It previously and incorrectly described the increased revenue from rates and enforcement as going directly into the pension fund.  - Thanks Bram for pointing this out.


Bram Reichbaum said...

In terms of labeling or devising with metaphors, it helps to remember that Council pledged parking TAX revenue -- which it does control -- and backed it up with, well, general fund revenue, which it also controls.

Council merely suggested strongly that the only way the City could survive that pledge is if the Parking Authority played along with Council's designs. Basically, Council said, "Do the Council Controller plan or we shoot this puppy", and the administration is saying, "Whatever, I've always been more of a cat person."

I'm more interested in your next promised installment. I'm still trying to be convinced that eluding state takeover is worthwhile, and I'm not there yet. I understand that a plan for 100% pensions funding is unnecessary overkill and a burden on taxpayers and ratepayers -- HOWEVER I'm not convinced that avoiding 0% pensions funding during the next 6 years is possible, and the opportunity put investment management in the hands of nonpartisan, noncommercial professionals isn't a once-in-a-lifetime positive opportunity. (And underscoring the impossibility of our crisis early might lead to its own benefits, one of which is politicians considering drastic actions sooner than otherwise.)

SteelCityMud said...

I share your thought that a state takeover might not be such a bad thing. As I understand it they enjoy lower admin costs, more realistic projections and higher returns than the City fund.

After all, the money is going to be extracted from Pittsburgh way or the other. Those pensions have to be paid. So if it can be done more efficiently it seems prudent to take advantage of that.

I suppose the counter-argument is that local leaders will wield an extraction tool that is more sensitive to local concerns. This argument fails though when the we remember that these local leaders just botched the extraction plan. It parking overhaul proved hugely unpopular and undercut both small local businesses and ongoing efforts to revitalize downtown. If this is what those sensitive to local concerns have to offer, I think I'd prefer the outsider.

Anonymous said...

Other than his drastic miscalculation on the library tax, Dowd is the most intelligent person on Grant Street. Although his library tax is weighing him down big time. If the taxpayers are able to cough up more taxes, shouldn't it be going to something like, em, debt?

SteelCityMud said...

I agree that Dowd is really smart, no doubt about that. I hope nothing I said was read as impugning his intelligence.

But I don't really see the library tax as a miscalculation. Those libraries are a wonderful resource for Pittsburgh and it seems there is no other way to keep them funded. In fact, there have been so many problems getting money that has already been approved released to the library system that the referendum seems like the only way to make sure they have a revenue stream that can't be tampered with.

MH said...

Is it the same guy wandering around the comment sections trying to make like a few bucks for the libraries is the kind of thing Nixon would have done if he were truly evil?