Friday, September 30, 2011

The Politics of Parking and Pensions

I think almost everyone has probably grown tired of the parking and pension issue. But I promised to cover the politics of the solution and so cover it I will.

I don’t take the various proposed solutions to the pension crisis to have been undertaken in bad faith by either Ravenstahl’s office or the council. However, I do think that it was, at bottom, a political solution. That is, a solution that had as much to do with keeping a scorecard of winners and losers as it had to do with bailing out the pension.

Let us start with the mayor’s proposed solution. Lease the parking assets for 50 years to LAZ. This would have generated an immediate 452 Million, of which 230 Million was to go to the pension fund. The rest was discretionary, though it was suggested that some of the remainder would also find its way into the pension fund. 

Now on the face of it this doesn’t seem like such a terrible plan. 452 Million, if invested at 6% a year, will compound to almost 8.5 Billion over 50 years. Further the provisions of Act 44 still allow for the city to impose a parking tax. Finally, a great deal of repair, maintenance and employee costs would be reduced under this lease plan. 

But the plan was rejected. Informing this rejection was the idea that a long term of lease of assets should be a last resort for any city. Something that should only be done when there is no other way to make budget. In fact, Chicago’s 75 year lease of parking assets and the steep increases in parking rates was also on everyone’s mind during that time. It was widely reported that LAZ was  aggressively enforcing meter times and paid that city about a quarter of what its parking assets were worth.

Now, fair enough, LAZ may be a company with more to gain from this deal than the city. It certainly would have imposed a more aggressively enforced and expensive parking deal and they would have been largely outside of public control.

So what did we get instead? 

More aggressive enforcement, more expensive parking and a parking authority that is largely outside public control!
However, in order to get that we had to go through a few different plans. Each was rejected in some form or other by the mayor’s office. 

Throughout the argument between city council and the mayor a fairly constant refrain could be heard – “keep public assets public”. Indeed, Dowd did a great deal to forcefully articulate this position at every opportunity, though I often took him to speaking for most everyone else when he did.

The problem is that many of the proposals offered by council didn’t really do that. 

It might help to recall the various alternatives that were being floated at this point in the debate.

 One scheme would have given the parking infrastructure directly to the pension fund.
-This would have, perhaps, saved the pension but it would have then been outside the public control and little would have improved in the parking authority.

 Another was to sell the parking infrastructure the city owned to the parking authority and use the proceeds to fund the pension.
-Given that the mayor controls the authority this also would have reduced the public nature of these assets. The money would have flowed into the parking authority not the city.  Again, nothing in this plan improves the service of the parking authority. 

Still another was to lease certain lots and meters to a private contractor for 40 years but with a revenue sharing agreement.
- Again maybe this prevents the takeover, but the other issues are untouched or made worse.

Each of these was rejected by the mayor’s office at various times.In response, Dowd said the mayor’s exhibited a “failure of leadership”. And Peduto accused the mayor of bullying tactics and threats. The perception wasthat this was a game of brinkmanship. By declining to offer alternatives the Mayor was dooming the pension fund to takeover by the State.
Which brings us to the proposal that won out. Transfer the parking tax revenue stream to the pension fund for the next 40years, and deal with the hole created in the budget by demanding a greater cut of the increased revenue brought on by rate increases and aggressive enforcement from the parking authority.
 I suppose this keeps public assets public but only nominally so. The problem is that the lion’s share of the parking infrastructure is still controlled by the parking authority and they have been particularly recalcitrant in coming to a new deal on sharing that revenue stream. While the authority is controlled by the mayor’s office, and so is in some sense under public control, in reality this extra layer of bureaucracy insulates the parking authority from real oversight and scrutiny.

Now city council was facing a deadline here and had little support form the mayor’s office, but it should still be pointed out that while they had criticized the mayor for playing a game of brinkmanship, they did something similar. They essentially put themselves in a position to go broke if the parking authority didn’t renegotiate its revenue sharing agreement with the city. 

In this interplay between council and the mayor, the urge to position oneself to declare victory over the other is particularly palpable. The mayor wants to see his plan succeed and so he ignores alternatives and refuses to allow his parking authority to cooperate with council’s plans. In response the need to show up the mayor as uncooperative leads council to stretch their authority to the absolute limit and essentially make the city’s budget contingent on that cooperation. 

As far as the second desire of Dowd’s goes, this was obviously accomplished. The pension fund was saved. Still, that outcome looked far from certain for a long time and I have heard privately from many who were surprised by that outcome.

Was the parking authority’s service improved? No. But then, I wonder if that was really a realistic goal anyway. If Dowd believed he could pull this off, he is to be admired for his ambition, but I suspect that this functioned as another talking point: another way to needle Ravenstahl.

So here we sit with some tough decisions to make about parking revenue, some tough politicking to get the parking authority to accept a new revenue sharing agreement, and the silver lining – a plan that actually rescued the pension fund. 

But I don’t think we are in any position to say, from this position, whether that solution was the best one. We still have one of the problems that come with the lease plan – more expensive parking and aggressive enforcement. And we don’t enjoy the benefits of outsourcing maintenance, employee costs and repairs. These are largely benefits the parking authority would enjoy, but if we consider that a ‘public entity’ then I guess we can claim those costs and benefits as our own.

We also have the pension fund under our control, in some sense. We can’t really tamper with the revenue stream, though at least we made the decision to use that revenue. And while keeping it seems like a victory, in reality it is a mixed bag. 

The state’s pension fund would have given us lower administration costs, more realistic projections of growth and would have been subject to more professional management. (Our pension fund, in contrast, has made risky investment decisions and recently pulled assets completely out of the stock market – losing millions) But turning the fund over to the state would have come with new taxes. At least by gaining revenue from parking we take some share of the money from the pockets of our suburban neighbors. 

Finally, have we kept public assets public? We haven’t privatized them, certainly, but we don’t have ready access to the revenue generated by them either. If they were public assets in the first place, I guess we have kept them as such. But there are real obstacles to seeing them as ever truly public.  

Wednesday, September 21, 2011

The Whole Year Inn

So the pension fund contains a tremendous hole. That hole might amount to 400 million dollars or 700 or some other number depending on who does the counting. But whatever the number is, it is large and it didn’t happen overnight. 

Let us not think in terms of dollars then, but in terms of the number of retirees relative to the number of working employees. The city’s pension fund owes benefits to over 1600 retired police, but currently there are only 800 active employees in paying in. That 2:1ratio of retirees to active employees is preserved in retired fire fighter’s fund, though it only owes benefits to 1200. Finally the municipal employee pension system is in the best shape. It has only a 1:1 ratio of current employees to retirees though it owes benefits to 1700 people.

So how did we get here?

In some sense this question assumes too much. It suggests that there was a time when we were not here and that some action pushed us over the brink and into the hole.

But it wasn’t like that. Pittsburgh’s pensions have never been adequately funded. Further, almost every effort to correct that situation has been a failure of one form or another.

In the distant past, i.e. before the 70’s, it appears that many local leaders conceived of Pittsburgh as a perpetual boom town. As such, there was little incentive to put aside adequate funds to keep pensions solvent. It seemed to be assumed that population would continue to grow and the size of city government would track that. So if not enough was put aside today, so what? Tomorrow the size of the workforce would increase and there would be even more new employees paying a pittance into the fund. True that wouldn’t cover the pensions that those employees were promised, but the current obligations were covered. Besides, the future would bring more employees and the cycle could begin again.

This is certainly short sighted leadership, since it, in effect, creates a Ponzi scheme. But it is not clear that it is short-sighted leadership of a particularly culpable sort. After all, many municipalities at the time thought to fund things this way. And, arguably, Social Security was set up on a similar model. 

Over the years the state introduced measures that helped make this situation even more untenable and seemed to launch the first calls for state assistance and state bailouts. Unions lobbied the state throughout the 40’s 50’s and 60’s for additional benefits. Typically these seemed to be benefits that they couldn’t add to existing contracts through the typical negotiation process with the City. These changed the ways union contracts were negotiated and increased pension benefits. Both directly and indirectly these increased pension costs in various ways. It is difficult to tell, but it doesn’t seem that the city was particularly proactive about ensuring that these new obligations were funded. In fact this seems to be the primary source of the attitude that much of the pension problem is the fault of Harrisburg and so it is they who should be required to contribute to the solution. 

There is a flaw in that argument however. For much of the 70’s Pittsburgh simply failed to pay into its pension fund. Pensions were allowed to dwindle in order to deal with the more pressing effects of depopulation. There is more than one culpable party here.

One of the first efforts at making the pension system whole came about in the mid 80’s with Act 205.  Act 205 made some of the first provisions for a commuter tax, but those were never triggered. Its main revenue stream was a tax on insurance policies sold by out-of-state companies.  For a time, things seemed to be going well. Although the level of funding was dismal – percentages hovering in the single digits – the fund began to show less of a shortfall each year. During these early days Pittsburgh was reaping almost 20% of the total pool of funds that Act 205 set up.  

But, ultimately Act 205 was not able to bring the pension fund back to financial health. Indeed, the failure of this bailout scheme foreshadows the failure of other efforts toward the same goal. Lobbying at the state level had left options in the act for allowing smaller municipalities to join. In some cases these newcomers were able to fully fund their own pensions through participation in the pool. As you might expect then, of those partaking of the revenue stream, it was Pittsburgh that bore the brunt of the burden to control costs. Even with state funds, the shortfall persisted. 

Of course, costs can be contained in more than one way. There are cuts and there are opportunities to raise more revenue. Without additional powers to levy taxes, and with cuts already being made, Pittsburgh pursued a program of high-risk investments designed to maximize returns and, for a time, it seemed to be enjoying moderate successes in that pursuit.

In the mid to late 90’s however it was clear that the fund was not growing fast enough and other measures would need to be taken. In response, the city started to issue Pension Bonds. Essentially this was a debt transfer from the pension fund to the city’s general fund. Those bonds were issued against the general fund while the funds realized from them went to pay down pensions. 

In some ways the opening stages course of action seems very similar to the scenario we have now seen play out. A hole was opened in the general fund on an ongoing basis in order to close a similar hole in the pension fund. We satisfied a promise, by making another promise. 

These bonds brought the pension up to the highest levels of funding it appears to have ever enjoyed. At one point the fund was almost 65% funded! However that aggressive investment strategy backfired when the internet bubble burst in the early 2000’s. At this point the pension fund was also paying out more money, more quickly than it had anticipated. Early retirement packages and other incentives to help the general fund reduce costs purchased those gains at the expense of the pensions. So at least some the debt that had been shouldered by the City’s general fund by way of the bonds was now being passed back to the pension account.  In any case, in less than ten years from the issuance of those bonds, Pittsburgh was in the same position it was before: sitting on a pension with funding levels, at best, in the high 20%’s. To add insult to injury it was also during this time that Act 205 was further amended to tie revenue availability to the number of active employees, rather than the number who are currently drawing a pension. As you might expect, for a city that had lost so many people, this measure only further eroded the support that the state was providing.

Then came Act 47 – Pennsylvania’s answer to municipal bankruptcy. At the end of ’03 Pittsburgh was declared a distressed municipality and an oversight team was created to present it with a plan for reform. Strictly speaking, this designation came about in response to the totality of Pittsburgh’s economic circumstance, not just the pension fund. Still the pension issue is the largest budget problem facing the city today. The Act 47 Team proposes 5 year budgets and has the power to withhold revenue until certain conditions are met. The silver lining to Act 47 was that the designation brought with it a new power to impose taxes. Specifically the idea of a commuter tax was revived. With it seemed the promise of finally being able to close the budget hole and stop passing it between the two accounts.

However, before the city really got a chance to flex any of this new taxation power, the Republican controlled state legislature passed Act 11. This act created the Intergovernmental Cooperation Authority. This was yet another oversight board - this one more highly politicized – that was to work alongside the Act 47 team. But Act 11 also removed the power to impose the new commuter tax for as long the new board was in existence.   
Act 11 enjoyed the strong support of suburbanites who worked in the city. There was a rather acrimonious debate over this measure. Those in the city argued that without the hospitals, universities and downtown infrastructure the suburbs simply wouldn’t be a desirable place to live. On that basis they reasoned that suburbanites should help shoulder the burden. The opposition argued that the new power amounted to ‘taxation without representation’ since suburbanites had no voice in the city. The measure passed, but the oversight board is set to expire this year. At which point, perhaps, we will get the power to tax commuters.

Finally came Act 44. This was the measure the required the pension to be funded to at least 50% by the end of last year of face takeover by the state. Incentives were included in this measure to encourage the city to privatize its parking assets- but we all know that didn’t work.

Instead, it was a dedication of parking tax that provided funding. But, once again, this came at the expense of the general fund. The debt looks to have been passed from one set of books to the other like it has many times in the past. I wait to see if this time will be any different.

Mea Culpa: Life intervened and I wasn't able to be as thorough in my research here as I would have liked. I also wasn't able to provide my usual references to the source material for all of this. Indeed, some parts of this essay are just a narration of this slide show. Those who are interested in researching this issue in more depth are urged to begin there.

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.