Common Sense for Mayoral Candidates: Legacy Costs

Member Group : Allegheny Institute

Legacy costs—pensions, retiree health care, general obligation debt, and long-term workers’ compensation liabilities—hang like a millstone around the City’s neck. Consider these numbers from the 2008 Controller’s audit:

• The three pension funds combined had $375 million in assets set aside to cover $899 million in liabilities (a funded ratio of 42%) before the economic downturn. There are more retirees collecting pensions (4,538) than active workers currently working and vested in the plans (3,248).

• Though not required to do so, there are no assets set aside to pay over $320 million in retiree health care obligations.

• Net bonded debt is around $762 million, resulting in a per person burden of $2,277.

• Accrued unfunded workers’ compensation is around $121 million.

There have been attempts to deal with these costs. For instance, lifetime retiree health care for police and fire was eliminated for those employees hired after June of 2004. The City has reduced some of its long-term debt and could get it lower if it does not borrow any more money in the coming decade. The oversight board commissioned a study of workers’ compensation and made recommendations. As a broad strategy, the City’s Act 47 plan is being rewritten in order to focus on legacy costs.

In the meantime, the latest attempt to get a large bundle of cash set aside for legacy costs occurred when the Mayor announced that he was directing the City’s Parking Authority to entertain the possibility of leasing their garages and lots for an upfront payment. Similar to the state’s proposed Turnpike lease, the City would take the payment to retire the Authority’s debt (about $100 million) and put the remainder into the pension funds. The City hopes to net about $300 to $400 million after paying off the debt for the deal to be worthwhile.

So it is clear that the strategy for dealing with legacy costs is twofold: one, get a large infusion of cash to put toward the costs and two, work on systemic reforms to change the nature of long-term obligations. There are things that the City itself can do, while other changes must come from the state.

Common Sense Recommendation for Mayoral Candidates

#4: Use a Disciplined, Aggressive Approach to Control Legacy Costs

If the garage plan comes to pass, the City should be encouraged to move other assets under its control or that of its related authorities that own real assets (Water and Sewer and Urban Redevelopment) in order to provide the cash infusion for the obligations mentioned above.

While it may sound like the City is looking under cushions for loose change, there is a great deal of precedent in other states and cities looking to relieve themselves of assets representing functions that could be handled privately and with market forces. There is a sizable component of parking handled by private operators in the City, and the Parking Authority has in years past contracted with private operators to manage some of their garages.

Selling assets not only brings in cash, it also shrinks the size and presence of City government and its authorities relative to the rest of the City. Take the parking garage deal as an example: if the garages and lots are moved to the private sector, all that would be left for the City to oversee would be any rate and maintenance provisions that would likely be contained in a lease agreement. That would not require the Parking Authority’s board, administrative structure, or employees.

Again, the key to this recommendation is to not just look for revenue and then stop. If that was all that was needed, then the City’s pension bond sales in the 1990s would have ensured a sustained period of solid pension balances. All it did was swap long term debt for healthier pensions, the latter only showing a brief break from its illness.

That’s why the second step of making changes under the City’s control is a necessary one. The Act 47 process ensures that no collective bargaining agreement negotiated during its existence can violate the terms of the plan. So as contracts come up for renegotiation it is imperative that the City work to get the changes to pay and benefits conducive to financial stability, including less lucrative benefit packages for new employees. When possible, new employees, regardless of type, should be enrolled in defined contribution type plans instead of defined benefit plans. This is where the state might have to help by setting phase-in dates for municipal pension plan enrollment.

But the City also has to keep an eye towards reducing the overall size of its workforce so that the accumulation of pension benefits is limited and the incidence of workers’ compensation is minimized. Consolidating or contracting with the County, as was mentioned in a previous Brief, would be a good step in this direction and privatizing services, including garbage collection (which has a very high incidence of workers’ compensation claims) also works toward the goal of curbing the growth in additional obligations.

It is fair to say that the legacy costs have a deep and wide impact on everything the City does or plans to do in the near future. Paying for debt and retiree health care out of general revenue means those dollars are not available for providing basic services. The common sense approach for Mayoral candidates is to attack the problem through a disciplined, aggressive approach.

Eric Montarti, Senior Policy Analyst
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