Pittsburgh officials say they are ready to emerge from eight years of state oversight, but how the city handles pension liability could determine when it exits.
Mayor Luke Ravenstahl and other city leaders on Tuesday trumpeted cost containment, rating improvements and debt reduction before the Intergovernmental Cooperation Authority, one of two oversight vehicles in the western Pennsylvania city of 307,000. Pittsburgh also belongs to the state’s distressed communities program, commonly known as Act 47.
The council later this year may consider a Ravenstahl initiative to formally request an end to oversight.
“The mayor’s position is that we’ve met the legal definition for leaving Act 47. It’s just a matter of dotting the I’s and crossing the T’s,” finance director Scott Kunka said in an interview.
Kunka said the city’s designation as distressed was “counterproductive” to operating in the ideal business climate.
“The outcome of the meeting with ICA was very positive,” said Kunka, who said relations between city and ICA officials have improved since the authority changed board members 18 months ago.
But the city’s pension funding level is only around 59%, despite two years ago having earmarked $736 million of parking tax revenues to the fund through 2041. State officials had warned of a pension-fund takeover had the fund level not been at 50% by the end of that year. The Pew Center on the States considers 80% an acceptable threshold.
City Comptroller Michael Lamb may talk with the city’s pension board this month about lowering Pittsburgh’s expectation of an 8% annual return on its investment portfolio, given market conditions. Lowering the assumption, however, means the city would have to pay more into the fund annually to comply with state funding formulas.
“We have a couple of meetings left with them this year, and we want to get a sense of what that would mean for the city budget,” Lamb said in an interview, citing 7% or 7.5% as a talking point.
According to Kunka, Ravenstahl convinced the pension board in 2008 to lower its earnings assumption to 8% from 8.75%. Kunka urged the state to enable municipalities to lower pension costs. "We can keep paying every year and it won't do any good unless there's a change in fundamental structure," Kunka said.
In January, Moody’s Investors Service and Standard & Poor’s revised their outlooks to stable from negative after city officials visited the rating agencies in New York and pitched upgrades. Moody’s rates the city’s general obligation bonds A1, while Fitch Ratings and Standard & Poor’s assign A and BBB, respectively.
According to Lamb’s annual financial report for the year ended Dec. 31, 2011, Pittsburgh has retired $222 million of debt over the last five years. Its total outstanding debt stood at $581 million after repaying about $52 million toward outstanding bonds last year.
Lamb, however, warned that debt management challenges remain. “Clearly, the city has done a good job of reducing its debt, but the problem is that while the city itself has done well, contingency liability of units such as the Water and Sewer Authority and the Parking Authority has gone up,” he said.
Pittsburgh’s Act 47 coordinator is Philadelphia consulting firm PFM Group Inc. in conjunction with Pittsburgh law firm Eckert Seamans Cherin & Mellott LLC.
PFM managing director Dean Kaplan, while acknowledging Pittsburgh’s challenges, including pensions and “significant legacy cost issues,” said the city has substantially improved under Ravenstahl, who took office late in 2006.
“Pittsburgh has made a lot of significant progress in managing its budget,” Kaplan said. “They’ve embraced some of the challenges we presented, especially on labor. They’ve right-sized the fire department, for starters.”
Kaplan said his firm and Eckert Seamans are working on another status report on the city.
Pittsburgh’s transformation from a steel-industry city has not been lost on its statewide peers. Chris Doherty, mayor of troubled Scranton, even called Pittsburgh a model, given its health care and banking buildout.
David Fiorenza, a Villanova School of Business professor and the former chief financial officer of Radnor Township, agreed. “Pittsburgh is a template that can be used for other municipal governments,” he said. “The template can be altered to fit the needs of each city. Harrisburg, for instance, has a different set of facts compared to Pittsburgh, such as the high rate of tax exempt properties. Altoona, another example, has an obscure location.”
