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Dean Kaplan, managing director at Public Financial Management, said Pittsburgh must meet five objectives before exiting state oversight.
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Consultant: Budget Hole Stares at Pittsburgh

JUN 2, 2014 10:36am ET
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A drop in real estate revenues after a reassessment and lowered rate of return assumptions for an employee pension fund have triggered a budget deficit in Pittsburgh, said a report by the city's financial-recovery consultants.

"The combined impact of the early 2013 actions related to the real estate tax and the late 2013 actions related to the employee pension fund is a negative $14 million swing in 2015," said the amended plan filed by consulting firm Public Financial Management Inc. and law firm Eckert Seamans Cherin & Mellott LLC.

The firms are Pittsburgh's coordinators under the state-sponsored Municipalities Financial Recovery Act, known commonly as Act 47. Mayor Bill Peduto and the City Council will debate the plan and eventually vote on it.

"My office is still reviewing all the plan's recommendations, including proposed revenue increases and spending reductions," Peduto said in a statement. "In the coming weeks we will work with City Council and the Act 47 team to come to a final agreement on them."

Peduto, a former City Council finance committee chairman who succeeded Luke Ravenstahl in January, urged that Pittsburgh remain in Act 47, even though the city received 11 bond-rating upgrades from its junk status of 10 years ago. Ravenstahl, who did not run for reelection, had called the "distressed" label a stain on the city.

Peduto wants leverage in municipal labor negotiations and to forge a long-term agreement with the city's many large nonprofits for payments in lieu of taxes, or PILOTs.

In January, Standard & Poor's raised the city's general obligation bond rating to A-plus from A. Fitch Ratings and Moody's Investors Service rate Pittsburgh A and A1, respectively. All three assign stable outlooks.

Late last year, Pittsburgh's pension boards lowered the assumed investment rate of return from 8% to 7.5%, and adjusted mortality assumptions to reflect longer life expectancies.

"These are responsible things to do and we support them, but they add to the pension liability," said Dean Kaplan, a managing director at Public Financial Management. Kaplan, PFM senior managing consultant Gordon Mann, and Jim Roberts, a Pittsburgh-based Eckert Seamans shareholder, are running point on the project.

According to the report, the city's minimum contributions to the employee pension fund will jump from $31 million in 2014 to $43 million in 2015, even with the city committing a significant portion of its parking tax to the pension fund each year. The city boosted its pension funding level from 34% in 2009 to roughly 62% in 2012 by earmarking $736 million of parking tax revenues as a new funding source through 2041.

Also in 2013, the city reduced its real estate tax rate from 10.8 to 7.56 mills after Allegheny County's assessment with the intention of keeping tax revenues at the prior year's level. Instead, real estate tax revenues fell 5.7%, from $126.6 million in 2012 to $119.3 million in 2013.

In addition, the city moved to keep more police positions filled and approved a severance program for some non-uniformed, non-represented employees.

"When you do all that stuff, now you have a hole," said Kaplan.

According to Kaplan, Pittsburgh must meet five objectives before exiting Act 47: eliminate the operating deficits in the baseline multiyear financial projections while preserving basic services; gradually reduce debt; maintain a fund balance that negates the need for cash-flow borrowings; gradually increase the city's pension-fund contributions to levels recommended by its actuary; and direct more money to the capital budget.

Kaplan said even if Pittsburgh managed to keep its fund balance higher than shown in the baseline projection, the city needs to contribute more to fully address its pension liability.

"The consultants for the city have performed well enough to lift the bond rating, try to stabilize the tax base, look at all revenue enhancements and deal with contractual obligations of unions," said David Fiorenza, a Villanova School of Business professor and former chief financial officer of Radnor Township, Pa. "They also have not been fooled by the casino or new stadiums tax base as the key to restoring fiscal health."

The report also called on Pittsburgh to spend at least $25 million to $30 million a year on infrastructure by mixing "modest new borrowing" and additional pay-as-you-go contributions. "Clearly they need to invest more," said Kaplan, who along with Peduto hopes the city's nonprofits can contribute to the capital program.

"The plan acknowledges the city has long underinvested in infrastructure and must now begin more aggressively working to maintain its assets," said Peduto. "I won't ask our residents to shoulder these burdens alone, while there is an opportunity for our nonprofit stakeholders to share in these necessary investments."

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