New Pittsburgh Mayor Bill Peduto is smart to delay his city's request to exit a state oversight program for distressed communities, capital markets observers say.
"It seems like almost a layup for the new mayor. By staying he has a few more tools regarding labor contracts and other issues," said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia.
Reversing the stance of predecessor Luke Ravenstahl, Peduto - in his first act after his Jan. 6 swearing in - wrote Gov. Tom Corbett urging that Pittsburgh remain in the distressed communities program known commonly as Act 47, where it has resided since 2003.
"Our work is not yet done," Peduto said.
Ravenstahl, who did not seek re-election, had requested in October 2011 an exit from Act 47, saying the "distressed" label unfairly stigmatized his city.
"Leaving Act 47 would to a large degree be a psychological boost, but I can't see any tangible benefit," said Schankel.
Peduto wants to work with the city's Act 47 coordinators, Public Financial Management Inc. and Eckert Seamans Cherin & Mellott LLC, and the Intergovernmental Cooperation Authority oversight agency to craft "one final recovery plan - an exit plan from Act 47 that will leave our city truly fiscally sound."
The state Department of Community and Economic Development oversees the Act 47 program, which began in 1987 and includes 27 communities.
Peduto wants to address pension shortfalls and debt and establish a long-term program regarding payments in lieu of taxes, or PILOTs, with nonprofit organizations.
"We must leverage Act 47 status to develop a plan that will allow us to work with our nonprofit community to satisfy what would be their obligation under a payroll prep tax in a way that is fair and equitable to the city and to these large institutions," Peduto told Corbett.
Peduto could also use the same leverage in near-term labor contracts.
Additionally, the extra time would enable Peduto to survey the state landscape for any movement out of Harrisburg regarding pension system overhaul and other matters.
In addition, a new governor could take office next year, with incumbent Republican Tom Corbett appearing vulnerable in the polls.
"Pennsylvania will have a tough decision to make whether to continue Act 47 for Pittsburgh all the way to 2018," said David Fiorenza, a Villanova School of Business professor and a former chief financial officer of Radnor Township, Pa. "Pennsylvania has its own revenue issues with flat casino revenues, lawmakers looking to raise revenues through tavern games and smokeless tobacco. They will debate this while trying to keep a balanced budget so individual sales or income taxes will not need to be raised in the next year."
Pittsburgh in 2010 shored up its pension funding level, 34% at the time, by earmarking $736 million of parking tax revenues as a new funding source through 2041. A series of rating upgrades followed, including a triple-notch upgrade to A from BBB by Standard & Poor's last June.
Fitch Ratings in a report last week, citing a revised actuarial report as of Jan. 1, 2011, reported a funding level at 62.4%, assuming an 8% investment return. Using Fitch's more conservative 7% discount rate, the updated funded level is 56.3%.
Fitch said it expects the city to continue its plans to reduce debt levels in the next five years while adequately meeting its capital needs and reducing pension liabilities.
"I think the big enchilada is the pensions," said Schankel. "They took some steps with the parking revenues but I think they need further steps. Pensions and debt are the big problems."
