Pittsburgh's pension problem

Fiscal problems got you down, Philadelphia? Tax revenue drying up, pension problems draining the city budget, and Harrisburg indifferent, or downright hostile, to your pleas for help?

Here's a consolation: We're not Pittsburgh.

Having achieved the unenviable position as a national poster-child for distressed pension systems, Pittsburgh is now facing tough choices to begin the climb from a hole some believe it will never get out of alone. A recent report by the Pew Charitable Trusts showed its pension to be the worst among those of 10 comparable cities, including Philadelphia's, which ranked eighth.

With $252 million in assets and just under $900 million in liabilities, Pittsburgh, in December, had 28 percent of the money it needed to pay its long-term pension bills.

In many ways, Pittsburgh has cleaned up its financial house, running budget surpluses for the last four years, closing fire stations, cutting 40 percent of its workforce over 15 years, and charging admission to city pools, to name just a few austerity measures. But the pension, and an annual debt load that eats up 20 percent of its budget, keep the city in a precarious fiscal position.

"It's the one real thing that has the potential to hold us back financially," said Pittsburgh City Controller Michael Lamb.

Pittsburgh is well below Philadelphia's 47 percent funding level last year, which is in itself a cause for concern. Observers say Philadelphia has managed its pensions admirably compared to Pittsburgh, where cynical political deals and irresponsible fiscal management have put the pension fund in its current predicament.

That's why Philadelphia will be excluded from a proposed state takeover of struggling pension funds, while Pittsburgh appears to be a prime candidate.

"As long as the local government maintains control out there, they don't seem to be able to maintain the long-term political will necessary to hold the costs down," said James McAneny, executive director of the Pennsylvania Public Employee Retirement Commission, and a proponent of the pension-takeover bills now before the House. "This solves this problem."

Some Pittsburgh officials argue that they can solve their own pension problems. Others say they are crippled by state funding formulas that penalize older cities such as Pittsburgh. But to even begin, they will need new revenues, and to raise them, the city is asking for new laws from Harrisburg.

The city has recently concluded that its pensions need $200 million immediately to stabilize the fund. Mayor Luke Ravenstahl is touting privatization of downtown parking garages. In addition, to avoid going backward, the city must pay an extra $10 million to $14 million a year into its fund.

To accomplish this, Ravenstahl is asking the state legislature to empower the city to expand its 0.55 percent tax on a company's gross payroll to nonprofit institutions, which make up 40 percent of the city's otherwise taxable land. Alternately, the city would raise its local-services tax on workers, many of them commuters, from $52 to $144 annually.

Philadelphia also needs authorizations from Harrisburg - to raise the sales tax from 7 percent to 8 percent, to delay $230 million worth of pension contributions, and to change pension accounting to spread payments over 30 years.

Philadelphia's prospects are uncertain - but Pittsburgh's appear to be dismal.

"The City of Pittsburgh . . . has done schemes that no one else has done to put themselves in the position they're in," said state Senate Majority Whip Jane Orie (R., Allegheny), one of the harshest critics of the Democratic city's handling of its pensions. "There's no way the state is going to bail the City of Pittsburgh out for political decisions they've made."

Those comments from Orie - who is also critical of Philadelphia's requests - might not be surprising from a Republican from surrounding Allegheny County. But even Pittsburgh Democrats are concerned.

"While I am personally sympathetic to the requests, there is no consensus among Allegheny legislators . . . on either one of those issues," said Rep. Dan Frankel, leader of Allegheny's Democratic delegation.

Pittsburgh's Plan B? Slapping a $5 surcharge on all-day parkers, increasing the water rates to institutions that already pay a higher rate than homeowners, charging college students a head tax of $50 a semester, and initiating a head tax for hospital patients of $25 per admission.

"Whatever we can do within our own power, we are doing," said Scott Kunka, Ravenstahl's budget director. "The mayor and the City of Pittsburgh - we are not asking the state or the legislature to bail us out."

Pittsburgh still gets criticized in Harrisburg for deals such as a Fire Department contract agreed to by former Mayor Tom Murphy in 2001. On the eve of the mayoral primary, Murphy signed a contract with the firefighters union that included a no-layoff clause and $10 million in concessions, in exchange for the union's endorsement. He won by 699 votes.

Robert P. Strauss, professor of economics and public policy at Carnegie Mellon University, is working with the City Council on revenue alternatives. In a mayoral election year, he said, he fears that politics will again rule in critical financial decisions that include the negotiation of police and fire contracts by year's end.

"The pensions are only one element of an extremely difficult financial condition that the political establishment doesn't want to deal with, because it ultimately means dealing with police and fire," said Strauss. "People running for office need campaign funds, and I'd rather that the decision about what to do about the pensions, and whether or not to sell the city's parking garages, be dealt with after the mayoral election."

Bill Peduto, chairman of the City Council's Finance Committee, believes that the state formula that aids municipal pensions is flawed, that it punishes older municipalities like Pittsburgh, with a shrinking workforce but growing pension obligations. That formula is tied to the number of active workers, so Pittsburgh has been penalized by having reduced its workforce.

"We'll never dig ourselves out with the tools that we've been given," Peduto said. "It is nearly impossible."

What the state is offering Pittsburgh is the chance to be absorbed, along with other pensions funded below 50 percent, in the Pennsylvania Municipal Retirement System.

Bills introduced last week in the state House would exclude Philadelphia, but would likely include Pittsburgh in a plan that would freeze pensions at their current levels, so municipalities like Pittsburgh could not increase benefits.

The plan would take in new employees under a less-generous, fully funded plan and would force a more conservative financial model to calculate the city's annual payments.

McAneny, whose state Public Employee Retirement Commission oversees the health and integrity of the more than 3,000 plans across Pennsylvania, and is pushing the new plan, said it offered one vital resource for Pittsburgh.

"Hope," McAneny said, "hope for final resolution to the funding disaster that is their pension fund."