Pittsburgh Pension "Fix" Creates $13 Million Budget Hole

It's not good news that the City of Pittsburgh has again made the news with another article in Bloomberg pointing out the issues surrounding the City Council's recent 7-2 vote to divert funds from parking tax receipts to shore up a severely underfunded pension plan.

The City has only about $325 million in funds set aside for a total pension liability of approximately $1 billion. Pennsylvania law requires 50% funding else the State can actually take control of the pension plan.

Also, in more not-good-news, Pennsylvania may order the city to double its $46 million annual contribution by 2015 and to raise it to as much as $160 million by 2030, according to a report prepared for the state. Exactly where does the State expect the City of Pittsburgh to come up with $46 million?

In a city of just over 335,000 residents that has experienced more population decline then every major city outside of New Orleans since 2000, you can bet that there is no appetite for increased taxes on the part of residents.

Moving $13 million from parking taxes to fill the pension liability gap will create a $13 million hole in the general budget that the mayor and city council will need to fill by either raising taxes or reducing services.  How does the City attract businesses and residents in this environment.  According to the population decline article linked to above the city is lacking new immigration and deaths having outpaced births.

To his credit, the Mayor has opposed this plan- although I am afraid to hear what his solution might be instead. 

State and Local Government Revenues Have Stabilized

The National Conference of State Legislatures has published a report State Budget Update: November 2010.  In it the NCSL says that most states and local government agencies have seen a stabilization of revenues coming into their coffers.  From the report:

an increasing majority of state legislative fiscal directors are reporting that the revenue outlook for the remaining seven months of FY 2011 looks promising. At the same time, however, most states also are forecasting significant budget gaps in FY 2012. ... Funds from the American Recovery and Reinvestment Act (ARRA) have helped support state budgets since FY 2009. States will face a $37.9 billion loss in federal funds in FY 2012 compared to FY 2011, according to the Federal Funds Information for States. This is expected to make big holes in state budgets, what many state officials call the "ARRA cliff effect."

As you can see, the report also points out that without another round of ARRA funding (unlikely with the new Republican majority in the House) the holes in state budgets will widen.  Many states used accounting gimmicks in a effort to close budget holes in past years. These gimmicks were mostly intended to fix a short-term problem (budget deficits) while relying on impossible tax revenue growth to fill the budget gap in future years.  Basically, many states made budget adjustments as if the recession would last only one year and that the recovery would be immediate, strong, and long-lasting- as if the Federal Reserve and Congress would be their Viagra.

As with most drugs, the end result was a masking of the symptoms while the underlying cause of the matter (too much spending) had not been sufficiently addressed.  With ARRA ending and not coming back, State and Local governments will now have another round of addressing significant deficits in a world where tax increases are being fought tooth and nail by taxpayers.

Goldman Sachs put out report the other day that backs up the above claim. In their December 17 US Economic Analyst Report:

The ability of states to defer adjustment is waning, based on public comments from state officials and budget analyst reports. Most states have tapped rainy day funds, privatized assets, decreased pension fund contributions, delayed wage or contractor payments, and so on. While there are many possible tactics, the hardest-hit jurisdictions have already exhausted the most practical and politically attractive options, and so further budget adjustments are more likely to be made through spending cuts.

There is a lot more in that report that is worth reading including a prediction about employment growth (or lack thereof).  I don't particularly agree with their call of 3.5% GDP growth next year.  Without stimulus that would be difficult to reach. I also don't expect a recession late this year or early next but instead a long period of "muddling through" where high unemployment and slow growth becomes the norm. That is an environment where taxpayers will still fight any and all tax increases making it more incumbent on state and local officials to find ways to cut spending in a fashion that will be acceptable to taxpayers.

Here in Mt Lebanon we had seen significant reductions in Real Estate Transfer Tax revenues (which make up about 1% of the budget) and also a downward trend in Earned Income Tax (which make up just more than 5% of the budget).  Real Estate taxes are always stable since there have been no significant changes to assessed values since 2002.  These realities, however, will force a prioritization of services offered by both the Municipality and the School District until revenues begin to grow again.

Thanks for reading.

James

Municipal Bankrupcty Filings set to Soar- Updated

In 2011 we are set to see the number of municipalities filing for bankruptcy spike.  I first started posting about this in 2009 when the City of Vallejo, California filed for bankruptcy due largely to pension costs that got out of control.  A judge eventually granted Vallejo relief from its existing employment contracts with its public unions.

Now comes Prichard, Alabama who becomes the first city to default completely on its pension obligations to retired workers.  The city has sought bankruptcy protection twice and each time a judge has put obligations on the city that were unable to be met.  This time Prichard just decided to stop paying.

Lest you think these problems are half a country away, please read up on Harrisburg, PA which has decided to stop paying a loan it received for building a large garbage incinerator.  In addition to the incinerator debt, Harrisburg is coping with a $9 million deficit in the current budget. The city is considering layoffs, closing and leasing or selling a firehouse, and the selling of two fire trucks, among other measures. It has assigned volunteers to man police stations in order to have all officers on the streets. Ed Rendell stepped in to give $4.4 million to Harrisburg so they could finally make that bond payment.  Unfortunately, that is just going to delay the inevitable.  In Pennsylvania there are some very strict laws on municipalities filing for bankruptcies. For more on that read up on Act 47.  As you read that article please note that once a city enters Act 47, it pretty much never leaves.

So what does this all mean to you?  It means rising interest rates for municipalities and government entities in general.  In Pennsylvania we are slightly better off than in states where there is no implicit guarantee of the State stepping in when bond payments are missed (as was the case in Harrisburg).  However it is important to note that lenders take into account many factors when calculating interest rates to be charged to borrowers.  One of the most important factors after inflationary expectations is risk premium. See this link under "Market Interest Rates" to see all of the factors involved.

For Mt. Lebanon we have a pretty stable rating.  However, if municipal bankruptcies increase significantly across the country it will begin to impact interest rates for even the best rated government agencies.

***Update
For another perspective on the difficulty of filing Chapter 9 bankruptcy, please see this detailed article by Bond Girl.  She says that, while many municipalities will have difficulty paying the bills, it is much more difficult for them to actually enter the bankruptcy process.  This is somewhat of a contradiction to what the Meredith Whitney's of the world have been saying on TV and in the press lately.

Thanks for reading.

James

Soverign Debt Crisis and its impact here

We hear everyday about the PIIGS, Portugal, Italy, Ireland, Greece, and Spain and how their debt is going to sink their countries.  The European Central Bank (with some help from the Federal Reserve) is doing whatever it can to avoid a massive default on sovereign debt from any of those countries.

Typically the remedy to the problem of too much debt has been for the those countries to take on MORE debt either from the ECB or the IMF.  Ireland's most recent agreement with the ECB means they will get loans from the Band of England and the ECB that could total $16 billion. 


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On the email

I have been asked by a few people to post the email I sent to the Board last week regarding the solicitor contract.  Here it is:

I will not be in attendance at Monday's reorganization meeting.  My step-father has passed and I will be flying to Arizona tomorrow to help my mom with arrangements.  I should be back for the meeting on the 13th.

As for the meeting on Monday, I have been happy to see the lack of public lobbying for leadership positions that we saw last year. On the other hand, I have not been contacted by anyone that is seeking a leadership position to ask for my support. Perhaps its that you just think I wouldn't vote for anyone.  If I was at the meeting on Monday I would ask those seeking leadership the following questions:

1) Will you take a leadership role in putting a plan in place to solicit private donations for the construction of the high school? This is an idea I first brought to the Board over two years ago and no leadership to this point has been willing to make a serious effort (hire someone, go after alumni, etc) to reduce the tax impact of the High School on our residents using this avenue.  If there is as much support for the project as many of you claim, then why has this not already happened?

2) Will you ensure that the public has access to the same information that the Board does in its weekly packets?  Our community is as involved as they can be when it comes to the Board.  That is a good thing.  Too often we seem to hide behind "pre-decisional" information as a way to not share something with the public.  It's ridiculous to think that our involved public should not have access to the same information we do. How else can they ask informed questions? This idea that we can't share something like the Auditor's Report or the 5-year Forecasted Budget until AFTER we vote on something is an insult.  This sort of "pre-decisional" information can be applied to anything and everything we vote on every month.  Why share an AIU contract with the public before it is actually voted on? That is pre-decisional. Why share bids with the public before they are voted on since they are pre-decisional until after the vote as well? None of this makes sense unless the Board is actually trying to hide something from the public. And since we aren't hiding anything from the public, why make decisions that make it appear as if we are?  Share everything in the packet except for that which is confidential (attorney/client material and negotiated contracts) on the internet so that everyone has a chance to see the job we are doing.

If the people seeking leadership answered "yes" to the above, I would vote for them.

As for our solicitor contract, I have said in the past that I think it should not be renewed.  The advice given and work done by the solicitor on the Zoning Hearing lawsuit was subpar.  I would urge each board member to go back and read the briefs from all the attorneys involved in that case.  After doing so it should be clear that we need better counsel.  There was that much of a disparity in the level of preparation and work put into each of those briefs.  Regardless of my stance of not wanting to do the lawsuit in the first place, it was embarrassing to lose the way we did. I took no joy in that.  I would urge the Board to vote "no" on the contract and to put an RFP out for new counsel to start the first of next year.  This one action would also start to rebuild trust in the Board since it would show some real leadership in ridding ourselves of people/staff that give us bad advice and service.


See you on the 13th.

James

There's nothing new in there really.   I have always been an advocate of transparency and sharing packets with the public makes a heck of a lot of sense. 

Putting together a private funding campaign was part of the proposal I put together a few years ago to find a way to build a school that would impact taxes much less than the current plan does.  At the time there was a majority on the board who thought the idea was a good one. 

The above email is actually the epitome of good boardsmanship according to our own policy.  The policy asks that if a member of the board intends to vote against something then it is suggested that they also make clear what changes would need to happen to turn that vote around.  As I said in my previous post about my resignation, I received no material response to the email (there was one that suggested they were "planning on calling").  I don't think that email is unreasonable at all.

Thanks for reading.

James

If you want to be intermediately smart, read this site

Google has discovered the key to being the smartest one in the room. All you have to do is check out their Advance Search features and search websites based on "Reading Level". Your search results will be returned along with an evaluation of the overall reading level of the content on your site.

So how does this site stack up vs some others. Well, let me tell you, this site (or the old lebosbupdates site more specifically) scores at a 100% intermediate level.

 So there you go, it is completely at an intermediate level. 

How did other websites stack up?

For all you Rachel Maddow and Keith Olbermann lovers out there, lets see how MSNBC stacks up:

Seems like MSNBC caters to the Basic to Intermediate crowd.

Surely Google wouldn't rank FoxNews.com as being anything more than Basic, right?

Wait there has to be something wrong with the ranking system, right?  Well, as they say in the tech world, your search results never lie.

Given the ratings disparity  dissimilitude between the two cable news stations, perhaps the American audience prefers the more complex labyrinthine commentary (FoxNews) over the dumbed down dunderheaded (MSNBC) version. Hey, that's not me talking, it's Google (and a little Merriam-Webster Thesaurus).

Thanks for reading

James
P.S.- Google if you are reading this, please don't shut down my site!

It has been my honor...

It's been a good run but it is time for me to move on from the Mt. Lebanon School Board. In the past few months I have missed some meetings due mostly to travel out of the country. More often than not I find myself putting an emphasis more on my personal/work life than I am on the school board. For most of my 3 years on the Board the exact opposite was the case.

I wrote the following letter to School Board President Josephine Posti Wednesday morning:

Mrs. Posti,

It has been my greatest honor to serve the community of Mt. Lebanon in my capacity as a school director. However, it has become clear over these last few months that I will no longer be able to serve in this role going forward and I must resign my position on the Mt. Lebanon School Board effective immediately.

My time on the Board has been well spent and I am hopeful that many of the fiscally responsible messages that I have spoken about over the years will begin to take root.

Mt. Lebanon is a terrific place. The Mt. Lebanon School District is a proud one. It will take leadership and vision to maintain what has taken so long to build.

I wish you and the rest of the Board of Directors only the best.

Sincerely,


James Fraasch

So with that, it is time to move on to different things. I fully expect in the new year to do some more extensive travel to South America. In addition to that I will start my Master's Degree program at the University of Pittsburgh in 2011. So between learning Portuguese, getting my MBA, traveling to different hemispheres, raising the two best kids in the whole world, and being married to a very forgiving/understanding/patient wife, I think I will have a very full plate.

Understand that these are all choices that I have made over the last month or so. I could have delayed school or travel for some time but in the end it didn't really make sense to do so. The latest evidence of this came at the reorganization meeting (which I could not attend due to a death in my family). I was adamant about not extending our solicitor's contract due to what I believe was subpar representation during the school district's lawsuit against the Zoning Hearing Board. Via email I urged each Board member to review the work of every one of the attorneys in the case and determine if they thought our attorney provided service that was in any way comparable to either the Zoning Hearing Board attorney or that of the private citizens that joined the lawsuit. Taking time to review those documents would have proved my point. We received inadequate representation and lost the case. I received no response to the email and the vote went off in favor of the contract 8-0. That was just one example in a long line of them that I won't revisit here.

One last thing. I have to say that being elected to serve on the Board was perhaps the most humbling experience in my life. I never took your votes for granted. In the end I hope those that voted for me will always be able to say that I followed through on every one of my campaign promises; fiscal responsibility, open and honest communication, and new ideas.

Thanks for reading.

James Fraasch

The Joy of Stats

I love to share great finds on statistics and especially free markets.

Check out this video from Hans Rosling. Hat tip CoyoteBlog.



Every one of Hans Rosling's videos is a must watch and the best source for them is www.ted.com

His focus is on any statistic that has to do with world population, poverty, and health.

Thanks for reading.

James