U.S. cities facing rising debt, pension payments and budget holes, are taking extraordinary measures to maintain solvency, including selling assets, defaulting on payments and re-negotiating union contracts.
By Jonathan Miltimore
Facing declining revenues and mounting red ink, cities around the country are taking unusual steps to maintain solvency, including selling assets, skipping payments, and re-negotiating contracts.
Harrisburg, Pa., made headlines this week when officials announced the city is defaulting on a forthcoming $3.29 million bond payment, a rare move that could shake confidence in the $2.8 trillion municipal bond market.
“The city has a $4.5 million deficit,” said Chuck Ardo, communications director. “The choice had to made between providing essential services or making a bond payment.”
Harrisburg is hardly alone. The Government Accountability Office estimates
cities face roughly a $30 billion operating budget gap in 2011, which they are scrambling to close.
City council members in Miami, facing a $100 million budget shortfall and 13.5 percent unemployment, voted this week to adopt emergency powers to slash the wages and benefits of public workers, which account for 90 percent of city expenses, according to city officials
“The circumstances facing the city constitute a financial urgency,” said Michael Mattimore, an attorney hired by the city.
The Miami police union has since filed suit.
Miami city officials presented a flow chart Tuesday showing a 52-year-old city worker with 30 years' experience could collect a lump sum of $832,000 at retirement and an annual pension of $92,000.
Mattimore called the financial situation “unsustainable,” and city officials appear determined to avoid a scenario like that which is currently happening in Pittsburgh, where the city is completing a $300 million sale of its parking garage and meters to prevent the state from seizing control of its pension funds.
Contributions went under funded so long its official funding ratio is down to 27 percent, according to city officials.
“This is a severe crisis,” said press secretary Joanna Doven. “It was not our wish to take this course of action.”
The city is considering seven bids from prospective buyers, city officials said. If the top proposals, which are due September 15, fall within 10 percent of each other the sale will be determined by a best-and-final-offer.
If the sale is completed, the official funding ratio of Pittsburgh pensions is estimated to climb to slightly more than 50 percent — still well below the 80 percent recommended by actuaries but high enough to prevent a state takeover.
Pittsburgh, which has not accumulated debt the last four years, is paying the price of creative book-keeping from previous administrations, city officials say, which used anticipated rates of return as high as 10 percent on pension assets in the 1990s to lower annual contributions.
The contributions the city did make often were financed by floating pension bonds, policy analysts say, a high-risk maneuver which gambles investment returns outpace bond interest payments.
“They wanted to deal with the problem down the road,” said Eric Montarti, Senior Policy Analyst at the Allegheny Institute for Public Policy. “Instead they took on the debt, but didn’t solve the problem; the funding ratio never got more than a temporary bump.”
As a result Pittsburgh faces yearly $80 million debt payments
in addition to its unfunded retirement obligations, which currently amount to about $50 million per year, according to city officials, and will rise to $80 million if the state assumes control of the its pension.
“We have a $430 million budget,” Doven said. “You can see that doesn’t leave us a lot of room.”
Floating pension bonds was a tactic also employed by Harrisburg. Records show
the city sold $35,734,416 in 1995 to account for unfunded accrued pension liabilities. While the city is still paying the debt off, the gamble appears to have worked out better for Harrisburg, whose books reveal
a fully-funded pension system based on the city's actuarial assumptions.
Efforts to address the immediate fiscal crises in both Harrisburg and Pittsburgh have been frustrated by state laws that leave them with less flexibility than most cities around the country.
Most taxes are set by the state, as are many benefits public employees receive. Officials in both cities expressed frustration over the lack of budgetary tools at their disposal.
“We certainly could use a few more arrows in the quiver; that would be helpful,” Ardo said.
Doven said Pittsburgh attempted to organize an effort to influence state lawmakers to allow more local flexibility but found “little legislative appetite” at the state capitol.
Montarti agreed the state should allow cities more flexibility, but said cities have many tools at their disposal to lower costs, such as down-sizing, privatizing and lowering retirement costs by eliminating pension “spiking” and lucrative healthcare plans.
Some of these tools have been employed to varying degrees, while others have not, he said.
“There are many good minds that have made suggestions for what Pittsburgh and other cities can do to lower its costs,” Montarti said. “Unfortunately the problem in 2010 is not any better. It’s probably worse.”