Financial Times FT.com

Pittsburgh’s pensions crisis nears deadline

By Nicole Bullock in New York

Published: October 26 2010 19:00 | Last updated: October 26 2010 19:00

On the mayor of Pittsburgh’s website, among news about a new soccer complex and federal funding for a green transportation effort, there is a countdown window.

It ticks off the days, hours, minutes and seconds before the city’s underfunded pension funds will be seized by the state unless local lawmakers come up with a way to patch some of the hole.

Pennsylvania is demanding that Pittsburgh fund its pensions by at least 50 per cent by the end of the year or they will be turned over to the state for management. That would likely mean higher contributions from the city at a time when Pittsburgh, like the rest of the US, is struggling with the aftermath of a national recession.

“What (a state takeover) means is going through the budget and deciding what needs to be cut,” said Joanna Doven, spokesperson for Luke Ravenstahl, the mayor. His office predicts a state takeover will force the city to pay at least $30m more a year to its pensions.

A former steel city that is home to more than 300,000 people, Pittsburgh is not alone in its pension trouble.

A recent study co-authored by the Kellogg School of Management at Northwestern University estimated the cities and counties in the US face a collective $574bn pension funding gap.

Estimates for unfunded obligations at the state level range from $1,000bn to $3,000bn. As Mr Ravenstahl and the Pittsburgh city council wrangle over a solution, there are riots in France over pension reform there.

The mayor has brokered a deal for a 50-year lease of the city’s parking garages and meters for a lump-sum payment of about $452m from Pittsburgh Parking Partners, a consortium of institutional investors advised by JPMorgan Asset Management and P4 Partners, an affiliate of LAZ Parking. LAZ manages parking in 99 cities, including the public-private concession in Chicago. About half of the proceeds would go to the pensions.

Selling or leasing public assets is controversial. Critics argue that local governments feel pressure to auction off good, revenue-generating businesses, sometimes at low prices, in agreements that are destined to hamstring citizens with higher fees.

In a near unanimous vote, the city council last week shot down the mayor’s plan, which had been touted as a shining example of the growth of public-private partnerships in the US.

Other such deals are in the works in Los Angeles and Puerto Rico. New Orleans last week scrapped plans to privatise its international airport.

“Pittsburgh shows how difficult these (public-private) deals are and how complicated the politics can be,” says George Bilicic, head of power, energy and infrastructure at Lazard, who advises on public-private deals.

“ . . . A lot of the states and cities clearly need to do something different, financially. There is a high risk that the bond markets will stop financing them at a certain point and it is not sinking in,” he added.

Under a competing plan from the city council and Michael Lamb, controller, the city would sell parking assets to the parking authority for at least $220m. The parking authority would sell bonds to pay for the deal.

In a presentation, the first two “core objectives” listed for the plan are keeping public parking assets under public control and limiting increases in parking rates. Plugging the pension hole is seventh out of eight.

A plan to take on more debt to solve a problem involving future underfunded obligations has also raised eyebrows. And the mayor opposed the bonds.

“The debt does not become a burden of the city,” Mr Lamb said. “It is parking authority debt based on their ability to raise rates.”

Both plans involve raising parking rates, but the council controller’s plan claims it would raise rates by half as much as the lease deal in part to pay the bonds.

“The only thing that works is if we are all in the same boat,” Mr Lamb said. “We are on a very tight timeline right now.”