Pittsburgh's devil is in the details

I just got back from a lunch meeting outlining, among other things, the financial problems facing the city of Pittsburgh due to their pension program. Some details:

- There are a number of reasons that this problem has surfaced; one of them is that the population of the city of Pittsburgh has seen a remarkable decline over the last half-century. Pittsburgh proper's population was about 600,000 in 1960; Census projections put the figure at about 300,000 for the current Census.

That people are leaving city center's is not a Pittsburgh-specific problem. However, many other cities annex nearby locales and grow their land area-- some of them to a pretty remarkable extent. Houston went from about 150 square miles in 1950 to nearly 600 square miles today; you could say much the same about Phoenix as well.

Why can't Pittsburgh pull the same tricks? The way that the Pennsylvania state code is written to deal with this issue is that both the annexing and the annexed city would need to pass a referendum vote on the issue. That's not easy to do. The last time Pittsburgh annexed a nearby city was around 1930.

I'm not saying that annexation is a good thing...but that's been the outcome.

- Another reason for the shortcoming in Pittsburgh comes from the city's inability to control a tax revenue stream that comes from companies doing business in Pennsylvania using out-of-state casualty insurance. The revenue was designed for cities with financial troubles that were having issues funding their pension system. For the first five years of the tax, it served the Pittsburgh pension system quite well-- but then the law was reinterpreted to allow for cities with decent finances but poorly performing pension systems to secure revenue from this source as well. What's this create the incentive to do? Cities with fine finances can structure their pension system so as to qualify for need-based assistance. Some cities stopped contributing to their pension system altogether to claim their share of the funds. So Pittsburgh's share of tax revenue dropped by about 50%-- they're currently at about $20M-$30M per year less than where they'd be without the reinterpretation of the statute.

Again, not saying any of this is desirable...but that's the been the outcome.

- Pension systems use some sort of metric to determine the level of pay once retirement hits. The Pittsburgh system-- like many others-- use some sort of average of income earned over the final years of employment. The intention is to get a feel for the traditional income of an employee, and then the pension provides the appropriate level of replacement income. Well, this also creates the incentive for individuals to take on as much overtime as possible over the last few years of employment to maximize the pension payment. It's a process known as pension spiking. Once more, it's a process of the letter of the law not accurately reflecting the spirit.

Again, not arguing for publicly-funded pensions...but that's been the outcome.

- One of the solutions proposed for the pension shortfall has been to sell the parking assets of the city of Pittsburgh to the Pittsburgh Parking Authority (PPA). The PPA would then issue a bond to cover the sale, then using the increased parking revenues to pay the bond off over the coming decades.

Alright...but guess who owns the PPA? It's mostly a city of Pittsburgh enterprise. (There was a question concerning this at the meeting; somehow it's not entirely a public enterprise, but the mayor appoints the board of directors and they can float public bonds. I'm still a bit confused by this.) And guess what else? Issuing bonds to cover pension shortfalls are subject to taxes that bonds to cover asset purchases aren't. So while it's no small secret that this proposal is, in effect, a bond issuance to cover pension debts, the IRS won't see it as such.

Again, not arguing for any further debt for the city of Pittsburgh, bond or otherwise...but that's been the outcome.

Basically, you could make the argument that the pension troubles that exist today (as well as one of the potential solutions) are at least partially a function of laws written in a way so at to be open for interpretation or re-interpretation by groups looking to grab what they can.