Pittsburgh is running out of time to solve a severe pension problem.
If the city's retirement system, which currently has only 28% of the assets it needs to cover its obligations, cannot bring its funding up to 50% on Dec. 31 -- meaning the addition of $220 million -- the state will take it over.
That could result in painful consequences for local residents, such as loss of services and higher taxes to build up the pension fund.
Municipal bond analysts say that such a state takeover of a local pension system is rare. But they see more of them ahead as cash-strapped cities and towns struggle with revenues falling short of rising liabilities.
"They're all undergoing the same pressure in terms of reduced revenues and increased pressure on public spending, during a time while it feels like the economy has stabilized, it doesn't feel like it's recovering quickly enough to refill the revenue budgets where they were a couple years ago," said Mike Dawson, investment officer at MFS Investment Management in Boston.
Pennsylvania legislators last year enacted a law requiring that Pittsburgh's pension system be brought up to 50% funding as of the end of 2010 or be turned over to state officials. Pittsburgh's pension system is the most underfunded among systems in the state and is likely among the most underfunded in the country, according to municipal analysts.
Obligations are estimated to be roughly $990 million. Current assets are about $272 million, according to the most recent actuarial report.
"Once you get below 50%, pretty much everyone in the business agrees you're in a death spiral," said James McAneny, executive director at the Public Employee Retirement Commission, which monitors more than 3,000 local pension plans in Pennsylvania. "Nobody thinks you're going to earn your way out of it."
State officials will lay out parts of their takeover plan Thursday, including how much they would require the city to increase its annual contribution to its retirement system. Some in the city hope that the shock of a large number may spark renewed negotiation and urgency to come up with a different solution.
The path leading to Pittsburgh's crisis is far from unique. The city, the state's second-biggest with about 300,000 residents, had for years failed to fund its pensions adequately. Instead, it relied on overly optimistic forecasts of investment returns to cover the generous promises it made to its employees.
Pittsburgh officials this year and last year put around $60 million into the pension fund. But during the decade before 2009, the annual contributions were around $40 million to $45 million, said city controller Michael Lamb. Meanwhile, the system pays retirees $82 million a year.
Compounding the problem, retirees now outnumber active workers contributing to pensions by one-third, said Cathy Qureshi, the city's assistant director of finance.
The pension fund also assumes an 8% annual return on its investment, which several analysts called unrealistic. The Standard & Poor's 500-stock index has risen 6.9% so far this year, while the Barclays Capital U.S. Aggregate Bond Index has gained 8.54%.
To shore up the pension fund, Mayor Luke Ravenstahl for nearly two years advocated a long-term lease of parking garages and meters by private investors. But two weeks ago, the City Council rejected the top bidder, a team led by J.P. Morgan Asset Management and LAZ Parking, which offered about $452 million for a 50-year lease.
Instead, the council put forth its own alternative: a plan that called for the parking authority to sell bonds to buy city-owned parking assets for $220 million -- money the city would use to boost the pension to 50% funding.
But that proposal, which Ravenstahl characterized as "fiscally irresponsible," was stymied by the parking authority board, which last week refused to hire a consultant to study it.
As difficult as it appears, getting to that 50% threshold would prevent more stringent measures. Under state control, the fund would have to reduce its investment-return forecast to 7.5% annually.
The lower rate could increase the amount the city would have to contribute to the plan to about $72 million a year, city administration officials anticipate. That's about 16% of the city's $450 million budget.
Qureshi said the mayor wants to avoid raising taxes but reduced services would be likely under a takeover.
The prospect of a state straitjacket should trouble investors, Paul Brennan, portfolio manager at Nuveen Asset Management, said. Mandatory payments to the state could reduce the city's financial flexibility -- "not necessarily a good thing for bond holders," Brennan said.
Other analysts, however, said that a state takeover could spur tough choices that create significant reforms in the long-term.
Often, "there is not political will on the local level," said Adam Weigold, portfolio manager at Eaton Vance. "But if you have the state forcing you to make decisions, the decisions actually get made."
-By Romy Varghese, Dow Jones Newswires; 215-656-8263; email@example.com.