What Happened?
Allentown, Pennsylvania, is leasing out its water and sewer system to generate funding for mounting pension liabilities. The deal includes an upfront lease payment from a buyer that will be allocated toward the unfunded pension liabilities to slow down the rising debt.
The Goal
Allentown owes $18.5 million to the public pension plan this year, and is expected to be responsible for $21 million in 2014. The city already cut its workforce by 20 percent to alleviate some burden on the pension system, but the pension funds are projected to equal 30 percent of the city’s general fund by 2015. If a solution to the growing pension problem is not found soon, Allentown is at risk of going bankrupt in the near future.
Allentown’s predicament is similar to many scenarios nationwide where local and state governments are falling further and further behind in pension payments. These unfunded liabilities prompt decision makers to reduce workforce numbers or cutback on retirement benefits for public employees. Many cities struggle to transfer revenue from various investments into the general fund to counter the pension problems. Creating a specific lease agreement helps officials bypass those legal prohibitions.
How It Will Work
The deal in Allentown mirrors a public-private partnership with both entities lying in the public sector. According to The Morning Call, The 50-year agreement calls for the Lehigh County Authority to maintain, operate, manage and collect revenue generated from the city’s water and wastewater facilities. Allentown will receive $211.3 million initially for renting out the utilities to the LCA, and accumulate $500,000 annually starting in 2016 in lease payments.
Of the capital provided through the lease agreement, $160 million will be dedicated to pension fund payments, $29.3 million will reduce water and sewer debt and $15 million will go into city reserves. If the deal goes off without a hitch, city officials estimate Allentown will contribute $3 million to the pension fund, which will be matched by the state, in 2014. At the same time, the city’s debt will drop, savings will increase and taxes will be left at current levels.
Moody’s rated Allentown’s lease initiative in May as a favorable solution to the pension problem. If the plan had not passed, the city would likely have had to increase property taxes by 75 percent or issue pension obligation bonds. In leasing the water and sewer systems to LCA, Allentown residents may see their water and sewer fees increase initially. The higher costs, however, are significantly lower than the potential jump in taxes if the deal were to fall through.
Make It Happen.
The Government Accounting Standards Board is implementing new rules governing how public pension plans account for portfolio gains and losses, and credit rating agencies are downgraded states with unfunded liabilities and no signs of reform in progress. Amidst the struggles, many cities are finding unique solutions to passing reform of systems. San Jose, California, launched a public education campaign to inform the public of reform options and boost support. Port Orange, Florida, redesigned its entire pension system for better long-term sustainability.
Persistent Pension Problems
Gov1 has tracked pension challenges and possible solutions at the local level.