Pennsylvania City Leases Water & Sewer Utility to Make Pension Payments

A Bloomberg article from last week highlights a plan by the city of Allentown, PA to lease it’s water and sewer utility to a private operator in order to support rising pension costs.  The city has an average funding ratio of 64% for its various pension plans, and an actuarially estimated contribution of $13.6 million due this year up from $3.85 million in 2005.  Allentown is among the 26% of Pennsylvania pension plans that have made illegal pension payouts according to the state auditor.  The city has allowed police and fire union members to pad their pension payouts by letting them arbitrarily select the period used to calculate pension benefit payments and also include overtime and unused vacation/sick leave to increase their post-retirement payouts.  According to state law these payments are illegal, however, the state has almost no ability to stop the payments and many municipalities that have previously allowed these practices have been unsuccessful in negotiating out of the contracts both inside and outside the courtroom.  Meanwhile, despite the overpromised benefits which are severely damaging their finances, municipal entities in Pennsylvania and the state itself (which may be required to ultimately support them) are not being penalized by the bond market as the extra yield on their bonds has hit an all-time low of 28 basis points above comparable benchmark issues.  In our view one-time fixes such as selling or leasing long-term assets to meet current cash outlays does not solve the fiscal problem and entities that are unable to control these costs will have to “pay the piper” eventually, quite possibly to the detriment of their bondholders.