Are Pension-Funding Windfalls Sitting Beneath City Streets?
What happens in Philadelphia may not stay in Philadelphia. That may be good news for municipal workers, pensioners and taxpayers faced with debts they may not be able to afford.
When Mayor Michael Nutter on March 3 reached an agreement to sell the Philadelphia Gas Works to UIL Holdings Corp. for about $1.9 billion, among beneficiaries of the deal were municipal workers in Pennsylvania’s biggest city, who’ll reap hundreds of millions of dollars to help shore up a pension plan that the Associated Press says has less than half the assets needed to meet promised obligations. The city council and Pennsylvania Public Utilities Commission must approve the sale – and gas-works union workers say they’ll fight it. But after the utility’s bondholders and own pension plan get their share of the proceeds, Philly’s retirement system will get between $424 million and $634 million to reduce a long-term obligation shadowing the city.
The agreement to sell a municipal utility founded in 1836 makes me wonder what other undervalued long-term assets may be sitting on the balance sheets of cities, counties and states that could be turned into cash to help close a pension gap of almost $3 trillion, and perhaps much more. The U.S. has more than 2,000 community-owned electric utilities and 1,000 public gas-distribution networks and districts. Members of the Association of Metropolitan Water Agencies serve 130 million customers of public systems from Alaska to Puerto Rico.
I’m certainly not urging any governments to start fire sales to erase budget deficits, such as the $1.2 billion transaction by former Chicago Mayor Richard Daley in 2008 that gave a Morgan Stanley-led group a 75-year lease on the city’s parking meters. And any deals need to be coupled with vigilant regulation of such muni monopolies as well as protections for workers and the citizens they serve. Still, municipalities may want to ask whether their core services, like public safety, education and health, no longer should include such capital-intensive areas as distributing gas, electricity, and water. If the answer is no, they then need to ask whether these assets can be tapped to free up cash to pay down long-term debts such as bonds and pension liabilities.
In some ways, the Philadelphia Gas Works is a special case. Dave Davies recalls on Philadelphia’s NBC10 website that the utility has been dogged by political scandals for decades: “In the 1990s, things got worse. A new management team so generously helped themselves to company perks and goodies that four executives faced criminal charges. Two pleaded guilty and two were acquitted at trial. They included former CEO James Hawes who was fined $22,000 and condemned by the state Ethics Commission. I spoke to current PGW CEO Craig White at the news conference announcing the sale. He became chief operating officer of the utility after the departure of the Hawes team, and he said the company was terribly managed then. 'We weren't billing 50,000 customers – they weren't even getting a bill,' White said. 'We weren't showing up for appointments, and we couldn't even answer the phone for 45 minutes to an hour.'”
Since those bleak days, improved management has helped the gas system’s net income climb almost tenfold, to about $30 million, from 2008 to 2012. Yet the utility still needs to come up with about $60 million a year for capital-spending needs.
Let’s cross the country and consider, for a moment, the city of Los Angeles. Through the Department of Water and Power, America’s third-most populous municipality owned $20 billion in water and electric assets as of June 30, according to its latest annual report. That offsets $11 billion in long-term debt. With the department’s own pension plan facing an unfunded liability of $2.1 billion and the Los Angeles City Employees’ Retirement System only 69 percent funded, according to its latest annual report, should privatization at least be discussed?
The outlook for such a transaction may be dim, given the city council’s reluctance to spin off parking garages and the municipally owned zoo. Toll-road privatizations have also been slow to evolve, as former New Jersey Governor Jon Corzine learned in 2007 when his plan for “asset monetization” of the New Jersey Turnpike was greeted by a storm of opposition. But not every public service needs to be handled by local governments. New York City, for example, long has obtained both gas and electric service from regulated private utilities, including Consolidated Edison Inc. Much of New Jersey’s water supply is delivered by American Water Works Co. Regional agencies may also provide a solution. In bankrupt Detroit, Emergency Manager Kevyn Orr wants to lease the city’s water and sewer department, burdened with $5.3 billion in long-term debt, to a new authority run by Wayne, Macomb and Oakland counties for $47 million annually over 40 years, according to the Detroit News.
As state and local governments look for ways to make good on promises to workers they never properly funded, trillions of dollars of government assets on the ground – and those above and beneath it – may become an increasingly attractive source of scarce cash from new sources to pay for the long-term obligations they’ve taken on.