BALTIMORE — A steep unfunded pension liability drove the Allentown, Pa., water-lease transaction and more such deals will occur nationally, said the city's mayor.
"Pension-like problems are in large and small cities across the country," Ed Pawlowski said Friday morning at The Bond Buyer's municipal distress, recovery and sustainability symposium at the Hyatt Regency Baltimore. "Our costs kept escalating year after year after year. You could hear this giant sucking sound."
Allentown, facing a $150 million unfunded pension liability that Pawlowski said would have consumed nearly one-third of its operating budget by 2015 and possibly pushed the 119,000-population city to bankruptcy, leased its water and sewer system last year to the Allentown-based Lehigh County Authority. The quasi-public agency sold $308 million of bonds in July to finance the transaction.
The contract runs for 50 years, after which the city will get back the system. "I'll be dead at that point and my kids can do it all over again," he said.
Allentown received an upfront payment of $211 million and will get an annual payment of $500,000 beginning in 2016. "Kentucky, Texas and other states across the country have called about our deal. The word has spread wildly and quickly," said the authority's chief executive, Aurel Arndt.
Pension liability has become a hot-button issue in public finance the past few years. In December, consulting group Public Financial Management Inc., which advised on Allentown's deal,
Moody's Investors Service reported that unfunded liabilities of the four largest public pension plans spiked to $174 billion in 2012 from $34 billion in 2003, and to 135% of covered payroll from 33% over that period.
John Sugden, senior director for state and local government at Standard & Poor's, called the Allentown case "a good example of before and after." S&P revised its outlook to positive on Allentown's general obligation bonds after the city closed on the sale last summer. It rates the bonds BBB-plus, while it rates the authority AA with a stable outlook.
"It was not the city looking for Lehigh County to bail them out, but a case where it was mutually beneficial," said Sugden. "In other instances, they're waiting for a knight in shining armor and they have credit implications."
Discussions about overhauls to pension systems and health care packages for municipal workers and retirees come amid intensified scrutiny by bond rating companies.
"If the liability is going up, our little scorecard is getting worse," said Moody's managing director Tim Blake.
