Municipal Pensions - The Mother of All Budget Busters

Callahan gets some financial tips from his  younger constituents

When Bethlehem Mayor John Callahan proposed an 8.5% tax hike for next year's $72 million budget, the first thing I did was scratch my head and ask, Isn't that what the casino host fee is designed to prevent? Some of my readers have asked that question, too. They've also asked Callahan. "If I could get a dime for every person who asked me that question, I wouldn't need a tax increase," Callahan told me in an interview last week.

But it's a fair question. The casino host fee was heralded as the Holy Grail of municipal budgets, a cure that would eventually end tax increases and cure malaria, to boot. At that time, nobody was aware that the mother of all budget busters was on the horizon.

The looming municipal pension crisis.

Pennsylvania has over 3,200 local government pension plans, and in 66 of the Commonwealth's 67 counties, at least one municipality is having trouble keeping it funded. Over 1/3 of Pennsylvanians live in a municipality with a distressed pension.

In Easton, Mayor Sal Panto has been forced to impose a commuter tax that he hates himself, and admits that the revenue generated still won't be enough for his 69%-funded pension. In Allentown, a commuter tax was imposed two years ago. But Mayor Edwin Pawlowski still needs more money for the minimum annual payment (MMO) on his 64%-funded pension. So he's selling or leasing everything that isn't nailed down, including the City's water and sewer systems. In Easton and Allentown, the pensions are considered "moderately distressed."

Things are much worse in cities like Harrisburg and Scranton.

Unlike Allentown or Easton, Bethlehem has no authority under state law to impose a commuter tax. Its pension fund just isn't sick enough. It's funded at 78%, which makes it only "minimally distressed." But even if he could do so, Callahan told me last week that he has his doubts. "How am I going to get a new company to move here with a commuter tax?" he asked.

Still, making that annual minimal payment (MMO) is a drain on City finances. In 2004, when Callahan thought he could eventually cut taxes, that annual payment was just $1.5 million. By 2007, it had risen to $7.1 million. And next year, the City will have to come up with $11,129,609. That's a whopping 55.5% increase over the payment made just the year before.

How About That Casino Host Fee?

So let's just use the casino host fee. Problem solved, right? Wrong. The casino host fee, which could have been used to pay the salary of 95 police officers, will instead be gobbled up by pension costs.

In 2009, when the casino first became operational in Bethlehem for a few months, the City pulled in a $1.6 million host fee. That rose to $7.2 million in 2010, after a full year of operation. With the advent of table games in 2011, it shot up to $9.2 million. This year, the money pile is $9,375,000. As good as that is, it's not even enough to pay the $11.1 million needed for the pension.

Can't We Just Change the Pensions?

Another argument I often hear is that city officials in Allentown, Easton or Bethlehem should just wave their magic wands and change the pensions. It does not work that way. You can't mess with a defined benefit pension without violating the constitution, basic contract law and a host of labor laws. Most of these pensions, incidentally, were negotiated before any of the municipal officials we like to blame, including Callahan or Panto, were in office.

What can they do?

One thing Callahan has done in Bethlehem is change the pensions for new hires.

Under the current system, your basic municipal employee will get 70% of his "legacy" after 25 years of service. That includes his final base salary PLUS longevity PLUS differential PLUS overtime that year PLUS holiday pay PLUS Holidays worked last 12 months PLUS roster duty PLUS Sick Bonus PLUS Education Bonus.

That's a lot of PLUSes.

So an employee whose base pay is $68,133 will manage to retire at 70% of his total compensation with $61,754 per year for the rest of his life. Not bad.

Almost as good as the lottery.

But that same employee, under the new system negotiated by Callahan and public sector unions, might actually have to work another job. Instead of 70%, he'll only be getting 50% under the new formula. That's the highest cut Callahan could make under state law. And that same worker will walk away with base pay PLUS Longevity PLUS ... nothing else. That's it. So a worker with a base pay of $68,133 and 25 years of service will see a $36,317 annual pension instead of $61,754.

This is a major change in pensions, and it will help Bethlehem;s bottom line. But down the road, not now.

Can't the City Just Make Cuts?

The Lehigh County Commissioner approach to this problem would be to take out a budget axe and swing away and away, eliminating personnel..That also seems to be The Express Times approach. That newspaper pooh poohs every revenue enhancement proposal, even the no-brainers like an events tax or the PILOT, both of which are designed to lighten the load on the rest of us. But it fails to offer one responsible suggestion.

Cutting with a buzzsaw, suggested by the rocket scientists at a newspaper that is itself financially distressed, is irresponsible. Bethlehem, like Lehigh County, is already a lean machine. Over the last three years, Callahan has cut 69 positions, 10% of his workforce. He's down to 617 employees, which is "by far and away the smallest workforce" he can recall in his years as a Council member or Mayor.

In his proposed budget, he's eliminated anther five positions.

The Express Times financial wizards, who can't seem to keep their own paper in the black, think Callahan should cut even more. But he feels he's at the absolute minimum before city services begin to suffer. "I don't have less streets to plow," he tells me. And a recent citizen satisfaction survey tags the Mayor on that point. He is proud that "we still have one of the largest police forces in the state." Of the City's 617-person workforce, 141 of are police officers.

Perhaps the Express Times would like to see some police officers or firefighters laid off. From their perches, editors declaim, "Taxpayers deserve a look at what the city would have to do to live within its means, starting with no tax hike."

I can already tell you what the City would look like.

Allentown.

So you can see why it just might bother Bethlehem officials, who are already dealing with the largest brownfield in the country, to see a $1.1 billion-endowed university occupying 20% of the City's land mass without contributing so much as a dime.

The Express Times want us to feel sorry for Lehigh and the "real consequences" of being asked to pony up and pay for the frickin' 220 fire calls to which Bethlehem firefighters had to respond at that noble institution last year.

To say nothing of the cost of cleaning puke off uniforms.

But what about that terrible events tax? Why the single hauler proposal? Is the City still robbing Peter to pay Paul? I'll weigh in on each of these questions in the coming days.

In the meantime, if you can come up with responsible suggestions for $72 million in revenue, I'm all ears.

Sometimes, you just have to raise taxes. You can play games and deplete reserves like Jane Baker and Glenn Reibman did, and like John Stoffa is doing now, but you eventually end up with a 70% tax hike.