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1 posts from February 2013

02/15/2013

Allentown's Fiscal Cliff

Gary_Strathearn_smBy City of Allentown Finance Director Garret Strathearn

There's been much said recently about the recommendation to use a concession lease of the City's water and sewer utilities to address Allentown's pressing unfunded pension liability.  There has not been much said about the consequences of not doing it. As the City's Director of Finance, it is my responsibility to inform all of our residents, taxpayers and business owners of the very serious nature of these consequences.

Allentown's unfunded liability represents a $200 million and growing legally binding full faith and credit general obligation debt of the City.  If no action is taken, the City's finances will be precarious for decades to come.  Our state-mandated annual payments on this debt, our Minimal Municipal Obligation (MMO), have risen enormously.  Those payments will soon consume close to $30 million of our $90 million General Fund budget.  In short, Allentown is facing a financial tsunami of seismic proportions. 

The amount of our MMO is directly driven by the size of our unfunded liability.  We must either eliminate - or at the very least - significantly reduce it.  Without this relief, the city's ability to provide the breadth and quality of services Allentown residents have come to expect and deserve will be drastically reduced.

Unfortunately, our situation only gets worse with time.  A series of intricate actuarial changes in the way pension obligations are calculated and measured by standard setting and rating authorities will soon compound the seriousness of our situation. 

The significant savings initiatives the city has put into place over the past six years have been very beneficial.  Yet these steps are equivalent to repairing a house room-by-room.  It's now time to permanently strengthen the foundation.  Without that, the whole place will collapse under its own weight.         

We cannot save, borrow, tax or invest our way out of this problem.  For example, it would require close to a 100% real estate tax increase to just keep pace with our growing minimal pension payments.  Yet, this would have no impact at all on eliminating the problem; the debt caused by our pension plan's unfunded liability.  It's equal to making a minimum payment on a huge credit card balance; it gets you nowhere.  Taking this approach is irresponsible financial management and will lead to crippling long-term consequences for all Allentown stakeholders.  

After much research, study and evaluation of several options, it was decided the most prudent, cost-effective financing tool for the City to address this formidable problem is a concession lease that leverages the equity of our water and sewer operations in order to receive a sizeable upfront payment to reduce or eliminate our unfunded liability. 

This is the best option we have to address the City's fiscal crisis. If this option is not implemented, in less than 24 months Allentown will be another PA city making ugly headlines about bankruptcy and a lack of political will to address its obligations. We will not allow Allentown to become another Harrisburg, Scranton or worse yet Stockton, California.

We fully understand the enormous responsibility that comes with this recommendation.  A team of the country's most respected and experienced legal, financial, engineering and technical professionals has been assembled to help the City meet this challenge.  This team has been laser-focused on preserving the excellence and dependability of Allentown's water supply; including compliance with environmental standards and technical expertise; conducting thorough due diligence; and carefully crafting a concession agreement which includes a structured rate schedule and provisions for monitoring and enforcing water quality and performance standards. 

Allentown is on the road to sustained economic recovery and stability. With this option, and working with City Council and the City Controller, we can eliminate or substantially reduce our unfunded pension liability debt, stabilize our tax rate for years, and keep our important water and sewer assets in good order, condition and repair for decades to come.

I encourage you to review the information on the city's website.
http://www.allentownpa.gov and click on the Water/Sewer Concession icon. 

Also, please watch the following video outlining the details of both our pension crisis and our proposed solution. 
http://www.youtube.com/embed/YDSIbFqElDk.   

While we did not create the pension liability problem, it is our responsibility to resolve it.  Lyndon Johnson said it best, "Yesterday is not ours to recover but tomorrow is ours to win or lose." We truly believe the proposed concession lease is the best solution to preserve and protect Allentown's future.  This is a fiscal cliff we CAN -- and MUST avoid.