July 20, 2012 | By | Posted in General News

Week In Review – Debt downgrades and cities in distress

By PA Independent Staff

HARRISBURG – With two cities near bankruptcy and a downgrade from a major credit rating agency, it was not a good fiscal week for Pennsylvania.

Moody’s Investors Service lowered the state’s credit rating one notch Monday and warned that a similar downgrade may be on the horizon for the state’s colleges and universities.  The downgrade was based on mounting pension costs after years of underfunding the state pension system.

Meanwhile, years of underfunding a generous municipal pension plan and more than $155 million in municipal debt has pushed Scranton to the edge of bankruptcy.  A state law prevents the city from changing its pension system to contain costs.

Moody’s downgrades Pennsylvania debt rating, state universities could be next

Moody’s Investors Service on Monday lowered Pennsylvania’s outstanding general obligation, or GO, bonds to Aa2 from Aa1 and assigned an upcoming $363.5 million bond issuance an Aa2 rating.

The agency’s reasons were the state’s growing unfunded pension obligation — now near $40 billion — and the state’s recent history of systematically underfunding the pensions, which will require higher contributions in coming years.

“This is a problem that’s been going on for years (long before Gov. Tom Corbett’s tenure began in 2010) and has only been exacerbated over the last decade,” said Erik Shirk, spokesman for Corbett, who has made public pension reform a priority of his administration. “This is a problem that we need to fix.”

Investors use Moody’s rating as one tool in determining a bond issuer’s risk of defaulting on bond payments.

A second downgrade could affect another set of Pennsylvania bonds – those held by the state’s system of colleges and universities.

Moody’s Investors Service on Wednesday announced it has placed $942 million worth of bonds issued by Pennsylvania’s 14 state-owned universities “on review for downgrade.” Within 90 days, Moody’s will decide whether to downgrade the universities’ bonds from Aa2 to Aa3.

The Moody’s report cited the “high-post retirement liability” of the university system’s “unionized faculty and staff work force” as one reason for its review.

Pension costs and state law causing financial chaos in Scranton

The city of Scranton is facing a cash crunch stemming from $300 million in debt – the result of several structural problems, not the least of which is $90 million in pension debt.

Scranton maintains four public pension plans, which operate independent of one another — one for firefighters, one for police officers and two for the city’s nonuniformed employees, which includes employees ranging from clerks to blue-collar workers.

Collectively, the plans are funded at only 47 percent and listed by the state Public Employee Retirement Commission as “severely distressed.” PERC oversees and analyzes state and local pension plans in Pennsylvania.

The most recent data available from PERC – a snapshot of the pension plans as they were in July of 2010 – shows Scranton with about $64 million in assets to cover $138 million in liabilities.

One of the problems plaguing Scranton’s public pensions is a generous plan for the city’s nonuniformed workers that promises benefits equal to 3 percent of each year’s salary for workers, said James McAneny, PERC executive director.

“They are never going to get their pension costs under control as long as they have that,” he said.

For now, cities are prevented from taking some steps that would help reduce their future pension obligations, such as moving to a defined contribution system similar to 401(k) retirement plans in the private sector.

Because of a state law, all cities in Pennsylvania must maintain a defined benefit pension formula – in which benefits are calculated by a formula of salary and years of service, instead of being based on a set contributions by employees and employers each year, as in defined contribution plans.

Turnpike’s hiring practices under investigation

The Pennsylvania Office of Attorney General is investigating the Pennsylvania Turnpike Commission for potential abuse-of-power practices, according to recently unsealed court documents.

According to documents filed with the state Court of Common Pleas this week, the attorney general has been investigating the turnpike’s employment and procurement practices since 2009.

Judge Barry Feudale denied the commission any right to prepare a “privilege log” for communications under attorney-client privilege, or hold back information. Now the commission is appealing that decision with the state Supreme Court, unsealing the Court of Common Pleas order and the original petition.

The Supreme Court has accepted the case, but has not set a date for the hearing. The attorney general’s office was unable to confirm or deny any details of the investigation.

The Turnpike Commission has been criticized for years as a haven for political patronage jobs and soft landings for former state employees and others with political connections.

Supreme Court may have significantly altered scope of PA’s open records law

A major court victory for transparency advocates may turn out to be more limited than it initially appeared.

The Pennsylvania Supreme Court, in SWB Yankees LLC v. Gretchen Wintermantel and the Scranton Times Tribune, agreed with a Commonwealth Court ruling that the privately owned Scranton/Wilkes-Barre Yankees minor league baseball team had to disclose copies of names and bids for concessionaire contracts at PNC Field, which is owned by Lackawanna County. The stadium recently received a facelift with the help of $20 million from state taxpayers.

While the Supreme Court ruled that government contractors clearly fall under the 2008 Right-to-Know Law, the justices in their May 29 decision also established a new test for when businesses can conceal documents related to their government contracts.

In Yankees v. Wintermantel, the high court ruled that only documents related to “non-ancillary” or core functions of government are subject to Right-to-Know. This is a seemingly minor change, but lawyers say it may alter the transparency landscape significantly, depending on how future cases define “ancillary” functions.

Lawyers representing contractors and open records advocates disagree on how the ruling will play out.

William Warren is a partner at the Harrisburg office of Saul Ewing LLP, an East Coast law firm. He represents numerous companies that contract with the government and says businesses should welcome the ruling, because the high court now agrees hey can restrict access to some contract-related documents.

“It’s a new decision and a revolutionary one because it narrows the scope,” Warren said. “It really changes the understanding of how Right-to-Know will be applied.”

But until future courts determine how the “ancillary” and “non-ancillary” framework applies, businesses will have to decide on their own where the line is drawn.

Teachers’ union accidentally reveals plan to undercut school board

Simon Campbell, a member of the Pennsbury School Board and one of the state’s leading critics of teachers’ unions, says a plan to revamp how school board members are selected in that district is secretly an attempt to remove him and one of his colleagues from the board.

“I think they are trying to get me out of the way and also get the school board majority out of the way,” he said  Wednesday.

A school board member since 2005, Campbell has built a majority on the board to implement a series of reforms opposed by the Pennsbury Education Association, the local teachers’ union.

Documents filed in court by the Concerned Residents of Pennsbury, the union-backed group pushing for the one of the two new apportionments plan, seemingly back Campbell’s concerns.

In a letter filed with the Bucks County Court of Common Pleas, along with other court filings related to redrawing the district lines, local teachers’ union president George Miller writes that rearranging the way members are elected to the school board would make it “virtually impossible for Campbell to maintain his majority position on the board.

In a separate memo also filed with the court, former local teachers’ union president John McDonnell – who is leading the CROP effort – writes that the new plan “provides the opportunity to cut off the head of the snake by denying Campbell a seat to run for. Why not go for the kill?”

Campbell said he was “appalled and horrified” by the content of the letters and the language used by the union heads.

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Eric Boehm is a reporter for PA Independent. He can be reached at or at (717) 350-0963.

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