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Allentown Secures Pension Plan, Brightens Financial Outlook with Water, Sewer Concession Lease

July 29, 2013


Allentown employees are split between two pension systems: the Pennsylvania Municipal Retirement System (PMRS) for all but a very small minority of non-uniformed staff, and the city’s single-employer plan, which covers police, fire, and the handful of non-uniformed personnel in the Officers and Employees category.

Allentown’s pension landscape is totally lopsided. For the 510 employees in PMRS, the city’s 2013 contribution – its Minimum Municipal Obligation (MMO) – is $1.6 million. The 2013 MMO for the 319 employees in the city’s plan, $16.3 million, is ten times higher. Added to this is $2.3 million in pension obligation debt service payments on bonds issued in 1996. The city’s retirement plan has more than 500 retirees but only about 280 contributing members.

City officials knew they were confronting an absurd and unsustainable situation that would only get worse with time. The unfunded liability represented a $200 million-plus legally binding full faith and credit general obligation debt of the city. The projected growth of this unfunded liability put the MMO on a trajectory that would quickly drain over 30 percent of the General Fund budget. It was understood that if action was not taken, Allentown’s finances would soon be crippled for decades to come. It was also understood that the problem was too big for the city to tax, save, borrow, or invest its way to a solution. For example, it would require a nearly 100 percent real estate tax increase to simply keep pace with the growing MMO payments, and Allentown already had the highest tax rate in the region. According to Mayor Ed Pawlowski, taking this approach would constitute “irresponsible fiscal mismanagement and lead to insidious consequences.”

Following much research and evaluation, officials determined that the most prudent, cost-effective financing tool capable of generating the nearly $200 million needed to wipe out Allentown’s debilitating unfunded pension liability would be a concession lease, and it was decided to capitalize on the equity Allentown had built up in its water and sewer operations. Recruiting the best talent available from across the country, the city began a 15-month transparent process of qualifying, evaluating, and negotiating to create a bid document – the actual concession lease agreement – that pre-qualified bidders would competitively bid on.

In late April, the city received what it considered to be three very strong bids and, on May 2, the mayor signed a 50-year concession lease agreement with the Lehigh County Authority (LCA) which allowed LCA to operate Allentown’s water and sewer system in exchange for a $220 million upfront payment, plus a $500,000 annual payment beginning in year four of the lease. The upfront payment allows the city to immediately fully fund its pension plan, eliminate certain debt and, most importantly, put Allentown on a firm financial footing well into the future. On the day the lease agreement was signed, the lead story in Moody’s U.S. Public Finance Weekly Credit Outlook was titled “Long-Term Lease of Water and Sewer Enterprise Is a Credit Positive for Allentown (PA).”

Pawlowski believes that using the concession lease as a financing tool was a bold but necessary move, with the very survival of the city at stake. “The concession lease agreement that was developed over the past 15 months provides for strong protection to the city and the system’s ratepayers while also allowing LCA to do what it does best: provide clean, safe drinking water and environmentally compliant sewer services to the residents of the Lehigh Valley and now Allentown. I couldn’t ask for anything more.”

Additional information on Allentown’s concession lease agreement is available from Garret Strathearn, Director of Finance, at (610) 437-8788 or GarretH.Strathearn@allentownpa.gov.