Allentown officials outline how water lease revenue is being used

Posted: 7:25 AM EDT Oct 25, 2013

Not all of the $211.3 million Allentown has received from Lehigh County Authority will be spent to end the city’s pension debt crisis.

During a City Council committee-of-the-whole meeting Thursday night, city officials outlined how they plan to spend the money from Allentown’s 50-year lease of the water and sewer system to LCA.

They revealed more than $31 million already has been spent, none of it to reduce police and firefighter pension costs.

Here’s the breakdown:

• $170 million will be used to reduce and possibly eliminate the
unfunded liability in those pension funds and to reduce pension obligation bonds

• $29.3 million immediately was used to pay off the city’s outstanding
water and sewer debts, as well to pay other related costs

• $8.5 million will be used to build up cash reserves in the city’s
unrestricted general fund

• $2 million already has been used to complete the city’s automatic
meter reading project

• $1.5 million will go into a sewer “administrative order” reserve
fund, that will be used to address sewage overflows and water infiltration and inflow into the city’s sanitary sewer system

LCA took over the operation of the city’s water and sanitary sewerage systems on Aug. 8, the day after the lease deal was concluded.

Before that lease was approved, Mayor Ed Pawlowski repeatedly argued the water and sewer systems had to be leased because the city was facing an unfunded debt approaching $160 million in its police and firefighter pensions.

The mayor warned the city faced crippling tax increases and cuts in services if the lease deal failed and that debt was not eliminated.

City Council member Peter Schweyer explained the city is able to designate that some of the lease revenue be used for more than ending that pension crisis because it got more money from the lease than originally anticipated.

But the administration has not yet decided how much of the pension debt it actually will eliminate. The mayor said the city may decide to continue with “a small amount of unfunded pension liability” but stressed that decision has not yet been made.

“We’re out from underneath this pension nightmare that we had,”
declared the mayor. “We’ve put ourselves back on a solid fiscal footing.

“Everybody in the state and everybody in the country is looking at us as an example of how you can address this huge monster of a pension cost, without having to bankrupt the city in the process.”

Pawlowski and other members of his administration, as well as Scott Shearer of PFM, the city’s financial consultant, were at the meeting to answer questions about the status of the water and sewer lease.

More details about the outlined spending allocations will be contained in the administration’s proposed budget for 2014, which City Council must review and approve before the end of this year.

City Council member Jeanette Eichenwald repeatedly asked the mayor and Shearer if the city’s pensions now are fully funded. She said she’s heard “over and over again” that the city now has a fully funded pension.

“When we pay off our unfunded pension liability, we will have a fully funded pension,” responded Pawlowski.

Resident Rich Fegley angrily accused Pawlowski of boasting that the city now has a fully-funded pension plan, as part of his campaign to become Pennsylvania’s next governor. Pawlowski is running both for re-election as mayor and in next spring’s Democratic primary for governor.

“Mr. Fegley is correct,” confirmed Eichenwald. “There’s a big difference between saying that ‘it will be’ and that ‘it is’.”

“We have the money in the bank,” said the mayor, who argued the city now is just “doing the process to transfer the money to pay off the unfunded pension liability.” He added that process will be completed before the end of this year.

Fegley was one of several critics of the administration who got into arguments with the mayor at the meeting. Resident Lou Hershman accused Pawlowski of making snide remarks.

Michael Donovan, who is running as an independent against Pawlowski in the Nov. 5 mayoral election in Allentown, was at the meeting and asked his opponent questions about the lease, but their exchanges were polite.

Money’s in the bank

The unspent revenue from the lease is in National Penn Bank, said Debi Bowman, the city’s deputy finance director. She said it is in an interest-bearing account that has earned about $25,000.

“That’s less than .1 percent interest,” said city resident Glenn Hunsicker. “That’s bad news, that’s very low.”

Pawlowski said the bank is charging the city no fees, adding the money is in a savings account. He said the city’s immediate goal is not to maximize investments with the money. “It’s a secure, guaranteed holding pattern for this money.”

Responded Hunsicker: “The administration should be trying to maximize their money, wherever it goes.” He noted the city has had the money from the lease for more than 70 days.

The council committee meeting, held in a fifth floor conference room in City Hall because renovations are being done in City Council chambers, was not well-attended.

“Ordinarily this type of meeting is so deadly dull that nobody wants to come,” said city resident David Maguire, who added it’s not council members that are deadly dull, only the subject matter.

$170 million

Pawlowski said the $170 million allocated for the “pension fund contribution” will be used “to eliminate unfunded pension liability and dramatically reduce pension bond debt.”

The city is still in the process of deciding how to best use that money to do both.

Outstanding pension bonds total $30 million, according to the mayor, and the city has $155 million to $160 million in unfunded pension debt.

Schweyer noted paying off both would cost nearly $190 million.

“We’re trying to figure out the best way to pay off the pension costs,” said the mayor. He said the city may pay off more pension bonds and keep a small amount of unfunded pension liability or pay off all the liability and just some pension bonds.

“How we invest the money is critical. We’ll present that at a future date.”

$29.3 million

Schweyer, who chairs council’s budget and finance committee, explained
$29.3 million of the $211.3 million immediately was used to pay off outstanding capital debts directly tied to the city’s now-leased water and sewer systems.

Shearer of PFM said the city faced no penalties for paying off those debts early.

Pawlowski said Allentown already has eliminated close to 38 percent of its total debt. He said it now has less than $100 million in debt, “which is pretty darn good for any city our size.”

Some of that $29.3 million also was used for related costs, including consulting fees for professionals hired to assist the city in developing the lease.

Bowman did not have a detailed list of those costs Thursday night. She promised to provide a breakdown explaining how the entire $29.3 million was spent at the next City Council meeting.

Hunsicker wants to know how much PFM was paid to prepare the lease.
Schweyer indicated that will be provided at the next meeting.

Eichenwald, who opposed the water/sewer lease as well as paying so many consultants to develop it, said city residents have a right to know that public information.

$1.5 million

Pawlowski explained the $1.5 million going into a sewer reserve fund will be used to comply with administrative orders from the state Department of Environmental Protection and the federal Environmental Protection Agency.

“We’re not going to spend all that $1.5 million right off the bat,”
said the mayor. He said the environmental agencies now only are requiring that the city fix manhole covers, which will cost about $400,000. “There may be other things they want us to do.”

He assured Eichenwald that the city will not be using that money to pay fines because it has not been fined by either agency. And he anticipates it won’t be fined “unless we don’t do what they want us to do.”

He said if more extensive work that costs millions of dollars is required by EPA or DEP in future years, the city will float a bond, which surrounding “signatory” municipalities would help pay.

Bill 49

Acting as a committee-of-the-whole, the five council members at the meeting unanimously recommended the full council pass Bill 49, a proposed ordinance that Schweyer defined as “an official accounting measure.”

Schweyer explained the city is required to put the more than $182 million remaining from the lease into its water and sewer funds to comply with its annual audit.

City Council will do that by giving final approval to Bill 49 when it next meets during the first week in November.

On paper, more than $114.7 million will be transferred the city’s water fund and more than $67.3 million to the sewer fund. But the entire $182-plus-million will just pass through those funds on its way to being transferred back into a restricted account in the city’s general fund.