Secret Meeting with Bond Underwriters Fuels Speculation in Philadelphia

Published May 1, 2013

Why such secrecy in Philadelphia? No one who knows will say because, well, it’s a secret.

This much we do know: Mayor Michael Nutter and other city officials in April held a two-day conference financed by municipal bond underwriters. Approximately 100 municipal bond underwriters attended. The conference was closed to the public and the press. Speakers in addition to Nutter included Rob Dubow (Philadelphia’s finance director) and Mark Gale (CEO of Philadelphia International Airport).

We also know this: The city gave lenders tours of city-owned properties, including Philadelphia Gas Works, the largest municipally owned natural gas utility in the United States.

Something else we know: Philadelphia has one of the lowest credit ratings of any major city in the United States—the lowest among the nation’s five most-populous cities. The city also reports a pension funding level of just 47.6 percent.

‘City Is in Deep Trouble’

“You know a city is in deep trouble when its mayor invites Wall Street but not the press and not private citizens to a closed meeting to discuss the future, including a sell-off of city assets,” wrote Mike “Mish” Shedlock, a registered investment advisor representative for SitkaPacific Capital Management, on his GlobalEconomicAnalysis blog.

“It does not take a genius to figure out what is going on here,” Shedlock wrote. “Philadelphia is bankrupt. Without even seeing the details, it is safe to assume untenable union wages and pension benefits are at the heart of it all. A 47.6% funded pension is rather telling in and of itself.”

In a sign of the financial distress Philadelphia is under, in March of this year city officials voted to close 9 percent of the city’s schools to try to shrink a $304 million deficit in the schools budget. Bloomberg News reports school officials have asked the city for $60 million and the state for $120 million. And last December the city issued $127 million of tax and revenue anticipation bonds to fund operations. Bond underwriters of course earn income arranging such bond deals, but if bond buyers worry about being repaid, interest rates go up—or bonds go unsold.

Bankrupt But No Bankruptcy

Rick Dreyfuss, a senior fellow at the Pennsylvania-based Commonwealth Foundation, said he believes even if Philadelphia is bankrupt the city will not go into bankruptcy.

“My sense is they are trying to make a case” to investors to keep lending the city money. “I don’t see bankruptcy because that would require state approval, and I don’t think they would allow Philadelphia or Harrisburg [Pennsylvania’s capital city, which has been widely reported to be nearly insolvent] to go bankrupt. My sense is they’re trying to put together a fiscal plan to sell to potential bond underwriters with the notion that borrowing is part of the long-term solution.”

He said if his sense is correct, though, the city could end up making its financial situation worse.

“It looks to me, with current debt outstanding separate from pensions, it’s about $8.75 billion,” Dreyfuss said. “I think they feel part of their answer is to be able borrow more money. But you cannot borrow your way to prosperity.”

Shaky Pension Funds

He agrees with Shedlock that Philadelphia’s pensions are a huge drag on the city’s finances. The city has three separate pension plans. The one for non-uniformed personnel has about $2.7 billion of unfunded liability. The one for police has an unfunded liability of about $1.5 billion. The one for the city’s firefighters is underfunded by about $600 million.

But Dreyfuss said the city’s pension plans could be in worse shape than those figures indicate. First, those numbers come from reports that are nearly two years old. Second, the pension liabilities are being valued at or above an 8 percent rate of return on investments. In many years pension funds have failed to reach their projected returns. When this happens, the liabilities are actually worse than the pension funds officially report.

Another problem: Philadelphia has more retirees cashing benefits checks than workers paying into the system.

‘Perpetuates Distrust and Cynicism’

The news blackout of the conference has not sat well with news publishers. The Philadelphia Inquirer newspaper and Bloomberg News led an unsuccessful effort to have the conference opened to reporters and general public.

“Your decision to have this discussion hidden from public view perpetuates distrust and cynicism among not only voters and the taxpaying public, but distrust of the City of Philadelphia by investors in infrastructure, bonds and other aspects of public finance,” Bloomberg News lawyer Charles J. Glasser Jr. wrote in a letter to city officials that was also signed by the Inquirer, Associated Press, and other news organizations.

“In our view, when the City of Philadelphia speaks to investors about the issuance of public bonds and the city’s fiscal condition, that’s important public business,” Inquirer editor William K. Marimow said for an article in his newspaper.

“It’s an informational session where the city will be talking about its assets and its fiscal condition. It was never intended to be a public meeting,” city finance chief Rob DuBow told the Inquirer in defense of the secrecy.