Lehigh County Authority is Not “Bailing Out” Allentown

I agree with much of this post from Rich Wilkins, but I strongly disagree with the headline and the characterization of what Lehigh County Authority’s doing as a bailout. I don’t think that was actually Rich’s point, but that’s how the Tea People are talking about this.

The LCA is paying money to Allentown, and in return they’re getting control of a valuable asset. That’s not a bailout. When I go to Chipotle and buy a Burrito Bowl, I’m not bailing out Chipotle. They get money, and I get a delicious lunch.


  1. The headline was meant to convey the political bailout that happened. I think this could have ruined his administration. It won’t now.

  2. At least now (maybe) we can get to the real heart of the matter: how exactly the city is going to use its “windfall” to pay off its pension debt. There will be considerable pressure to use this money for current expenses (particularly to cover the loss of income from the water system) and not pension debt, which will create some interesting questions about why exactly this was done. Given the city’s well-renowned commitment to transparency, it won’t be easy to get the answers.

    I don’t think the Mayor is out of the woods yet.

    • Jon Geeting says:

      This is a good time to start the conversation about that. What do you think they should do with the money?

  3. Conservatively invested at 5% a year, the interest on that money could cover pension expenses, which is about what i would recommend with the city slowly raising taxes to cover the lost yearly water revenue.

  4. I don’t think the lease was a terrible idea in principle. My main concern is that Allentown doesn’t have the management experience or a Mohammed el-Erian to handle such a large amount of money at one time, and without oversight they are likely to misstep. Lack of familiarity with financial products and a willingness to take the short term gain over the long term uncertainty is what got BSD and others into the swaps mess.

    I am not an expert on pensions, and its a bit challenging to understand exactly how it works in Allentown, but the main thing is that it seems to be a “pay as you go” system, with little to none prepaid. My recommendations:

    1. Time to get smart on the problem and to ask hard questions of the Mayor (particularly the local press). It is useless to read that “Mayor P says the unfunded requirement is X.” What we need to hear is “Mayor P says the unfunded requirement is X, based on an expected Y rate of real return on investment.”

    2. I think the current planning of the city expects an 8 percent return (unclear if this is real or nominal) on investment, leading to a figure of a $150 million shortfall. An 8 percent return for a city’s pension fund is highly optimistic in this climate. I’d prefer to see an assumption of 6 percent or lower. That puts the shortfall quite a bit higher.

    3. I would put the money is a “sinking fund” that winds itself up over the next 15-20 years by paying out returns on investment plus some percentage of the principle so that eventually the money runs out about the time the projected pension bulge winds up. Even better, have the city pass a law that the city must make a cash pension contribution of at least 50% of the “sinking fund”‘s annual payout, so that the city doesn’t use the fund to remove all annual pension obligations from the city’s budget.

    3. Admit that its everyone’s problem to solve. Don’t use this money to replenish the rainy day fund, pay salaries, or repair streets. One of the worst things you can do is let a well-meaning chap like Alan Jennings come up with a line like “this was the peoples’ water infrastructure, and why are we giving this all to fat cats on Wall Street? Let’s use some of it for a business incubator, jobs training, etc.” No! This pension plan is a millstone on the city, and solving the problem in the promised manner will allow the city’s fiscal position to recover and improve.

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