Sept. 18 (Bloomberg) -- Pennsylvania legislators rejected a plan to take over poorly funded municipal pension systems in Pittsburgh and other towns in favor of selling parking garages and raising a local tax to beef up the accounts.

The Senate, by a vote of 32-17, approved a plan yesterday allowing Pennsylvania’s 2,000 cities and towns to reduce contributions to their retirement systems. The measure must be signed by Democratic Governor Edward Rendell.

At the same time, lawmakers agreed to forego a takeover option they had approved last month, which would have let the state impose lower benefits on new employees in about 30 towns where local pensions have less than half the amount needed to cover promised retiree benefits.

“Ultimately the state will have to take on pension costs,” said Terry Madonna, director of the Floyd Institute’s Center for Politics and Public Affairs at Franklin & Marshall College in Lancaster, Pennsylvania. “There is a day of reckoning on pensions coming.”

The largest retirement plan that originally faced takeover is in Pittsburgh, where the account for 6,000 local employees has $260 million on hand to cover almost $1 billion in promised benefits. The city pays about $80 million in benefits annually, according to information prepared by the Pittsburgh Finance Department for the Legislature.

Parking Meters

The revision gives Pittsburgh two years to prove it can shore up its fund by leasing city-owned parking garages and meters to a private operator and by dedicating about $5 million a year in parking taxes to the retirement fund.

Mayor Luke Ravenstahl, a Democrat, said in a telephone interview yesterday that his plan will put $200 million into the fund next year, after the parking lot and meters transactions. That would boost the fund’s holdings to 53 percent of the cost of benefits by 2011, enough to head off a state takeover.

“Leasing our parking garages is a long-term fix,” he said. “We have a two-year window. That holds our feet to the fire. That makes us responsible.”

Eric Montarti, senior policy analyst for the Allegheny Institute, a conservative think-tank in Pittsburgh, doubts the plan will work.

“Right now, this is their Hail Mary pass,”, he said, referring to a play in American football in which a quarterback attempts a long scoring pass in a game’s waning seconds.

Pittsburgh is still repaying $294 million in bonds mostly issued 11 years ago to replenish the pension fund, he said.

Skipping Payments

On the other side of the state, Philadelphia, the sixth- largest U.S. city by population, was given permission to skip $235 million in pension contributions this year and next, on the promise the payments will be made up with 8.25 percent interest by 2014.

Philadelphia also received permission to increase its local sales tax to 8 percent from 7 percent to raise funds for the pension repayments.

Holding just more than $4 billion to cover $8 billion in promised benefits, City Finance Director Rob Dubow says the contribution deferral won’t add to the deficit.

“We’re paying it back, and we’re paying it back quickly,” Dubow said in an interview on Sept. 17.

Philadelphia’s pension contributions will have to rise to $694 million in 2013 from $305 million this year to meet the terms of the plan lawmakers approved, a legislative analysis of the measure shows. The full city budget is about $4 billion.

Recoup Market Losses

Other communities in the state were given permission to take an extra five years to recoup investment losses incurred last year, and must pay only three-fourths of the contribution they would otherwise owe to their pensions. The steps are designed to defer steep increases in pension payments the towns face because of investment losses in 2008, when the Standard & Poor’s 500 Index dropped 37 percent.

“We can always come back and take a second look at the broader issue of underfunded pension funds,” state Representative Jewell Williams, a Philadelphia Democrat who sponsored the revised measure, said in a statement released after the House passed the measure Sept. 11.

Senator Jim Ferlo, a Pittsburgh Democrat, told his colleagues during debate yesterday that the measure they were approving would “kick the can down the road.”

“We haven’t changed the rules of the game,” he said. “As usual, we’ve just postponed the inevitable.”

Organized Labor

The Legislature’s decision to wait to undertake drastic pension overhaul was a victory for organized labor, which turned out at the state Capitol in Harrisburg to rally against the state takeover provisions of the measure.

“At this point, it’s just status quo,” Montarti said.

James McAneny, executive director of the Pennsylvania Public Employee Retirement Commission, said lawmakers missed a chance to “get the ball rolling” on fixing pensions by stripping out the takeover provisions he initially proposed. Some communities soon won’t be able to afford their retiree benefits, he said.

“Unfortunately, I don’t think that’s that far away,” McAneny said. “We’ll know in five or six years. The trouble is, in five or six years we may not be in a position to do anything except assume the obligations to pay.”

To contact the reporter on this story: Dunstan McNichol in Trenton at dmcnichol@bloomberg.net.

Last Updated: September 18, 2009 00:01 EDT