Thursday, December 04, 2008

pension funds and more

In case you didn't catch the news that the city's pension funds are down to $261 million, it's probably the biggest news you will read the least about... and the biggest finance issue that the city is facing that the 5 year plan put together by the Act 47 team pretty much ignores for reasons I really can't fathom. For those who understand the implications, the question for the ICA and Act 47 folks is just how much the city's minimum municipal obligation is expected to go up in the coming years based on the trends in the city's pension fund.

Beyond that, anything I have to say I have said before, and before, and before. If anything I have proven to be wildly optimistic. The number being quoted about how much the city pension fund should have to be full funded is $899 million. That number is at best the number for January 1st 2007 and so is now 2 years old at best. The realistic number for the unfunded pension liability is likely much higher if there was a current estimate, we just won't learn a more current number for another year to year and a half. If the actuary has to assume a lower inflation rate out the next 30 years, or a lower investment return over that time, the potential for a much higher pension liability is a bit scary to contemplate. Lower inflation rate is going to push up the NPV of those future pension payouts, something that could be a big big issue across the nation not just here.

*****

Unemployment rate did in fact come in at 5.5% as I suggested it would. Again the big curiosity is that despite nationwide, or worldwide, economic collapse... why is the local employment level and labor force continuing to go up from their historic highs for the region. Labor force participation rates do not move that fast month over month or year over year even. So my answer as I got into a bit earlier is: migration.

******

and it may seem like just a sports story, but maybe it isn't. NYT had a slightly different version of the story on Monday, but the International Herald Tribune talked Steelers-world yesterday. : Steelers are NFL's one constant. In a sense, it isn't saying something all that different from what Potter in the City Paper said about Pittsburgh this week.

14 Comments:

Blogger fester said...

At this point municipal bankruptcy has to be seriously considered cause that looks like a 600 million dollar hole that no one wants to acknowledge.

Thursday, December 04, 2008 9:50:00 PM  
Anonymous Anonymous said...

the year-over-year increase in labor force for Metro PGH is quite dramatic (about 28k or so now) when compared to the previous 15 years... where the labor force was essentially flat... growing only 6k over that time.

Friday, December 05, 2008 12:39:00 AM  
Blogger illyrias said...

I understand we're in an awful place, but it would be nice to see some perspective on this. Every pension fund in the country is struggling right now. Were we hit harder in the recent months or has the recent economic crisis leveled the playing field at all?

Friday, December 05, 2008 10:05:00 AM  
Anonymous Anonymous said...

Just FYI, your link to my piece is broken -- looks like you hit Ctrl-V a second time without hitting Ctrl-C.

Correct link is:

http://www.pittsburghcitypaper.ws/gyrobase/Content?oid=oid%3A56242

Drive that traffic! Patronize our many fine advertisers!

Anyway, I'm sympathetic to Illyrias' point above (and suspect you are too). This problem is bigger than even the combined lunacy of all the city's politicians and overseers. Which tells you just how screwed we REALLY are.

-- potter

Friday, December 05, 2008 11:39:00 AM  
Blogger Judge Rufus Peckham said...

The oversight boards are akin to a bandaid on a gunshot wound to the head. It is not their fault because nothing -- absolutely nothing -- they suggest can begin to cure a problem this severe. Non-municipal entities in a similar fix have a viable solution: bankruptcy.

Friday, December 05, 2008 11:44:00 AM  
Blogger C. Briem said...

Ok ok… I fixed the link. Potter can send me a check for the advertising revenue the 4 additional hits he gets over on the city paper.

and I have discussed the bankruptcy issue so much in the past... I will get back to it again but will leave that be for the moment.

As for how Pittsburgh's pension fund is doing compared to others.... there is a question I trust our fine media brethren will dig into a bit. But realize that the $124 million loss is not describing the investment loss in itself. That is the net decline in the pension fund which included at the least the city’s contribution into the fund of $38+ million. Also realize, the pension fund is not supposed to be treading water, by statute it ought to be building toward fully funded-ness. The fact that it is so underfunded means that the effects are much more near term for the city than most other pension systems which are losing money. Even as I type, the police pension system must need to realistically look at a point not too long from now that it hits a literal zero balance.

Even if the loss is comparable to the declines in the stock markets, you would hope that a diversified fund would not be tied directly to the risks in the equity markets in themselves. It really makes you wonder. Also, and this is a big big also… realize that the city BORROWED 300+million in the late 1990’s just to invest the borrowed money so as to beef up the stock market. That is called a leveraged investment and inherently makes the portfolio that much riskier. You would think that past and present investment managers would take into account that fundamental leverage when setting the portfolio. It seems to me that they (they being both past and present managers) didn’t do that in any meaningful way. What the city is left with is as if you took out a 2nd mortgage on your house, took all the proceeds and invested in NASDAQ and now have both no money and a huge loan payment every month. That right there makes the situation here so much different and worse than most anywhere else. That and given the low funding ratio for the city compared to most any other major pension system, you have to take that into account when crafting an appropriate portfolio. All in… there is no luxury here of hiding behind some argument that says this is all par for the course when it comes to investments these days.

and if you want to skip all of that.. bottom line the hole is a lot more than $600 million these days I am quite sure.

Friday, December 05, 2008 4:12:00 PM  
Anonymous TheTruth said...

Even if the loss is comparable to the declines in the stock markets, you would hope that a diversified fund would not be tied directly to the risks in the equity markets in themselves. It really makes you wonder. Also, and this is a big big also… realize that the city BORROWED 300+million in the late 1990’s just to invest the borrowed money so as to beef up the stock market. That is called a leveraged investment and inherently makes the portfolio that much riskier. You would think that past and present investment managers would take into account that fundamental leverage when setting the portfolio. It seems to me that they (they being both past and present managers) didn’t do that in any meaningful way. What the city is left with is as if you took out a 2nd mortgage on your house, took all the proceeds and invested in NASDAQ and now have both no money and a huge loan payment every month. That right there makes the situation here so much different and worse than most anywhere else. That and given the low funding ratio for the city compared to most any other major pension system, you have to take that into account when crafting an appropriate portfolio. All in… there is no luxury here of hiding behind some argument that says this is all par for the course when it comes to investments these days.

Bravo Mr. Briem! One article I read pointed out that half of the losses took place over the past couple of months. Simply put, that is a piss poor job of managing risk. A good pension fund advisor would have seen the pending financial crisis last year when MBS, ABS and CDO's started to fall apart. Key question: What type of selection process did the city use to determine that Mercer Investments should be our pension fund advisor?

Friday, December 05, 2008 5:47:00 PM  
Anonymous MH said...

"Also, and this is a big big also… realize that the city BORROWED 300+million in the late 1990’s just to invest the borrowed money so as to beef up the stock market. That is called a leveraged investment and inherently makes the portfolio that much riskier."

Maybe I'll go and look to see who was mayor in the late 1990s.

Friday, December 05, 2008 8:37:00 PM  
Blogger Bram Reichbaum said...

"realize that the city BORROWED 300+million in the late 1990’s just to invest the borrowed money so as to beef up the stock market."

Since I'm all about the Politics of Personality, I'm curious when exactly this happened, under whom, and who led that effort.

Friday, December 05, 2008 8:42:00 PM  
Anonymous MH said...

I'm willing to donate all of the Inkling market funny money I'm likely to win by betting against the bus strike.

Friday, December 05, 2008 11:49:00 PM  
Blogger Bram Reichbaum said...

Okay, given it was Mayor Murphy. But it becomes so tiresome to go "Grrr, Mayor Murphy!" I'm wondering who sold the idea to him, who checked off on it, and who commentated on it like it was a good thing. I'm feeling very Rahm Emmanuel on the subject.

Saturday, December 06, 2008 1:55:00 PM  
Blogger C. Briem said...

be careful the question about selecting Mercer, the same question was worth asking about how the previous investment manager was chosen. I have not looked at the details yet, but isn't one of the problems Mercer has been facing is how to get out of funds still run by the earlier firm? Given some effot,one might be able to figure out what the losses would have been if portfolio was as had been typical in the past tosee if recent chages impacted recent performance.

Bram. good questions,though most of the answers are pretty well known. No time right now to get into it, but I promise to in the future. For all,the answers are a bit more complicated than they may appear.

Saturday, December 06, 2008 6:55:00 PM  
Anonymous MH said...

You're getting competition from the big blogs. Pittsburgh's pension shortfall hit Instapundit (yesterday's last post).

Monday, December 08, 2008 9:13:00 AM  
Anonymous Pittsburgh Polemics said...

If only the folks with the purse strings would start thinking about the needs of the city rather than their political futures we might get some results. Don't get me wrong, I ain't holdin' my breath, but I can still hope can't I. I mentioned a few of my not-quite-so-sophisticated thoughts at our blog (site below).

Foolhardily,
Allie Gainey

http://www.pghpolemics.com/iWeb/Pittsburgh%20Polemics/Home/680E0245-3C7D-40FB-9FD2-8B08BF9F237A.html

Thursday, December 18, 2008 2:39:00 AM  

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