Wednesday, August 09, 2006

Sic semper ero debitum - part II

The NY Times is starting a series on the state of public pension systems in the US. They focus on San Diego just because there has been talk of the pension system there driving the city into Chapter 9 bankruptcy. The sad truth is that the leading edge of public pension underfunding is Pittsburgh more than anywhere else. San Diego’s problems are in many ways transient compared to the structural deficits in Pittsburgh, with a declining population and a total pension liability of at least $850 million. The city has minimal wherewithal to ever re-fund its pension funds without outside help.

Why is the city pension system in such trouble? Many think it is because the pension system is overly generous somehow. Yet, the average general municipal pensioner in Pittsburgh receives less than $800 per month, many get even less. That's it. Police and fire pensions average a little higher, but many still get less than $1k/month. In many ways, local pension benefits pale compared to some other cities. What did Pittsburgh in was a combination of long term population decline which eroded the tax base, occasional raiding of pension funds over the years to keep the city budget above water, and chronic under-funding of the pension system over decades.

The irony is that the Act 47 process has had some deleterious effects on the pension system. Because of Act 47 mandated changes in the retirement system, many found it advantageous to retire years earlier than they would have otherwise . Thus a lot of relatively young retirees have started drawing down pension fund cash earlier, and will draw it down for a longer period of time, than they were planning to do. One other impact of the early retirements, the state's contribution into the city's pension system is much lower than it would be. The state contribution is not based on the number of retirees, but on the number of current employees, which in the city's case has been plummeting. By my estimation, the city's share of state pension aid is down by 25% just from 2003. Oh, and lest I forget... $350+ million in debt was already floated to refund the pension in the 1990's. The problem there is that it was borrowed at precisely the wrong time in the late 1990's, not the early 1990's, so the city never benefited from the stock market gains of the mid 1990's. All of the shortfalls must essentially be made up by additional city contributions from its operating budget.. money that just isnt there as you peer into the future. Ever wonder why the 5 year budget that was supposed to be completed last year is still uncompleted.

One factoid that puts this in perspective. As of Jan 1, 2005, city police had 804 current employees, but over 1,663 retirees receiving benefits. At more than 2 retirees per current worker, I challenge anyone to find such a screwey ratio in any other large public retirement system in the country. That ratio has probably increased given the additional retirements, and minimal hiring, since 1/1/05.

If you are crazy enough to have read all of that, you can read all the excruciating details in the required state actuarial reports for the city's 3 major pension systems which I have scanned here: the 1) Police, 2) Fire and 3) General Municipal pension funds.

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