Monday, July 21, 2008

All Billboard All the Time

update: If you are reading this, I have updated some of the data and charts below in a subsequent post: Pension Update and Clarifications

No, this isn't about billboards at all. I thought I would try some bait and switch; otherwise who would want to read about boring Pittsburgh pension math.

I really am confused. Lots of news of late about the city's financial status and its now-denied request to leave Act 47 oversight. From news reports to the state's own press release, they all refer to the city's unfunded pension liability as being $462 million dollars. I am pretty sure that figure comes from reports reflecting the state of the pension system as of January 1, 2005 which is more than a little dated now. At the time the total pension liability for the city of Pittsburgh 3 main pension system was reported as $843 million. Since there was reported to be $373 in the bank at the time, the unfunded liability worked out to be $469 million, or alternatively that the pension system was roughly 44% funded.

What I don't understand is why there is no reporting of the more recent data which the city reported to the state in March. The more recent reports, reflecting the state of the pension systems as of January 1, 2007 showed that the total pension liability for the City of Pittsburgh exceeds a billion dollars for the first time ever, $1.04 billion to be more precise. Total value of assets to cover that was $375 million at the time, so the city's pension systems collectively were underfunded by over $660 million (not $460 or so) and have a funding ratio more like 36% (and not 44). Funny how the city does not go out of its way to mention how big the pension liability has increased in just the last few years. Well, not that funny, I can understand the motivation. But I don't quite get why the state does not read the actuarial reports the city sent to them in March.

If you want to dig into the painful details, or are overspending on Ambien and need an organic alternative, the most current actuarial reports for the 3 pension plans are here:

Looking back, here is the time series of the total pension liability for the three main pension systems. Anyone discern a trend??

The trend has a couple causes. Some of it comes from what may need to be conservative assumptions on future mortality. I'll get back to that, but there is a big jump between 2005 and 2007 that is a story unto itself. I believe that increase (biggest ever increase? maybe) results from a lot of early retirements that the Act 47 process induced. So instead of getting continued work from a lot of folks that anticipated decreased benefits down the road if they remained on the job, they did the logical thing and retired early. It might have saved some dollars up front which I am sure the Act 47 folks will take credit for, but realize there is a big chunk of those costs were really just displaced into future pension liabilities. Those early retirees are going to be collecting benefits for a lot longer time than they would have otherwise. That big pension liability jump from 2005-2007 amounts to $190 million dollars unto itself and obviates a lot of what is being counted as 'savings' that resulted from Act 47. Not all of it for sure, but enough to make note of.

In the long run it's about the funding ratio. The funding ratio which is the ratio of assets to that total liability looks like this over the last decade.

Something you won't notice in that top line funding ratio for the entire pension system: Not all of the pension systems are in the same state these days. If you look at each pension system individually, there are the funding ratios for each:

Which shows that relative to the other two, the police pension system is significantly less funded. This could become a pretty serious issue really soon. It is also interesting that the fire pension system used to be the highest funded system of the three, but because it has seen the largest percentage of its workers take early retirements, it has unsurprisingly seen the biggest jump in its pension liability, and as a corollary seen the biggest decrease in its funding ratio.

Again, these are all numbers for January 1, 2007 which is itself now over a year and a half ago. Both of the key numbers, the total liability and the value of assets invested to cover that future cost have surely changed since then. How have they changed? News reports say that as of April the total $ value in the pension system was down to $350 million. That in itself would put the funding ration down around 34%. But you may have noticed that the stock market has been pretty bearish over the last few months. If you think that $350 has gone down just 10% to say $315 million (the stock market is generally down by a bigger % from its recent highs, but let's hope the investment is well diversified into safer things), the funding ratio could easily be pushing 30% right now. The police pension system could easily be pushing down near 20%. All numbers that are not really qualitatively different from where the city was at before it floated a huge pension bond to fund the system in the 1990's. The point of that bond was to push the pension system to where it would be able to sustainably garner investment income and eventually sustain itself in the future. It hasn't worked out that way at all.

If that is not bad enough, go and look at the time series for the total liability numbers. For a lot of really boring reasons I could go into why I think that total liability number continues to go up. Some of it relates to the Act 47 issue earlier, but it also results from a lot of assumptions that you have to make when looking into these future actuarial projections. In a certain sense those assumptions have to be conservative, but I think there is no reason not to believe that the total liability number has continued to inch up. Basically retirees are living longer than is being presumed, and thus every time you recalculate this future liability you see that there are more folks still living and collecting pensions than were expected in the past. So it's UPMC's fault that the pension liability keeps going up. (joke ok, don't want the UPMC police coming after me). But if the average annual increase of roughly +5% has continued, for 2008 the total pension liability could be on the order of $1.08 billion, for 2009 it could be on the order of $1.14 billion. January 1, 2009 is just a few months away so that may be my best guess as to the current state of the pension system.

If there is $300 million or so in the bank for a 1.1 billion dollar liability puts you at a funding ratio of roughly 26% overall, which would probably put the police pension system at a funding ratio in the teens. That last sentence is my own educated guess, but the pension system could put a more definitive number on what the assets are in the police pension system alone if someone wanted to give them a call.

In the past, I have seen pension reports for the city that assume that at funding ratios below 25% or so, the system would switch into a Pay-as-You-Go type of system. That would have big implications for the city budget near term if that comes to pass. What it all means in the end is that the required payments the city has to make to pay the anticipated liability are shooting up at rates that I am pretty sure are not reflected in any budget plan I have seen. At funding ratio's that low, you have to consider that even if a bull market reappears, the assets will never have achance to appreciate enough to catch up to where the pension fund needs to be. If the trend continues, the unfunded liability will eventually come close to matching the total liability which is now that billion+ number. A billion that is falling mostly upon an ever smaller population base which generates most of the revenue capacity for the city. Without going off on another tangent, the big issue with the city's declining population overall is that there is probably a growing student and transient population in the city. Students, along with seniors, do not exactly have the revenue generating capacity that will ever help with the city's future liability. The city's household population that is it's real tax base has been declining faster than the overall population trend would imply. So per capita, the debt issues are huge and unlike most anywhere else in the country.


For reference, current and some past pension documents and other ephemera I collect are on my Pittsburgh Policy Document Collection web page.

The data used for the above illustrations are in an excel file I have online here.


Anonymous MH said...

I'm a little afraid to ask, but what about the teachers' pension?

Monday, July 21, 2008 6:34:00 PM  
Blogger Burgher Jon said...

The scariest part to me is that since the report came out in 2005 we've gone from $373M in the bank to $375M in the bank, a remarkable 2% increase (or adjusted for inflation, a 5% decrease). It's good to know that we've known it is a problem and have addressed the problem by not even keeping up with inflation.

Tuesday, July 22, 2008 6:44:00 AM  
Blogger Richmond K. Turner said...

Fantaistic post. And this is really scary stuff. But your joke about it all being UPMC's fault that people are living longer begs for an even scarier question. It's so scary, that I almost don't want to ask it, but...

... what about the costs of all the health care that all these early retirees (and their spouses, and -- since many of then retired so early -- their still-in-school children) are going to consume over their 20+ (30+?) years of retirement?

I'm guessing that most of these folks are retiring with the "promise" of full healthcare coverage, but I'm also not all that informed about how these things work. A firefighter who retired early (say at age 58), before Act 47 came into effect will obviously remain out of the Medicare coverage window for several years. I'm guessing that the city is on the hook for 100% of the healthcare costs until a retiree reaches the Medicare birthday, right?

What happens after that? Does the city still have to pay any costs that are not covered by Medicare?

Tuesday, July 22, 2008 8:24:00 AM  
Blogger V said...

Thanks Chris,
Excellent, as I expect.

Thursday, July 24, 2008 2:03:00 AM  
Anonymous Johnny G. said...

In a tiny little blurb in the P-G Neighborhoods section yesterday (7/23) about how to spend $3 million the city will save from refinancing debt, the following was stated:

"The city's pension fund should ideally contain $899 million, said Finance Director Scott Kunka. In May, it held $375 million."

I'll let smarter and better informed minds speculate as to what that means.

Thursday, July 24, 2008 8:31:00 AM  
Blogger EdHeath said...

I believe I saw, when Dennis Yablonsky said that we would *not* emerge frm Act 47 status, that a new five (or ten or twennty) year plan is needed, one that will address our debt and pension obligations.

But the State's record on addressing this issue (see the first five year plan) does not give me that *much* hope.

Thursday, July 24, 2008 1:05:00 PM  
Blogger C. Briem said...

I will have to post some updates and clarification to this post which I will do soon..

but to MH's first question, I do believe that the state pension system covering most public school teachers is either 86% or 102% funded depending on how you are calculating it (more on that when I update the post here). There has been some news of late of bad specific investments they have out there, but it ought to be well diversified so no specific investment will put it anywhere near where the city of Pittsburgh is. It's also apples and oranges because most teachers participate in a collective state system.

Sunday, August 03, 2008 1:35:00 PM  
Blogger C. Briem said...

and I am still catching up, but what happened with little refunding newsoid John G. mentions... I would like to see the details of how the city thinks it can net out 3 million in savings out of refunding 72 million in debt in today's market. Lots of city debt out there, so I wont say its not possible, but it would be an interesting exercise to see what series of debt they can save that much from right now.

Sunday, August 03, 2008 1:37:00 PM  
Anonymous MH said...

Good to know about the schools. Thanks.

Tuesday, August 05, 2008 10:19:00 AM  

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