Thursday, April 09, 2009

Worthy of international mention even.... City of Pittsburgh Pensions

From an anonymous commenter here.. A Financial Times article I should have caught mentions Pittsburgh among the worst examples of underfunded pension systems:

Double blow for US pensions as values crash. Deborah Brewster. April 7, 2009.

It's a short article, yet it's a bit scary if you deconstruct it. Pittsburgh is listed among the single most problematic cities because its pensions are nominally measured at under 50% required funding. I actually think that if it were available the latest data would show the city's pensions systems collectively are half of that even, under 25% at best. The worst funded part of Pittsburgh's pension system is the pension fund for the Police Bureau which must be getting close to single digits in its funding ratio.

Remember I said 'nominal'. Take this section in the article.
Most experts believe that the situation is even worse than these official funding figures suggest, because of the way the funds calculate returns and liabilities. Almost all funds base their funding levels on an assumption of an annual return of 8 per cent, but in the decade to 2004 the average return was only 6.5 per cent. (emphasis added)

Take that to heart when you hear what is going on in the city. For the longest time they didn't just assume a future 8% return, but 8.75%. The city has actually be touting recently that they have made a big advance by lowering the future return assumption to 8%, which is the number often criticized as being too high for the long run... too high especially when you consider that the portfolio ought to be well diversified and not just include equities, but also safer bond investments as well which would likely dilute potential returns. Bonds that are paying some historically low levels in themselves.

For the financial wonks out there... there is something else rarely mentioned except in the footnotes of financial statements. With inflation rates low and getting lower in the last year, I think most pension actuaries are going to have to start lowering their discount rate assumptions going into the long run future which will have a real impact pushing up the NPV of future pension liabilities.


Blogger Lady Elaine said...

I refuse to register!

So, gathering from what you write in your blog, the pension people are over-over-inflating their returns, but in actuality, they are receiving way-way-under what they get?

And other cities in the same boat were/are doing the same thing because of how the whole thing is calculated?

Why then didn't they just change how it was calculated? Or am I a moron?

Friday, April 10, 2009 8:31:00 AM  

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