Thursday, June 11, 2009

Act 47 and the immutable law of unintended consequences

OK. I admit it. I tried to watch the city council deliberations on the Act 47 plan. Don't ask me to explain what was going on. Even if I could explain it (I can't), there were so many sub-plots to everything going on that it would take forever to even try. By the time it would take to go through it you would wind up more confused than you started. Then just to prove how screwey it all was there was this moment when Joe King was passing little notes to Bill P. in the middle of it all. I felt like I was watching the old Star Trek episode where the transporter malfunctioned and the crew was beamed to an alternate universe where everything was backwards.

So forget the big picture, but there is one thing I've had in my head. Think Act 47 has been a success? Maybe it has been, but it's not so straightforward to figure out. Here is something to consider. The figure below shows the trends for monthly benefit expenditures from the city's 3 major pension funds. The red mark is for the latest number I have seen quoted in the news and these numbers all exclude administrative expenses which collectively add another $2-3 million annually to that. The important point as you look at this is to ask yourself: when did Act 47 kick in and what effect has it had on pension costs?

What I think this shows is one of the unaccounted for costs of the original Act 47 plan that nobody talks about publicly. Future wages and pensions were clearly impacted by the plan and city workers made the rational retirement decisions that you would expect. Lots of workers retired much earlier (noticably both fire and police workers) than they otherwise would have. Those early retirements had real costs that make the savings touted by the Act 47 process less than what they may appear.

The induced retirements hit the city budget and the pension funds in 4 different ways I figure. The graph above is only for one of those impacts resulting from retirees drawing their retirement pay years earlier than they would have on their own. Thus the pension funds' cash depletes much faster than had been anticipated. Second order effects are important as well. Those same retirees would have actually been paying into the system if they had kept working. Not having those contributions add to the pension funds' current cash woes. It gets worse. The city now receives less state funding for the pension system because the formula used to determine how much the city gets is based on the number of active workers. Once retired, the lower head count of city workers directly lowered the amount of subsidy the city gets from the state forcing the city to make up the difference from general funds. And finally, as has been noted in the news, once the drawdown of personnel took place there were personnel shortages that necessitated costly overtime expenditures in recent years that again hits the city budget directly. I wonder if anyone has tried to systematically add up all of those costs?

So you may consider the Act 47 either a success or just unavoidable. But when calculating the benefit of the first 5-year plan you really need to base that assessment on a full accounting. None of the costs above are calculated as part of the overall 'success' of Act 47. As with all cost-benefit analyses.. If you only look at the benefit, most every project looks stupendous. Those pesky costs, especially the ones that are not always easy to measure, are part of the equation.

Couple all of that with what the PG compiled yesterday on personnel numbers relevant to the police bureau. The day earlier a long-awaited study of the city's personnel system came out and among the findings was the little nugget that the city police are paid significantly less than their suburban brethren. Ask yourself the first question about whether you would rather be a suburban police officer or a city one? It looks like the badge-drain from the city police bureau has already begun.

Couple all of that with the number compiled by the PG that 530 of 880 city police officers are eligible to retire in the next 5 years. Honestly that is one of the scarier city finance numbers I have seen in some time. Especially given how low the police pension system is funded right now. If this new Act 47 plan induces again higher than anticipated retirements the result can only be greater acceleration of the cash burn from the system. If folks retire faster, then all the future liability calculations are really going to become obsolete.

You might think police may not retire en masse, but they are rational folks. If they earn their retirement and see the writing on the wall then why continue working for the city? Retire, take retirement check and then take an even higher paying suburban job. Plenty of their brethren are doing it already so there is no reason to think they will not do it in the future.

Not the same circumstances, but it has happened before. Slow population growth in the city of Pittsburgh had minimized hiring for a couple decades heading into the early 1990's. As a result the police force in the city had mostly aged in place resulting in a period when a large proportion of the police force retired around the same time. Is that the future being foreshadowed by all of this? And what does it mean to city finances, yet alone public safety if the force loses its most experienced folks. Ironically a lot of them I suspect are the folks who all came onto the force around the same time in the early 1990s. It all ties together one way or another.


Blogger n'at said...

So, ACT 47 exacerbated the pension problem? It will get much worse before it gets better?

It's unfortunate from my perspective that the city is finally attempting to fix their situation only after public safety and their unions push back against rightsizing and ACT 47. Meanwhile the city's professional services - accountants (pension, budget, finance and controller), lawyers, planning, engineering, construction - were all starved of funds and personnel starting as far back as the late 1970s.

Public Safety is the last line of defense, and now we're about to lose that?

Thursday, June 11, 2009 2:12:00 PM  

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