Pensions Redux Redux
The news that the state is crafting a plan to essentially take over the city’s pension funds has all sorts of angles that in quieter news cycles would be getting a whole lot more attention than it is. G20 and Penguin fever has the story buried deep. It’s really really big news for the city’s budget, for city workers, for retirees, for a bunch of financial advisers to just begin with. Tomes could be written.
Where to start? How about here. A few short months ago the city said that such talk about a pension crisis was akin to "Crying fire in a crowded theater". It seems the fire department has showed up on it's own. I really wonder if that was the city's response when the reported meeting with the state pension chief took place last week.
But hold that thought. Here is my first big question on the recent news:
Did anyone at the state even mention to the Act 47 team (which is hired by and reports to the state technically) that any of this was in the pipeline? Put another way, are any of the financial assumptions in the Act 47 consistent with what this plan will force upon the city? I bet not. If true, why did we just go through all that Act 47 shadow play if it is already overcome by events. One number quoted is that the plan will take additional contributions on the order of $35 million a year from the city. Is that really factored into the new 5 year plan.
Oddest line in the PG version is that the state pension boss has this line: “the city has long used calculations that "artificially" allow it to put less into its pension fund than it should“. You really would think that such a statement would beg for more explanation if you are going to throw that out there. Wonder what he is talking about? There are a number of things, but one of the bigger ones I explained in this past oped. Basically for years the city’s pension projections used old mortality tables. Why? If you presume people die faster than they are, then your calculation shows you will paying out less in the future. Sounds great except that when people don’t die as planned the future bill is higher than expected.
The recent PG story is only the second time I have ever seen a city actuary comment in the public record. Must be a rule somewhere that things are bad when actuaries get quoted. For the earlier instance see Potter’s interview with the actuary mentioned in this CP article. Questioned on this topic the actuary says that his ex-post analysis of mortality here was consistent with the old mortality tables. So basically we are dying at rates consistent with the rest of the nation a quarter century ago. We must be just one big superfund site which would be troubling unto itself if true.
Here is the kicker. All of the funding ratios for the pension being quoted in the news are really out of date statistics. The pension fund knows pretty current data on its fund assets. But the funding ratio is assets divided by the actuary’s estimate of the total pension liability. All of the facts being reported are being based on the last known actuary report which calculates the pension liability for January 1, 2007….now 2.5 years ago. If the past is any judge then that denominator is actually much larger now.. and thus all the funding ratios being reported are actually much lower than they nominally being reported.
Pension math isn’t necessarily hard, but it is too tedious to go into in much detail. If you really want to go read actuarial reports: feel free. So here is the crib sheet. Brief wall street uptick notwithstanding, the city's pension fund was at a low of $226 million at end of March. Annual burn rate for the pension funds collectively will come to about $85 million a year over coming years. City’s current required payment is being upped to $44 million a year. Don’t need calculus for the math that follows directly from just those two numbers. Assume a big investment return or a low investment return on the fund assets. Assume whatever you want on future mortality rates or normal costs.. it really does not matter. What once you could argue was a crisis decades into the future is years.
Finally, keep in mind that the numbers generally reported are for the state of the pension funds collectively. There are actually 3 major pension funds for the city. One for fire bureau retirees, one for police retirees and one for other municipal workers. In recent years the police pension funded has been in the worst shape. Generally the funding ratio for the police pension system has trailed the overall average by 5-10 percentage points.
So connect the dots and what’s it give you? Back of the envelope: If the overall pension system is being reported at 25% funding in March… the updated actuary report when it come out will make that really more like 20% currently, maybe 22% if you want to err on the city’s side. The police pension fund trails the other two pension funds which probably puts it in actuality under 15% right now. All these numbers are clearly declining. When will the police pension fund be below 10% funding? When will it be at literal zero?
I could go on. Actuaries are lowering discount rates which are impacting all long term private and public sector pension liability calculations. A sensible investment portfolio is going to have some safer investments in the mix, yet low interest rates are making it hard to sustain any meaningful return given current market rates. It all adds up to a bad story ending.