Monday, August 31, 2009

City of Faust

On Sunday the PG picked up my comments on how I think one of the biggest impacts of a potential state takeover of the city's pension funds is that the state will hire their own actuary to evaluate the system.  The actuary's report is also what determines how much $$ must be put into the system each year. It could be very illuminating.

One of the core reasons the city is in the predicament it is is that over the years the actuary has consistently understimated how much the city should be putting into the system. Thus the city's funding ratio for the pension liability keeps going down.  It is supposed to be marching up toward being fully funded at some ever-pushed-out point in the future.  Think about that.  Even without the massive pension bonds of the 1990's. Even without the historic investment returns in the stock market of the 1990's, even without the 'extra' payments supposedly being made in the last few months into the pension funds, the funding ratio for the system was supposed to have been marching toward being fully funded.  Yet even with all that extra help along the way it has been falling behind more and more, faster and faster. I would love to have the city's actuary and the Act 47 team debate why that is. I honestly think our intrepid reporters should be calling the city's actuary to ask how we got in this predicament.  More than anyone else it has been his job to keep us solvent. Yet I only know of one time the poor fellow has ever been called out.  So he clearly is willing to talk on the record.  For anyone trying to figure out what happened in Pittsburgh, I'd track the man down. He is not entirely to blame, but he is the one with all the answers to how we got into this situation. .

So if the city liquidates its parking assets and puts it toward the pension system, will that solve the problem.  Not at all, and certainly not if the actuary reports continue to understimate the minimum municipal obligation in the future.  The city is hoping to net $200 million from the leasing of the parking authority assets.  Consider a few things first:

Nobody really knows how much the parking assets will get yet.  Certainly has not been an RFP put out to actually sell the system.  There was a RFP for someone to study the idea not to actually implement it.  No bids are out there to actually pay the city anything as yet. Not even close.

Then there is this little issue of whether cash liquidated by the parking authority can be just turned over to the city.  Is the parking authority not an independent organization.  Granted the governance is controlled by a city appointed board, but I am pretty sure that by law the parking authority is a creation of the commonwealth. Consider that very closely.  Would the state need to be sent the money collected via any liquidation of assets.  I have no idea, but I bet the lawyers have not thought about that much and the legal issues tied up in this may be complicated. It will certainly be unlike what happened in a lot of other places where this has been tried.  As many know so well, Pennsylvania law is not like elsewhere. The situations in Chicago or elsewhere may not apply. At the very least I bet the state would have to at least accede to parking authority cash being turned over to the city.  City-Commonwealth relations being what they are these days, I am not sure I would want to assume that would be a quick of painless process.  

Consider that in the 1990's the Murphy administration floated two large bonds toward the same goal as the proposed parking asset sale, i.e. to recapitialize the pension fund.  In fact the Murphy folks put in not $200 million, but almost $300 million dollars over a decade ago.  $300 million in 1998 is worth what?  Maybe $400 million in today's dollars.  Why anyone thinks putting far less than that into the system now, when the total pension liability is much bigger than it was calculated at back then*, is going to solve the core problem is beyond me. But there is a great irony that the core solution being proposed is essentially what Murphy tried in the 1990's with the sale of the water authority and floating of the pension bonds.  That all worked out so well

Honestly, as esoteric as it is, I really do think the problem with past actuary reports is one of the core motivations behind the state's plan to take over the city's pension system.  Trust me, they might want to consolidate a lot of the pension systems in the state, but there is nothing but trouble for them to absorb what may be the least well funded major pension system in the country.  That and the fact that the city was so publicly denying that there was any real problem just a few months ago is really what pushed the state into immediate action vice something more deliberative. Supposedly the city was claiming they were  "on track to fully fund the pension system".  Why does everyone else in the world disagree with that. It didn't give the state any faith much was going to change anytime soon if the city was left to its own devices. Thus they felt forced to do something as soon as possible. The state knows that it's probably too late to keep the system out of insolvency no matter who is running the system, they or the city.  Should they have done all of this decades ago? Probably.  Now the choices are all Faustian at best. 

* in 1995 the total pension liability for the city pension system was calculated to be $622 milion.  So the $300 million being put in by the Murphy folks itself amounted to almost half of the total calculated liability at the time.  If the city today nets $200 million (after parking authority debt is paid off) to put into the system it represents just 22% of the current $899 million pension liabillity calculation.  But as I have said I bet the real current liability is much higher than that, and thus the $200 million comes out to even less as a percentage of the total liability.


Anonymous Anonymous said...

Looks like the city proved they're incapable of managing their pension system responsibly. Having it run by the state will hopefully provide mature, competent administration and puts the city one step closer to an inevitable state bailout, be it implicit or explicit.

Monday, August 31, 2009 12:53:00 PM  
Anonymous Anonymous said...

The problem is that the city can not afford the payments the state will demand even with the Garage proceeds thrown in. Also the City's fund has regularly outperformed the state fund from an investment perspective. If the city, which is 32% funded at about 285 million Market Value, invests the garage proceeds (hopefully 200 Million) then truthfully amortizes the liability, the payments would be much more manageable than under the State plan.

Monday, August 31, 2009 4:44:00 PM  
Blogger C. Briem said...

City can't afford to make the payments the state will mandate and the pension fund can't afford for those payments not to be made. Bad scene.

and mark my words... the $899 liability number is from almost 3 years ago at this point. Either a city or state run actuary report is going to come up with a different number when we get an update. So I wouldn't pay much heed to a 32% funding ratio. Could be very different even right now.

Monday, August 31, 2009 5:27:00 PM  
Anonymous Anonymous said...

If the city sold off the parking garages, wouldn't they have to use the proceeds to retire outstanding parking authority bonds?

Monday, August 31, 2009 9:30:00 PM  
Blogger C. Briem said...

All anyone is talking about as far as I can tell is the amount that will be net of paying off outstanding parking authority debt. Realize the parking authority has been around a long time so a lot of original debt must be paid off and some of those garages are free and clear.. thus the potential that selling them could net a cash gain. I do not think anyone is contemplating something like Stadium Authority II where the cash raised goes toward the city pension and there is legacy debt to be paid off by a rump authority. In fact, I would be surprised if the terms of the debt would allow that. I presume most are revenue bonds and have provisions that they would have to paid off if the revenue source is liquidated. But I have not looked that carefully.

Monday, August 31, 2009 9:39:00 PM  
Blogger Tom Mc said...

So what will this seizure of the pension fund mean for public servant contract negotiations? Does this bring the state in to say, you have to contribute to the pension plan. I think this may open up whole other can of worms for Police, Fire, EMS and other city workers contracts.

Tuesday, September 01, 2009 6:48:00 PM  

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