Friday, August 14, 2009

Pension-math ever again

Yeah, pension math is pension math. I'll do this with (almost) no numbers.

The latest update on the plan the state is working to take over Pittsburgh pension plans is being reported today... Nobody should think this is news, the path was pretty obvious going back years. This all follows up a story from a couple weeks ago that pretty much foretold today's news. The key quote from the story then is the state saying:

"In the not-too-distant future, there's going to be a default on the ability to pay benefits if nothing severe is done."
That's pretty explicit. What I still don't get is how just a few months ago the mere mention of dire pension problems and the mere prospect of running out of cash was deemed by the city to be:
The further quote in that from the city is:
"I think that the data was inaccurate. It's quite a bit of a distortion,".
The state has the current quote including "Default".... "not too distant future".... unless something "severe" is done. Is the city saying the state's prognostication is inaccurate and a distortion? If anything, stock market has been doing ok this year, certainly not the freefall from last December when the earlier story is from. So if anything, the situation was worse back then.


OK, got that out of my system. There is actually a bigger looming problem for the pension fund. Something not talked about much, but certainly something a few folks in Harrisburg realize already. A big chunk of pension funding for the city is from state aide. It's not a guaranteed amount, it all comes from one single pot of money. Specifically revenue collected from the "foreign insurance" premia. Foreign as in out of state companies that issue policies in the state. That money is divided up proportionally across all the municipal pension funds across the state that need money. The number of municipalities that need money is key factor in figuring how much any one municipality gets.

There are two fundamental problems looming for municipal pension plans. The first is obviously that the stock market was whacked and the pension assets of virtually all pension systems are down. In the past a lot of local pension plans were so well funded that they didn't qualify for any aide at all from the state. Thus more was available for the plans that 'needed' outside funding. It's a good bet that a lot of local pension plans will soon be qualifying for state aide for the first time in a long time and for some the first time ever. It's a simple divide-the-pie issue. The more who want a slice, the less each one gets. It bodes ill for any current projections of future state pension aid the city is expecting in coming years. Less aid will require more to be made up by the city one way or the other according to Act 205.

Then there is the recession itself and the impact it is having on tax revenues. The tax revenue that the state dedicates to local pension aid is based on insurance premia. That pot actually had some sizable increases in the years following 9/11 as insurance need and costs grew. So even as the city has been complaining that their state pension aid is down a lot from where it had been in the past, if the total revenue coming in from the foreign insurance tax had not jumped up a lot, the amount the city would be getting currently would be a lot less than it is. An odd ripple effect from 9/11. We would have been having some very different budget discussions in recent years if the total pot of state pension aid had not gone up 65% in the last decade!

In the last year of data the revenues show that revenues from that tax have held their own remarkably, but the growth since 2001 has certainly leveled off. Is it conceivable that ongoing recession is going to actually pull down these revenues. If it does the city is looking at a double whammy as the pot of money allocated to pension aid comes down while the fraction of the total it is allocated decreases as well.

So a graph, with a few numbers... The recent trend looks like this:


Anonymous MH said...

"Is it conceivable that ongoing recession is going to actually pull down these revenues."

Probably, but PA and the city have tax structures that are not progressive. That should keep us safe from a California-size revenue crash.

Friday, August 14, 2009 3:12:00 PM  

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