Thursday, August 27, 2009

Ostrich Without Sand

Too much happening too fast to really talk about the machinations in Harrisburg that are about to impact the City of Pittsburgh for decades. That and the legislation isn't signed yet, so most anything could happen....  But there are a few key points relating to the news that Harrisburg may be about to pass legislation to have the state take over the city’s miasmic pension system.

If half of this plan comes to fruition as it looks like it will, it pretty much negates all of the Act 47 work over the years. Nowhere is there a plan for city finances to deal with this. No wonder the Act 47 coordinators publicly came out at the last minute against the plan being worked on by the state. It means there will be ever more city fiscal miasma and any ‘success’ to be claimed righting the ship is just going to be lost in the noise.

Lost in the minutia, but beyond the immediate financial impacts, the biggest repercussion of a state takeover of the pension system is that the state is going to hire the next actuary who will evaluate the systems total liability. At least that is my assumption. I’m willing to give odds that any state hired actuary is going to come up with a qualitatively different numbers than the city’s actuary has in recent cycles for how big the pension liability really is and how big the minimum pension payment needs to be each year. The city has been over-estimating future investment returns, underestimating future mortality of city retirees and playing with other assumptions over the years. It will not be pretty if redone with more standard assumptions. 

What is amazing is that this is all happening so fast. What could be described as the biggest financial news impacting the city’s finances in decades is barely noticed for a host of reasons. To put in a bit of perspective. One of the biggest things to happen to city finances in a long time was the monetization of the water authority assets for funds the city would expend in the mid 1990’s. That was a deal worth $96 million or so. The tax liens on city properties were a big disaster in the end. It was a deal worth $30 million or so. Even the floating of bonds to help fund the pension system in the late 1990’s was a deal for just under $300 million. Here the state is taking over from the city the responsibility what I am sure is at least a billion dollar liability currently. I am not exaggerating; we are talking about a billion dollar liability at least by now. How to deal with that liability affects nearly everything in the city and the county. The city’s ability to provide core services. The city’s future tax rates and its ability to be competitive for residents and business in the future. Finance is really the core of all City/County consolidation issues and I have not begun to talk about public infrastructure issues.

How bad is the the situation?  I've gone through the numbers.  The state is declaring the system bankrupt already.  Even thought the city was still denying there was a problem recently they announced late yesterday it is going to go ahead and try to sell the city's parking assets as fast as they can.  As best I can tell, even if the city sells the parking assets and nets out $200 million after debt is paid off, and if all of that goes directly into the pension fund, the pension system will still be well under 50% of the funding ratio that the state is using as a threshold that the new legislation will require.  So there is no need to rush any potential sale. It is no longer an immediate issue. It may be the city's biggest fungible asset, so we want to handle its sale correctly. And it really ought to be sold, not leased... but that is a topic of its own.

Just some small incidental questions I wonder about. Curious there have been no public comments from or via the ICA on any of this.  Are the provision of retiree health and other benefits captured by this state takeover in any way? I am thinking no, but worth looking at. Who is it that will really be running the pension system to include some of the routine but important decisions on things like disability determinations? Lots of implications that really have not been talked about to all all of this... probably have not even been thought about as yet. 

I really don't claim to be prescient at all. Most of what I say here is just documenting the obvious. Problem in town is lots of folks like to deny the obvious.  The path here has been awfully clear for some time. Anyone who has ever looked at the pension numbers knew this day was coming. It is NOT about the stock market decline at all last year.  That may have altered the timing a bit is all. What has been amazing is that it has so thoroughly been ignored for so long.  There has been lip service paid to the issue, but in general the policy has been more thoroughly ostrich-like for decades. The sand has blown away.


Blogger EdHeath said...

Don’t Ostriches run pretty fast? Neither here nor there.

One particular commenter from the suburbs has suggested the pension benefits of retirees be cut. Apparently that’s illegal, although personally I wouldn’t be surprised if someone (official) at least proposed it anyway.

I just can not see how the City’s parking garages are worth 200 million plus whatever the debt is. I know the lease/sale was proposed back in, what February or even before. What I have not heard is anyone talking about the offers coming in. I mean, I have not been scouring the newspapers, but it seems like an elected official likes nothing better than to go on about how successful his/her latest initiative is.

Even if the rights to control making people pay for parking for all City garages and surface streets were sold, the result would probably be that whomever had the rights would make us all suffer. It would be a way to make more of us ride bikes, as long as we were allowed to park them in our homes and our offices/company garages. I can just see the hundred dollar parking corporation tickets for locking up my bike on the sidewalk in Squirrel Hill. Plus there would be the pain of having to park my car in Wilkinsburg or Aspinwall or where-ever, to avoid being ticketed at one of the hundred thousand new parking meters that would blanket the City and be in front of every house and apartment building.

Well, it will be all right once we get the silver jackets and jet packs we were supposed to have back in 1976.

Thursday, August 27, 2009 8:17:00 AM  
Blogger C. Briem said...

I don't have the cite on top of my head, but there is precedent from the state supreme court that you just can't legislate away already owed pensions. Leaves little room to propose or pass any such thing via statute.

Thursday, August 27, 2009 8:38:00 AM  
Anonymous MH said...

You can't just make taxpayers pay more either. You can set the rate as high as you want, but between Amazon and the suburbs, you can only make people pay so much.

Thursday, August 27, 2009 10:36:00 AM  
Anonymous Anonymous said...

It's clear that there's a maximum amount of revenue that can be obtained through taxes. If the pension burden is as large as it's made out to be, it's entirely possible that the amount owed is larger than the city could ever raise. There's simply no way out of such a situation without a bailout of some kind if pgh cannot legally cut benefits.

Thursday, August 27, 2009 3:04:00 PM  
Anonymous Anonymous said...

(1) It's about time Harrisburg told municipalities to be honest about pensions. Politicians seem to hand out pensions like candy--passing the buck to later generations.

(2) I have not read the Supreme Court opinion referenced by Chris. But, if it follows California as most states do (federal and Texas law treat public pension promises as "gratutities" which can be changed at any time), there is likely an exception for changes that "preserve the actuarial soundness of the pension system". It is a high standard, but we might be getting there.

(3) I wonder if this is another reason that the City should have declared bankruptcy. We all have seen how private companies have shed pension obligations in bankruptcy. Perhaps the City could have done the same.

Thursday, August 27, 2009 7:28:00 PM  

Post a Comment

<< Home