Saturday, November 06, 2010

Does anyone at all really know what is going on inside the Pension Board?

Being at the end, beginning, make that the middle of the parking pension imbroglio here in the City..  this really caught my attention. Unfortunately it may only be me.

First off, what is the most important pension story of the month?  The parking lease, or lack thereof?   Possibly, but there may be something else.  Yes, it is what a ranted on about recently.   The story that the city of Pittsburgh was reported to have made a really big bet on the stock market in August.  A bet which it would appear has cost the city a lot of money given how the markets have performed over the last couple of months.

Did it happen?   An anonymous commenter here...  and I have always said this blog has the most knowledgable commenters around I am proud to say...  put up a comment saying that the city in fact did NOT implement the plan reported upon.. i.e. it did not 'freeze' the pension funds assets at their levels of late August.  I would have believed that.

Now I made clear that I really had no idea if the city actually did what it said it did and 'froze' the city's pension assets. Just because that is what the news said gets a bit irrelevant.  I infer from the article on this that they were never going to actually sell all their equities for cash, since for an asset base in the hundreds of $millions that would be pretty costly when it came to transaction costs.. especially since they would clearly want ot be reinvested in their portfolio come the beginning of the year it would make little sense to actually sell any stock to accomplish what was intended..  It really sounded to me like they had bought a bunch of market put options that would effectively do the same thing.  A guess on my part, but straighforward enough a possibility. Begs the question how you hedge an illiquid asset, but let's leave that for another post someday.

Here is the deal.  On PCNC's Nighttalk which aired Friday there was a general discussion of all the weeks talking points with folks who really should know all that is going on in town. The only point that caught my ear was Allegheny County Council President, and City of Pittsburgh resident, Rich Fitzgerald making the point that the city did in fact literally sell it's pension fund assets and lost a big chunk of money in the process.

Really gets me wondering...  is the council president correct which would mean the city really is underwater with a huge bet they placed with the pension funds' assets.  As troubling as that is, it is more troubling to think he had it wrong since if he is not being told the situation then who is?   Does anyone at all know what goes on inside the pension board?  Did they do what the news reports said they did and if so what were the consequences?  It may be the most esoteric, but most important question impacting the future of the pension fund.  More than whether the parking lease deal goes through. 

Why so important?  How much of a loss are we talking about?   I benchmarked the notional loss at $14-15 million, though the potential is for twice that.  Just for bracketing a worse case, call that high end loss to be $30 million.  Now couple that with all the talk of the last week of pension asset appreciation and the impact of the state's 6% appreciation assumpion on the future of the pension fund.  City would prefer a presumption that pension assets will appreciate at 7.5, 8 or 8.75% in perpetuity.   In fact the city has been assuming 8.75% for most of the last decade, which is the real root of the problem we are having now, but hold that thought for now.  If that notional $30 million is allowed to appreciate at a presumed 8% over a 30 year amortization period, the loss we are talking about really becomes $300 million.   Over 40 years:  $650 million.  Do I need to add an exclamation point?

But again, it's about the transparency.  It seems it is not just something Joe Q. Public is being left in the dark on.. it seems even the most important local politicians in town are equally being left out of the loop. Scary.

10 Comments:

Anonymous MH said...

and I have always said this blog has the most knowledgable commenters around

Pittsblog might have more knowledgeable commenters and all of the good comments never make it past moderation.

Sunday, November 07, 2010 12:57:00 AM  
Anonymous BrianTH said...

The lease is still a bigger deal, for the same reason (compounding). Heck, remember the heady days after the bid came in high? The extra money was well over $100 million--whether or not to put that into the pension would straightforwardly be a much bigger question than whether or not a poor investment decisions recently cost the fund $30 million. But whether or not that is even possible (perhaps on a reduced basis if there is a renegotiation of terms) is just part of the lease question.

That said--$30 million here, $30 million there, soon you are talking about real money.

Sunday, November 07, 2010 7:19:00 AM  
Blogger C. Briem said...

by that argument, the capitalization of the pension fund with the pension bonds in the 1990's would have been an even bigger deal. What nobody seems to want to talk about is why that didn't solve the problem as some expected it would. Therin resides the nub of it all. The ultimate question as it were. Now we just need the ultimate answer.

Sunday, November 07, 2010 8:02:00 AM  
Anonymous Anonymous said...

Who invested the proceeds of Murphy's 1998 pension bonds?

Sunday, November 07, 2010 9:58:00 AM  
Blogger C. Briem said...

that would be the pension board and their investment advisors at the time.. which as some really seem to want to intentionally conflate are not the current investment managers.

I kind of wonder what the Mercer thought of the direction to buy the put options that may or may not have lost a lot of money. Could it be (pure conjecture on my part) that they refused to implement such an inane strategy and wound up saving the city millions? Until there is an answer I will just have to keep guessing like that.

Sunday, November 07, 2010 10:14:00 AM  
Anonymous BrianTH said...

I'm not sure potential mismanagement of the fund is the only possible reason why the pension bonds failed to permanently fix the problem. But sure, if the issue is not just this particular episode but potential mismanagement in general, then there is no upper bound on how potentially important that issue could be.

Sunday, November 07, 2010 11:21:00 AM  
Anonymous MH said...

I thought the story was that the funds from the bond issue were reasonably well managed (considering the small size of the fund and the very bad timing as far as the tech boom goes), but that you can't refill a bucket with a hole in the bottom and expect it to stay full.

Sunday, November 07, 2010 11:26:00 AM  
Blogger C. Briem said...

the bad management extends across a lot of issues, but why has the actuarial derived minimum municipal obligation failed to keep the pension funds from appreciating even in good market years is where I start.

But I agree with MH on the issue of when this all happened and market issues at the time in both stock and bond markets impacting the pension funds.. but that does not mitigate the decisions to put the money into the markets at that time. Some clear tulip vision at the time (end of the 1990s') which had seen some pretty serious market appreciation and the idea was clearly it would continue forever into the future.

Then there is the presumptions of not 6, not 8.5 or even 8, but 8.75% overall market appreciation into the future.. That of course is the error that ties both the issues above together. I think if you pick it apart.. the actuary assumed 8.75% as the overall investment growth in the pension funds.. it was not that they assumed merely 8.75% in equity growth, but 8.75% in a portfolio clearly mixed with bonds. So they were implicitly assuming a sustained equity return much larger.

Sunday, November 07, 2010 11:40:00 AM  
Blogger Bram Reichbaum said...

Well, as to the "why" we could guess as to the size and number of the "illiquid" investments. The state tells us that (and only that) these such things are in private equity, which is not awful on its face but does offer returns which can be expected to be meager before they get fulsome. If a significant sum is in PE I suppose it could impact the larger picture, maybe the more so depending on the exact vehicles being used.

But I agree: 8.75% seems "right out" anymore. Can't they reform this in a lickety-split manner? Wouldn't need to be ponderously legislated is my conjecture.

Monday, November 08, 2010 1:23:00 AM  
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