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