Monday, November 01, 2010

Peering past the singularity

I've said it before, but the center of gravity in the whole pension/parking imbrogio is not the funding level of the pension system, but control over how the pension system in run.  Trib today has a line on that: State takeover would open Pittsburgh's pension books

I still think it is ridiculous that there is virtually no pubic information on the pension fund, what is clearly now the single biggest policy conundrum facing the future of the city of Pittsburgh as a municipal entity.  That I have the only public posting of the city's actuarial reports on the pension system is, quite honestly, an embarassment.  Nobody seems to care though which is not a knock on the public as a whole as a lot of folks paid lots of money to care about the most esoteric of things.  Act 47 ignored all the hard questions associated with pensions.  The ICA could be conducting ongoing guerilla tactics to improve the status quo.  Everyone collectively likes to ignore the issue.  Some form of group-think, or group enabling going on. Some like to blame the city for the mess it is in, but there are a whole cast of accomplices and unindicted co-conspirators.

Think for a second how much we don't know about the pension fund.  If nothing else, the path thus far has revealed that the minimal funding of the city's pension assets include what all agree are some undisclosed illiquid assets.  That disclosure in itself is worth the pain we have been through thus far. What those illiquid assets are, and what they are really worth presently, may turn out to be a bigger story than the whole parking lease debate in itself. The actuary's letter references in the link in this paragraph says only the the illiquid assets on the city's books somehow "could be bonds issued by foreign governments or private equity".  So the actuary itself does not know, or does not want to disclose the specifics?  It means we may own some Czech sovereign debt or a piece of a Brazilian cello manufacturer? Who knows?  Who is even asking?  At the very least it means that a pension fund that is selling parking assets because it is so in need of cash has made investments in things that can't be converted to cash in the near term. That's assuming they can be converted to cash at all.

If anyone down at the city claims that the city just has to lease the parking assets, just look back not too long ago and wonder why the city was strongly rebuting any claims that there was a pension problem at all. The quote from the end of 2008 was:
City Budget Director Scott Kunka likened that to yelling "Fire!" in a crowded theater.
"I think that the data was inaccurate. It's quite a bit of a distortion," Kunka said. The city is legally required to fully fund the pension and is on track to do so, he said.
 ... on track to fully fund the pension?? That's what they said. Begs the question of why it's so important all of a sudden to get money from the lease of the parking assets?  That quote is from the end of 2008, so the wall street crunch had already taken its toll on the pension assets.  In fact pension funding would rebound a bit over the next year. If it was not a problem back then, it is not a problem now.  Of course it was a problem at the time. 

There has been a real cost to all of this.  I mentioned this earlier, but I may have been a bit too indirect.  The short story if you re-read that post is that the city was so concerned a couple months ago with ongoing investment losses that they 'locked in' the pension assets at the time.  Who knows if they really did, but that was they said publicly based on decisions at the last pension board meeting.  It was in a sense a large bet akin to try and time the market.  It would be that they made a big bet that the stock market was going to continue to go down.  In fact, the day that was in the news was the lowest the stock market has been in the last 6 months and the markets would generally appreciate 10% or more over the subsequent month.

So it seems to me that the city lost out on that gain because of their decision to 'freeze' the pension assets.  Now I presume actually moving money out of bond or equity markets would be costly, I infer that the decision they announced meant they placed a large bet investment in some sort of market put options.  I would suspect that those put options have generally lost their value since then.  Someone really needs to go look into whether the pension board followed through on what it had announced, what investment was made to hedge the pension assets, and what the loss has been.  Market timing = bad. 

How much could the loss be?  Well, the stock market really did go up by 10% or so.  You would hope that the city's pension assets are not 100% in equities, although the actuarial assumption fo 8% returns in perpetuity would almost force them to be.  Lets assume for sake of argument a 50/50 split between equities and bonds.  So that notional 10% loss would be more like 5%.  5% on an asset base of $270 million equals a scary number. 

I'll stop the math there since it is a back of the envelope calculation based on minimal information... see the first paragraph on the lack of information problem.  I can't say they really did the hedge or not.. nor put a dollar amount on the potential loss, but if they did go through with it we are talking about 7 or even 8 figures.  Would be one of the biggest blows to the pension fund in some time. 

But we just don't know.


Anonymous MH said...

That disclosure in itself is worth the pain we have been through thus far.

Aside from feeling bad about various typos I've made in blog comments and time wasted to see what Bram's stalker was saying, there has been no pain for me at all. I want disclosure before any fix because my pain doesn't start until we actually start paying for this.

Monday, November 01, 2010 10:13:00 AM  
Anonymous Anonymous said...

The pension fund was NOT locked in

Due to incompetence (some cog in the bureaucratic wheel had off that day) rather than due to any market insight

Monday, November 01, 2010 11:49:00 PM  
Blogger C. Briem said...

So sheer luck kept the city from losing $15 million or so? Sounds about right. When were we going to learn about that? I missed the press release from the pension board telling us they were not going to go through with it all.

Monday, November 01, 2010 11:54:00 PM  
Blogger C. Briem said...

So wait a minute.. the pension board votes on a major change in policy.. the media reports on the major change in policy...

and it just does not happen??

Yeah, sure.

Tuesday, November 02, 2010 1:13:00 AM  
Anonymous MH said...

I'd buy it. If you called 311 during snowmaddegon, they'd say that the plow was just around the corner and we never saw one for a full week.

Tuesday, November 02, 2010 9:12:00 AM  

Post a Comment

Links to this post:

Create a Link

<< Home