Tuesday, May 24, 2011
You know, the auditor general may be on to something. Put it all in football terms and folks may pay attention. Like all such things I don’t have time to really keep up with all I could on my iPension page…. but with the report from the state auditor general in the news it seems worth pointing out a few things.
Only in Pittsburgh’s context is the verbiage ‘severely underfunded’ an optimistic euphemism. We can quibble over where they are at specifically, but in terms of real assets you are talking a pension funding that is under 30% of what the actuaries say should be in there. That is a calculation based on actuarial assumptions from over 2 years ago at this point since the total liability calculation is really based on data current as of January 1, 2009. It clearly has gone up since then. It also does not take into account that virtually all public pensions used unrealistic discount rates and excessive assumptions on investment returns. If recalculated with more conservative assumptions, who knows what the funding ratio would be.
Then there is the impact of the notional ‘asset’ created by a promise of City of Pittsburgh revenue. Whether that funding stream, if conceptualized as an asset and it’s NPV calculated, really is an asset is an almost metaphysical question... Little has been written about how unique such an asset is in the public pension accounting world. I have asked before, but let’s say the city changes the ordinance that sets aside that funding stream for the pension system… does anyone in the world have standing to sue? I think nobody is the answer, which really calls into question just how real that asset is. If it really does get counted as an asset, it really could lead to a revolution of sorts in public pension management and financing nationwide. We’ll see.
But ignore all of that. Here is the big picture: Even if the city of Pittsburgh’s pension system is notionally over 50% or not, or at least deemed by some actuary to be so… the question is what does the future hold? When the City of Pittsburgh floated just under $300 million in pension bonds in the late 1990’s the pension funds were calculated to be over 60% funded, and projected to quickly reach to 100%.
Yet that wasn’t the case. Even in years good for the stock market, the city of Pittsburgh’s pension fund has falled behind. With payouts, the fund as a whole has continued to drop. If the actuary used decent assumptions in calculating the liability of the fund, the overall funding should be going up. Yet even decent investment returns only allows the fund to tread water and in bad years it falls back quickly. Leads you to wonder if there are not some other fundamental problems going on with the management of the pension fund. Given that a decade ago they were close to 2/3rds funded, the city can't go back to the old excuse that decades ago the system was essentially a pay as you go system. The question is what has happened over the last decade and the problem goes far beyond what has happened on Wall Street.