Tuesday, May 24, 2011

In Arena Football we would be doing OK

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.


Blogger Bram Reichbaum said...

As to the metaphysical / baseline legal question -- it's a matter of trust? Cities are loathe to go back on their word and risk the alienation of decent businesspeople everywhere. The State alone would cajole us to meet that obligation by hook or crook. This country was built on a handshake, they say.

As to where we're at -- it'll take a miracle to remain functionally solvent through the next decade. As to how we can help ourselves in the meanwhile: yes, it's time to diagnose detectable deficiencies in our pension fund management, and shore those up.

We need to get new eyes on that.

Tuesday, May 24, 2011 7:10:00 PM  
Anonymous Anonymous said...

Just to get me up to speed, can you identify some of those detectable deficiencies Bram/Chris, and who are some candidates for providing those new eyes?

Wednesday, May 25, 2011 9:00:00 AM  
Anonymous Anonymous said...

The city has irrevocably conveyed future revenue to the pension trust fund and the trust fund has accepted that conveyance as an asset to the fund. If a future council or mayor tried to rescind or amend that conveyance, pension trustees would have a fiduciary responsibility to seek remedies including court action. The Commonwealth, through the Auditor General's audit function would also have the ability to enforce this agreement by the threat of nullifying the 2011 determination and reverting tto the consequences of Act 44 (state takeover). h .

Wednesday, May 25, 2011 9:14:00 AM  
Anonymous Anonymous said...


This concept is not that revolutionary. It is very similar to how REITs are valued in pension funds. Granted this is an original application of that idea. But hey, original thought from Grant Street seems a bit refreshing to me.

Wednesday, May 25, 2011 9:17:00 AM  
Anonymous Anonymous said...

The year after Murphy floated the bonds to get the City to 60% funding, the City contributed $4 million to the pension fund

There's your answer

Wednesday, May 25, 2011 10:22:00 AM  
Anonymous MH said...

The city has irrevocably conveyed future revenue to the pension trust fund and the trust fund has accepted that conveyance as an asset to the fund.

I'm no lawyer, but I don't think that accords with the usual interpretations of the U.S. Constitution.

Wednesday, May 25, 2011 11:54:00 AM  
Blogger C. Briem said...

I understand the analogy, but it just is not a REIT in any legal sense. See McAneny's comment in the Trib last week I think on this which raise lots of questions of what he was expecting this to look like. and the 'legal conveyance' is akin to 'no controlling legal authority' and equally meaningless from the lawyers I have asked. Is there a countersigned contract? What I think would be an asset would have been monetizing some future revenue stream into a bond that itself would be the asset and the bondholders would have clear claim on some future revenues. To do this without the financial instrument is really quite a leap in public finance practice in the United States. If for sake of argument you skip the REIT analogy, can someone really find an example of this being used in public finance accounting in the US?

Wednesday, May 25, 2011 12:26:00 PM  
Anonymous MH said...

I can't think of any examples, but I’m hardly one to know. But I don't understand how a city government can set a tax or fee in such a way that any later city government can’t change it. That would kind of remove the whole point of having elections every couple of years. And since Pittsburgh hasn’t sold an asset that seems to be the situation we are in now.

Wednesday, May 25, 2011 12:48:00 PM  
Blogger Bram Reichbaum said...

Back up to Anon 9:00 am: As to the deficiencies, there was a substantial bet based on market timing over the last year which went bad. There are unrealistic investment return assumptions baked into our projections. There may be parochial or even institutional biases. As to candidates for the fresh set of eyes, pass.

Wednesday, May 25, 2011 6:42:00 PM  

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