Tuesday, September 06, 2011
While the waiting game for the Pittsburgh pension system is inexorably extended. All sorts of public finance fodder to discuss in all of this. The core issue at the moment is what the actuarial gnomes here and in Harrisburg think of the idea of capitalizing the value of some future tax revenues. I think the real issue is what the lawyers think of the idea. Can a pledge of future tax revenues be an asset? In a sense, sure it can. Those ads you probably ignore about folks willing to trade some annuity they have to an upfront payment will attest to that. It also is fundamentally what happens when a revenue bond is issued. Still, what is being proposed here is a pretty novel concept. A basic question is who owns what asset in the first place, and whom is it being transferred to? This really boils down to an interesting question of governance.
Sure seems to me that the pension fund of the City of Pittsburgh is at its core, a part of the city of Pittsburgh. Yes? Yes, there is a pension board, but it is a board with a membership defined by city statute and entirely made up of city apparachiki. It would be a stretch to call it independent of the city. If you accept as a premise that city and pension fund are of the same DNA, then this whole pension question becomes quite strange.
The analogy I come up with is this. Imagine you are a company which has a large loan from a bank. A typical covenant to a business loan is that when the borrower’s assets fall below a set level, then the loan can be called or is otherwise is in default.
So some firm with declining assets decides to do something creative. It crafts an IOU to itself. Then it gets its at least somewhat compliant accountant to put the NPV of the IOU payback on its books as a current asset.
Problem solved…. Or not.
This is the type of thing that should give the GASB gnomes a short circuit: a promise by a government entity to itself constitutes a asset that is reported on the books as such. Think of all the possibilities for repositioning deficits. It gets stranger actually. If you consider that Act 205 mandates payments into the pension fund, payments which presumably are backed at the end of the day by city revenues… then has anything at all changed in all of this? Consider that literally no new revenue is being created by all of this, no change in future liabilities and pension payments… what exactly is changing.
Save that for the metaphysics class.There is an economic angle to all of this believe it or not. The future pledge of city revenues depends of course on the city's ability to pay such increased transfers into the pension fund... transfers that will be heightened for decades one way or the other. Do you believe that is always going to be feasible? Gets back to some great research by the public finance economist Bob Inman at the University of Pennsylvania which he was probably motivated to get into by the severe fiscal state of Philadelphia two decades ago. Just go google "Revenue Hills" and you will be lead to what I am talking about. That in a nutshell is why a government's pledge to itself is something a bit different from what normally is called an 'asset'..... or at the very least a marginally fungible asset. There indeed is the rub.... could the pension board 'sell' the pledge of revenue into the future to anyone at all for a fixed price up front?