Tuesday, September 06, 2011

Paper chase

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?


Anonymous BrianTH said...

I don't have an inherent problem with treating a pledge of specific revenues as an asset, even when done between entities that could be grouped under a large heading. Forget the general city government for the moment: if the Parking Authority pledged certain revenues to the Pension Board, something has in fact changed substantially with respect to the Pension Board's financing as a result of that pledge, and again I have no inherent problem with calling that pledge an asset of sorts held by the Pension Board.

What I don't know is how close what the City actually did comes to such a scenario. And in fact as I have learned more about the relationship between the Parking Authority and the City, it has become unclear to me that the City is actually entitled to do anything particularly close to that scenario.

Tuesday, September 06, 2011 1:22:00 PM  
Anonymous MH said...

I'm sure everything was done with the same attention to detail and legal requirements as always.

Tuesday, September 06, 2011 2:37:00 PM  
Anonymous Anonymous said...

I think the questions you raise are exactly what the gurus at PERC will be contemplating. I disagree with your contention that the Pension Board and City are one and the same. In fact the fiduciary obligation of pension fund members is first and foremost to the members of the fund while the city's obligation is more to the residents and taxpayers. Also, the board make-up was fundamentally changed in the past few years so that the Mayor no longer controls a majority of the board. The Pension fund board is actually far more independent and autonomous than any of the city's municipal authorities.

The real question is "does the pension fund own the future revenue?" The city irrevocably offerred it and the Pension fund accepted it so aguably there is a contract between the two. If, in the future, the city would try to alter the arrangement, the pension fund would have contractual remedies through leagal action.

Could the pension fund "sell" the future revenue? I think they could if they could find a buyer. The more telling or realistic question is "can they use the future revenue to finance a bond deal?" I think the answer to that is clearly yes. And there are plenty of underwriters willing to do that deal right now.

While this future committment might not be an asset under GASB or GAAP, it is clearly an economic asset to the fund. Whether or not that's good enough for PERC is the key question.

Wednesday, September 07, 2011 9:10:00 AM  
Blogger C. Briem said...

I was thinking about this...and it is probably irrelevant whether thepension board is independent of the city itself. The pension board is not really on the hook for future pension payments, the city of Pittsburgh itself is. If the pension fund goes dry completely, the city itself made the obligations as part of its past wage contracts and commitments. So it really does come down to whether the city's IOU to itself is an asset.

but on the issue as I parsed it originally it still is an interesting question. If the pension board exists on its own, what is its charter. Does it have a corporate existence? Of course not? Does it exist as a government? No.

I would not disagree that it is more independent thanmany of the city's municipal authorities in a sense. Legally though the authorities exist by specific statutes applicable only to them.

But one thing is just not true as it stands now. The concept that "The city irrevocably offerred "... There is nothing behind the irrevocable part of that statement as it stands. If you disagree, can you explain the legal mechanism that is 'irrevocable'? Remember when the lock box savings of the city were in an 'irrevocable' trust with the ICA to be used only for debt payments to the exclusion of pension payments. They revoked that without any more than a vote.. and a quick vote at that.

fun questions.

Wednesday, September 07, 2011 9:17:00 AM  
Blogger C. Briem said...

and here is a great question.. if indeed the pension board literally sold the asset to some third party... then is the whole deal here any different at all than a revenue bond being floated.

If it is different, then refer back to the questions about whether this all can be revoked.

Wednesday, September 07, 2011 9:21:00 AM  
Anonymous MH said...

...while the city's obligation is more to the residents and taxpayers.

Now that's dry wit.

Wednesday, September 07, 2011 9:40:00 AM  
Blogger C. Briem said...

apologies for beating the horse..

but more on my point about the city itself really being on the hood for pension payments. It was the city's position in the past that if/when the pension fund went dry, the system would effectively convert to a pay as you go type system with obligations being met from the city's budget directly. How that fits with Act 205 is a side question, but if true then consider what that all means to the nominal independence of the pension board.

Wednesday, September 07, 2011 9:46:00 AM  
Anonymous Anonymous said...

Chris, I'm glad you don't work at PERC. These are all great points.

Wednesday, September 07, 2011 12:03:00 PM  
Blogger Bram Reichbaum said...

In point of fact, the "irrevocable" fund was never made irrevocable -- hence the whole "fund in the nature of an irrevocable trust" meme that was also lauded for a "flexibility" of which we wound up taking advantage. But we all take your point in regards to the pension pledge.

Wednesday, September 07, 2011 4:54:00 PM  
Blogger C. Briem said...

Bram, you need to be a lawyer to have permission to repeat the phrase "fund in the nature of an irrevocable trust"..

Could such a fund have been made 'irrevocable' is a related question to all of this. Short of literal defeasement that is. The fact that they couldnt find a way is not unrelated to the questions at hand.

Wednesday, September 07, 2011 7:26:00 PM  

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