Saturday, July 20, 2013

Bankrupt is as bankrupt files

Let's be clear up front, I think there is immense good news around us here in Pittsburgh. Much of which is unnoticed.  Just yesterday data became available showing yet another new all time employment peak in the Pittsburgh region  That is for the REGION ok.   A lot of which is made up of the city of Pittsburgh, which also has a lot of good stories to tell. Good news for the city of Pittsburgh as well which maintains a high level of employment within the city proper.

But is it all such good news?  The Pittsburgh-Detroit meme is coming back, much as it started to at the beginning of the last recession.  Now we are onto looking at how the cities have fared given the big news in public finance world. See WashPo: Detroit goes bankrupt, largest municipal filing in U.S. history. Public finance is a topic unto itself and a story different from the metro economy.  In Detroit broadly the economic story is the auto makers are coming back and doing well.  Does not help the city's fiscal situation much which can't shed its history as easy as corporate America. So what about Pittsburgh?

So Time has this today: Pittsburgh's Lessons for Detroit. A curious, if telling, article that pretty much has no info on Pittsburgh. It is now just taken as a given we are a paragon of growth and recovery.

The topic at hand is big city finance.   What is wrong in Detroit is a huge huge topic we will all be gnashing over for decades, this being the first big city bankruptcy since New York City.  (Yes, I know full well NYC did not ever actually file for Chapter 9 bankruptcy, which is a topic unto itself that is not apropos here).   But is Detroit worse off than Pittsburgh?  Consider that one of the bigger issues in Detroit is the underfunding of their pension system.   The comparison of the two cities may shock you.

This all becomes very sobering when you realize that Detroit's pension system is much better funded than the City of Pittsburgh's pension system, no matter how you add up the numbers. Detroit's pension system is funded at either 69% or 91%. The 91% is the official number and based on some standard, if optimisitc assumptions.  91% is also the number to compare to Pittsburgh's if you want to compare consistent financial assumptions used in the calculation of Pittsburgh's pension funding.

Pittsburgh's pension system is reported to be 60% funded.  Yet, even that is misleading. Not only is Pittsburgh's pension funding calculated with a very optimistic assumption on future investment returns, but something else.  The biggest "asset" in the City of Pittsburgh's pension fund is the IOU it wrote to itself supposedly based on evening parking fees that have recently been cancelled. That IOU, for over $13 million a year is notionally estimated to equate to an asset value of $246 million. Take that out and you don't get a funding calculation anywhere near 60%.  In contrast Detroit's pension funding is entirely calculated based on real investment assets.

Just to be clear, if your retirement planning was based on the premise of the city of Pittsburgh, you would write a note to yourself saying you will save $X a year for the next 30 years.  Sign that note to say it is irrevocable and file it away between pages of some old book on your bookshelf.  If you don't follow through, you can always sue yourself for breach of contract and get your money. Problem solved.

The reality is much more painful. Pittsburgh has if anything worked to make it's pension situation worse in recent years. Still nobody really notices since the public meme is all was fixed. 

Like I said.. Even if you include the parking 'asset', Pittsburgh's pension funding ratio is far below Detroit's.  So even if you dispute my characterization of the notional parking asset... fine, ignore me.  Still the calculation of the city's pension unfunded pension liability in total is now even higher than when I wrote this in 2005. (official Jan 1, 2005 calculation of undunded liability = $469 million, I am pretty sure we are between $450-500 million today.... that is IF you assume the notional asset is real, higher otherwise.) I'd argue that the gap between actuarial assumptions and reality is much higher now than it was back then, but that is a bigger topic.

Lots of good news in Pittsburgh, but Pittsburgh's financial plight came from years (decades) of underplaying the city's pension problems.  The pension issues are worse than they ever were, yet everyone seems to agree there is no problem at all. At least in the past there was tacit agreement some problem was there, but that it was too much to do anything about. Today, just nothing. 

Ironically, Detroit's pension system might be even better funded if they didn't take a bath on their investment in Pittsburgh's casino.  Just had to mention that.  Of course it has also been brought to my attention that the Chilean government's pension system is now the owner of the sublimely flourescent K&L Gates Center downtown.  What big assets does the city of Pittsburgh's pension system own?  Oh, wait. I bet you can't use an IOU to yourself as collateral in a real estate purchase. At least not any longer.

and for those who have read thus far... for the post-credit scene....  anyone want to look at the 10 year trend in the pension funding ratio for Allegheny County?


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