Thursday, December 12, 2013

Perpetual Pension Punditry

So I've been a pension pundit for some time now, for good or bad, and long before many really cared to notice Downtown. That and if you want to play with the numbers, the references are all here. News today is that the city's pension board is lowering its actuarial assumptions on future investment returns. Something long advocated by just about everyone basically.  A deeply esoteric bit of public finance, but one that is clearly the biggest public finance story impacting the city this year and will continue to impact the city for years in the future. 
So the timing and the motivations of the change are curious for sure. Should this have been done in the past, but wasn't because it was opposed by the very same pension board? Yup. Nonetheless, whatever the motivations and whatever the timing, if you are a believer in good government, this is an unequivocally good thing. If there is one reason why the city of Pittsburgh's pension fund is so underfunded, it is because of the rosy assumptions that the pension board has allowed, or should I say directed, its actuaries to use when calculating how much $$ to put into the pension system. By assuming future investment returns were higher than is realistic, and a whole host of other bad assumptions, the city has gotten away with underfunding the pension system. I'd argue the change at hand yesterday is the single most positive step the pension board has taken to make the pension system solvent in the long run.  .

Don't get me wrong, this is not absolution. The pension board has made some decisions in the past that are quite frightful. To keep the pension system from being taken over by the state, a move that would have forced a revision of actuarial assumptions, the board once put all the assets into cash. One of those investment decisions that any financial advisor would never tell you to do with your retirement assets. It was a decision that clearly cost the city tens of millions.

The story I like best is how the actuary for years used to use severely outdated mortality tables when calculating how much money the pension fund needed from the city each year. By simply assuming workers are going to die faster (brilliant eh?), the pension fund, ergo, would have a smaller future liability. It is an assumption that the city's actuary, in his only public comment for the record ever, actually defended the math, saying we do die a lot faster here.It was the fellow's first and last comment on the record to the media ever. Potter must have offered him a free lifetime subscription to the City Paper to get it. It was a logic that, put another way, said we were all living in a big superfund site. Luckily, in a sense, the city's pension liability has kept going up.  That old assumption was even more perverse when you start to think about the aborted plan to save the pension system by purchasing a vast Dead Peasant life insurance policy.  There must have been some pathological arbitrage opportunity in all of that for someone.

So you might say that is all well and good, but it is still a bad idea to change assumptions right now. Except that again, this problem exists in the first place because every mayoral administration has wanted to punt this decision down the road. It is a problem that compounds itself ever worse every year it is deferred. It is one of those problems that gets that much worse the longer it is delayed. Keeping actuarial assumptions as they have been would be more of the past. I say that because you have to believe there will be pressure on the pension board to revert back on this decision, something that will only be very bad for the city in the future. The fiction would be less painful for sure, but just bad government.

What I wonder about in the future is that with a new finance director coming aboard, will the future finance director sign off on the pension system's actuarial report? I really wonder. If you look at page 14 of the most recent report (per the printed page numbering) you might see some missing signatures. That is the report officially submitted to the state by the way, which the state used to sign off on the plan to keep the city from turning over its pension system to the state.  They didn't seem to mind.

IMHO.....  Next to all that will happen with our water and sewer infrastructure, this one issue may be the single biggest issue impacting the city's financial future. Lots and lots of other stuff will make lots more headlines, but whether the city remains financially solvent in the future comes down to funding the pension system.  


Anonymous BrianTH said...

The only plausible argument I have seen is that it made sense for Pittsburgh to keep underfunding the pension fund in the hope that the state would eventually bail them out in some way (either provide additional funds, or allow a cut in obligations). That, however, appears to be a bit like waiting for Godot.

Friday, December 13, 2013 7:16:00 AM  
Blogger Bram Reichbaum said...

We are in need of a general refresher on how "bad" our pension crunch is. And I favor the term crunch until a better option comes along.

BrianTH I think we can and therefore are obligated to avoid a state "bail out". But we need to identify some legitimate and proper revenue streams which will indeed can "bail out" our City from a culture of tax avoision and our own past mistakes (from our historic population loss, to the mercies of our national economy, to navigational blunders and political tomfoolery.)

Friday, December 13, 2013 10:06:00 PM  
Blogger C. Briem said...

I find it impossible to discuss the general state of the pension system with anyone these days because so many believe in the illusion of the notional parking asset. All discussion and all reporting begs a mathematical fiction that confuses everything.

Crunch as euphemism is best applied to cereal.

Friday, December 13, 2013 11:06:00 PM  
Blogger Bram Reichbaum said...

How about one blog post from Universe A (the notional one, and give it its due!) and one blog post from Universe B (the real one, with a brief disclaimer near the top).

Or just two sets of numbers over years.

Big big fan.

Friday, December 13, 2013 11:58:00 PM  
Blogger C. Briem said...

Why me? Isn't one of these transition teams going to solve the pension problem over the month?

Saturday, December 14, 2013 12:05:00 AM  
Blogger C. Briem said...

but seriously Bram. I've already turned down an offer to put a big pension piece into the paper. Here or in ink, what's the point? There is so little new to say and the news of late proves the story stays much the same no matter.

Saturday, December 14, 2013 12:07:00 AM  
Blogger Bram Reichbaum said...

I'm unclear on what's going on over in the Lestitian arm. Perhaps we should ask.

Reminders, Chris. Repetition. The world is movable when people have information, and that requires sustained memories. If we don't see it in front of us, we presume it evaporated. That is the point.

Looking at iPension, if "nothing happened," in regards to the parking tax revenue (except a year or two's past contribution) we're still 40% funded. Of course in 2005 you warned of a few more years 'til full-blown crisis and eventually a cash flow crisis. How far away are we now from the cash-flow crisis? Are we about one term behind schedule? Did the redirecting of the irrevocable fund buy us that time? Is there any chance the new pension reporting standards will create opportunities? Would you be happier with calling it the Pension Asteroid? Is BrianTH right, should we scout mine shafts and play for a high draft pick?

Saturday, December 14, 2013 3:18:00 AM  
Blogger C. Briem said...

Cash injections beyond the Act 205 minimum requirements over the last several years have indeed deferred the immediate cash crisis, just as the pension bonds of the 1990s deferred the inevitable in the exact same way... albeit the recent cash injections have not had the downside of increasing debt. Tremendous stock market returns in recent years have aided as well of course. As always, there will be no pension crisis, here or anywhere, if stock markets continue to perform at double digit rates forever into the future.

Beyond that it all comes back to how much of the pension fund assets are actually made up of the notional parking asset. I believe at least half of the current pension assets are made up by it, and thus not by any semi-liquid market assets whatsoever. So if you think about it, this entire micro debate (not even that much interest in the topic to call it a 'debate' I realize) over future investment returns is so irrelevant as to be nonsensical. The parking asset it not appreciating, or depreciating, based on anything having to do with stock and bond markets. So changing the future return assumption means a lot less than one might presume, it should only apply to some of the assets although part of the fiction I believe is that the actuary will not make that distinction looking into the future... to them assets are assets. It all is very Vonnegut-like at this point. Until the discourse and the reporting makes clear the difference in the types of assets that make up the pension fund at this type I have no idea what to talk about, nor can I answer how far we are from more dire cash issues. I have to imagine the police pension fund's assets (net of any allocation of notional parking asset value... assuming it is divisible?) is pretty low. I've had debates with folks over whether the 3 funds can 'borrow' from each other if one goes to zero. I can't imagine that is legitimate, but some think it would be ok if you consider the 3 pension plans as a collective.

New pension reporting standards? Like GASB 45, mostly to be ignored here.

Saturday, December 14, 2013 11:17:00 AM  
Blogger C. Briem said...

and just nobody is paying attention to the underfunding that has been going on at the county's pension system for several years now. The city is required per Act 205 to fund its minimum obligation... county is not bound by the same rules and has not even been doing that. A decade ago (2003) Allegheny County's pension plan was over funded at 115%. Anyone want to look up what it is at now?

Saturday, December 14, 2013 11:34:00 AM  
Blogger Bram Reichbaum said...

"Until the discourse and the reporting makes clear the difference in the types of assets that make up the pension fund at this type [sic] I have no idea what to talk about.".

Then we have to do this, or we're between a rock and a hard place.

I assume the County Controller might be well disposed to a pass at concern at 11:34.

Saturday, December 14, 2013 4:19:00 PM  
Anonymous BrianTH said...

I'm not sure I see the argument for the City being "obligated" to limit whatever help it can get from the state. The state has set all sorts of restrictions on what the City can do to trim its pension obligations, and of course the whole Act 205 funding scheme has some perverse elements which have ill-served the City while benefiting other localities.

Big picturewise, the stakeholders who authorized and benefited from the services in question are not the exact same group as the people who make up the City's current revenue base. So it is a bit dubious to argue a relatively new member of that revenue base necessarily has a special moral obligation to pay the bill for services he or she never personally received.

But all this talk of obligations is a bit beside the point, since it does not appear any sort of sweeping pension reform at the state level is likely to be forthcoming. So as a matter of practicalities, not obligations, the City has to figure out how to work within the existing system.

Saturday, December 14, 2013 11:40:00 PM  
Blogger Bram Reichbaum said...

Edit: my last at 4:19 should rest "to take a pass at the concern"

Sunday, December 15, 2013 11:51:00 AM  
Blogger Bram Reichbaum said...

BrianTH - My leeriness toward asking the state to pursue extraordinary measures for our pension fund, is due to my assumption that the simplest way it could help is to recalculate its pension aid formula for local governments; an existing, practical mechanism already in the system. But if the politics of that are really worse than direct bailing I'd revisit. Maybe we should suggest that if they don't contribute, we'll move the city to Missouri.

Sunday, December 15, 2013 12:00:00 PM  
Anonymous BrianTH said...

To be more clear, the only way this even made sense as a vague hope was that there might be some sort of sweeping state-wide pension reform that happened to help Pittsburgh (meaning among many other localities). I agree it never made sense that the state would specifically bail out Pittsburgh.

Sunday, December 15, 2013 12:52:00 PM  
Blogger C. Briem said...

For pension funding formula to be adjusted in the city of Pittsburgh's favor, literally every other municipality in the state will take a real time hit. So yes, a political non-starter. Outright cash from state is more plausible because it would not come across as hurting other budets. That and Pittsburgh has been asking for this since at least beginning of Murphy years. City clout in Harrisburg has only gone down since then.

But also.. have not done it in some time, but I once worked out how much all proposed adjustments would matter and its not as much as you might think. Not going to change the game at this point, it might have 20 years ago.

Sunday, December 15, 2013 1:10:00 PM  
Anonymous Michael Lamb said...

I think the only successful change to Act 205 funding that would have potential for support would require a red-line funding level on current fund beneficiaries and then a more favorable calculation for the truly distressed funds for distribution of the growing remainder.

Monday, December 16, 2013 10:22:00 AM  
Blogger C. Briem said...

The problem remains that the state's system allocates a fixed pot of money derived from out of state insurance to be redistributed to municipal pensions. Makes for a zero sum game. So I agree with the 'red line' concept, but unless state finds net new money too many folks will be aggrieved by any change in and of itself.

Tuesday, December 17, 2013 12:05:00 PM  
Blogger Bram Reichbaum said...

Bet we can make it fly if we sell it as bailout and headache insurance and sell Pgh. and other cities as markets worth protecting. The red line concept if I understand correctly could get us within long FG range.

Tuesday, December 17, 2013 10:46:00 PM  
Anonymous Michael Lamb said...

Actually Chris,the last time I checked, the foreign insurance pool of funds that pays for Act 205 was growing year over year. I think that is still true.

Wednesday, December 18, 2013 3:23:00 PM  

Post a Comment

<< Home