Perpetual Pension Punditry
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The story I like best is how the actuary for years used to use severely outdated mortality tables when calculating how much money the pension fund needed from the city each year.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.