29 is the new zero

So here is an issue a lot of us have been kvetching about for a long time.  Bloomberg has this today on the vast unknown of how all the thousands of municipal pension funds in Pennsylvania spend to administer their pension plans: Pennsylvania Pays Pension Penalty as Bond Costs Climb.   It may be the single biggest black hole in Pennsylvania public finance.  and the administration costs probably are just the part of the iceberg you can see.  Nobody really can tell you whether the investments all those micro-plans are making really make sense.  Even the big plans that have lots of eyes on them do some really bizarre things that lose $millions.  Imagine what we don’t know about the investment decisions of the other 3,000 or so pension plans in Pennsylvania.   Locally I can’t read the pension news any longer since it all makes so little sense to me. Today:  City Pension Board Rejects Studying ‘Realistic’ Returns.  Pension doing well, pension doing poorly?  Who knows really?  The latest update on the status of the Pittsburgh pension fund is that it’s funding ratio went down by 1.7%.  OK what does that mean?

The numbers mean very little.  Skipping the long story, the pension ‘fund’ includes in its valuation a notional asset made up of a semi-codified promise of future parking tax revenue.  It is said the promise of future revenues have increased the funding ratio of the pension fund by 29%.  We will skip the fact that law and contracts all effectively mean that the city has promised to pay the pension fund anyway.  If the promise gets to be valued as an asset, then there isn’t any real need to be quantifying how funded the system is in the first place  OK, that is almost philosophical.  Skip the big picture question, but the real question is how well funded is Pittsburgh’s pension system?

So think about it.  If the pension fund had zero liquid or semi-liquid assets then it would still have this promise of future payments that kind of exists no matter.  If there were no liquid assets then you can’t spend the future promise of payments unless you borrow against them. So if consistent with the regular reporting on this, the official calculation would be that the pension fund would be funded at a 29% funding ratio.  No cash to send out checks, but no matter.  In other words 29 is the new zero.

So even if the news is minimal, the issue won’t go away even if the city wants it to.  For the microscopic % out there who might be able to read this past the paywall, but Bondbuyer recently covered us: Pittsburgh Wants toEnd Oversight, But Pensions Present Problems.  PBT earlier in the month if you missed it: Pittsburgh’s pension-fund projections met with skepticism

and as mentioned here in the past.. there are some more interesting things coming down the road with regards to public pension accounting nationally.

Not all pensions are created equal

So here is one of those factoids that may confuse those who read too much news.

So what do we know about the City of Pittsburgh’s pension system? Officially it was funded at around 56%, but that really is an old number. It also is a number that is more than double what it would be if you took out the notional ‘asset’ that I still find hard to talk about seriously.   No matter.  Pretend it really is 60% for sake of argument.  Only in Pittsburgh logic is that a ’success’ when the rest of the world would call it abysmal.  We also know that the Pennsylvania school pension system (PSERS) is better funded ataround 75%, all real assets by the way. Some consider that low, but still a lot better than a lot of municipalities. Could be better.    Now all propblems at the Port Authority are being laid at the feet of escalating pension costs.  Sure must be that the Port Authority’s pension system is in far worse shape than the city of PSERS right?  Just must be.   And like all common wisdom, it is far more common than wise.  Here is the time series (page 25) up to the latest public info on the funding ratio for the Port Authority drivers pension system.  Is this what you expected given what is in the headlines?

Seriously.. what number would you have guessed? It turns out a lot of pension math is misconstrued in public.

Note the latest data there is for January 1, 2010 which is still on the heels of some bad stock market losses for most funds.  2010 and then 2011 were both real good years for public pension systems in the US, so maybe they are even higher than the 87%.  Think about that.  The current funding ratio might be a slightly relevant number for the current public debate? The absolute numbers of relevance are that the calculated liability is $781 million and the assets available are $681 million.   Compare to the City of Pittsburgh which is now over a $billion in calculated liability and an ever diminishing amount of liquid assets to cover it.  I have never seen any reporting on how well funded the drivers pension plan is.  In fact, I have seen no reporting of the hard data on the pension plans $$ assets at all.     In fact..  I wonder a bit.   That January 1, 2010 calculation for the liability value is a dynamic number as actuarial valuations too often are.   The assumptions include some very steady wage increases for the Port Authority drivers.. all of them.  What do we know?   A lot of drivers are about to be laid off as routes are cut.  Lots of that liability is about to be lopped off, maybe a lot of that liability has already been taken off the books given layoffs since that January 1, 2010 reference data now 2.5 years ago.  I bet wage increases will come in a bit lower than the actuary assumes which would also lop off a big part of the liability calculation.  A small change in that assumption will bring down the calculated liability a lot actually. Could it be that if there was a current actuarial valuation that the current asset values would make it fully funded?  If not, it certainly may be the best funded large public pension system in Pennsylvania.  You would never get that from the headlines though.  Now..  the retort is that the the issue is health care costs, and in particular pension health care costs.  True.  But note that once you start talking about health care costs you are talking about something different from the pension discussion normally in the public debate for say the City of Pittsburgh.   Lots of public institutions have a big health care liability that is completely unfunded and is basically a big train wreck going to happen. It is a nearly ubiquitous problem in both public and private sector.  It just becomes an apples and oranges discussion when you talk about the pension problem at the Port Authority if there is any comparison to the pension debate for the city which mostly ignores the problem.  In fact there is a really convoluted aspect to this.   The Port Authority has some big pension cost problems when it comes to health care expenses now and in the future.  The big reason is that the health care liability has no $$ put toward it.  That is a very different problem than what I think most people assume that the pension fund itself is underfunded.  Like most public institutions you can’t say it was a big secret this health care bill was coming due.

Also was no secret that most public institutions were not putting money away for the expenses they knew were coming due.  In fact I think the rule that nominally is forcing public institutions to address this big looming problem, something called GASB 45, was mentioned right here years ago..  2006 actually if you poke at that link so yes I know what the issues are.  That the Port Authority is ramping up payments to fund some of the that health care liability is actually commendable for the record.  But if you are are lead to believe that the Port Authority is in worse shape than the city which also clearly has several hundred $million in unfunded health care liability but is just choosing to continue without such contributions is a meaningless comparison.   Also a little issue with Allegheny County as well which has seen its pension funding ratio falling behind over the last 5-10 years.  Few mention that much, or talk of shutting down a third of the county.  Maybe we can lop off everything north of the Allegheny River?

Puttering on Pensions

This could be an uber long post,or it could be short and pithy.

But if you think all the pension issues in the city are… if not say ’solved’ but even if you would go so far as to say ’stable’ there is a new iceberg in the water.

There are about to be some big new major changes in the pension accounting rules put out by the Government Accounting Standards Board (GASB). And when I say major there are some that would conceivably shift the debate in the City of Pittsburgh to a new plan.

As an aside… is the pledge (’pledge’… sounds like a public television pseudo advertisement doesn’t it? About the same thing in context) of future parking revenue even a GASB compliant investment vehicle in the first place?  Nevermind that.

The rules being proposed have lots in them, but the biggest things that will hit the city of Pittsburgh are these two.  Per the Bond Buyer article in the first link….

state and local governments, for the first time, to report unfunded pension liabilities on their balance sheets.

That one in itself is bad, but bad on paper.  Hopefully nobody thinks the unfunded liability is not there so it will not really change anything at the end of the day even if it gives ratings agencies pause.  The really big thing is that the new rules are being reported to require pension actuaries to use a 3.5% rate of return assumption for their investments.   I’d do the math on what I think it means if they used the 3.5% assumption here, but it is too scary.

yes, that was the short pithy version.   Or from my days on Capital Hill there is the this Senator summary which for this is:  Bad.

Catching up on a week in numbers

I was told my blog here needs more white space.  I am not sure this post will be an improvement, but here are some random hits from numbers talked about over the last week and a half.

So if I were Allegheny County and I were doing my due diligence defending itself in almost any appeal of a commercial property valuation I would start with this chart which is awfully clear. Since I am pretty sure real estate is a very fixed-cost investment… a roughly 25% decline in vacancy rate has to have a much bigger percentage gain on net profits for almost every office rental in the county. It is a remarkably positive trend no matter.

One of my first posts here some years ago mentioned the likely displacement of local bingo hall revenue that will result from the then notional casino.  Those stories have begun.  Trib: Alle-Kiski area bingo halls feel burned.

Speaking of casinos… the Cleveland casino is now slated to open May 14th.   When there will also be a casino in Lawrence County I just don’t track enough to know.

So you might read this story on the latest from the Pittsburgh pension fund and think things are good: Pittsburgh’s pension fund shows some recovery.  Of course if you do the division the numbers work out to the pension fund being up by just under 3%. See the problem?  Consider it was a great quarter for the markets and the Dow was up over 12% over the same period.  So if my math is right and if  you presume this trend continues unabated the pension fund will be fully funded in just over 4 years. That’s great.   Of course it also would mean that the Dow would be hitting 70,000 or so at the same time.   Hmmm….

Did you know the Pirates are setting attendance records?  and h/t to Otis White for pointing out what may be required reading here from MinnPost.com on what some are computing as the “Psychic Benefit” of professional sports.  Double Yoi$

obligatory mention of Marcellus Shale.. and following up on the post last week of how the government once tested atomic bombs for fracturing shale for natural gas extraction.  I see that the upcoming big shale conference is at the Greenbrier.  What is the Greenbrier known for?  It was the fallback captial if the US congress needed to evacuate Washington and continue operations even in the event of nuclear war.  Dots?

On Marcellus is an insightful article from the Towanda Daily Review about how Chesapeake recently sent a letter out explaining they are going to be taking out of royalty payments the costs of getting the gas to market.. and what will really hit the bottom line for some folks is that that they are going to do so retroactively going back more than a year. So when you couple the retroactive amount with the record low price of gas to begin with.. I am thinking some folks are not going to have any royalty payments for some time??  and you gotta love the company’s only non-comment on their letter to land-owners… it says their letter is “self-explanatory”.  That PR consultant deserves a bonus.

But hey, Chesapeake has some big cash issues..  I guess it is only fair to pass some of those troubles on to the landowners. Moving on……

In a new analysis the Pittsburgh region gets an ‘A’ for the degree of white-Latino residential segregation here.  Sort of..

I’m just connecting dots in my head.. but Port Authority transit cuts imminent..  Downtown office vacancy low and declining…  big retail like Macy’s Downsizing.  It all comes together for me in this story out of Cleveland.

and last, but not least…  h/t to Bram for pointing out the WashPo’s coverage on the state of cupcakism in the US.   Remember it was not long ago that we were so desparate for some ’sign’ of change in Pittsburgh that we obsessed on the metaphor of what the cupcake craze’s arrival in Pittsburgh meant. and yes, it was an obsession.

last last…  and the best local economic news I read is that someone is at least thinking of saving HEMAP.

Risk of depletion: the vacation from pension angst is over before it began

Yunz thought I forgot.  That or lost interest?  Boiler has been building up steam is all.  That and there seems to be quite a confluence of news in the nexus here: pensions, assessments, redistricting even migration. Damage Control teams being spread thin just trying to keep up. But let’s poke in on pensions for a minute.

Let’s recap:  we all declared victory just a few months ago it seemed.  We ’solved this for the city’ was one quote.


So last week we learn that the city pension funding is down to 54%,  Note that is 54% with the notional asset of pledged future parking revenues that is still hard to define and as council is learning even harder yet to extract from the Pittsburgh Parking Authority.  Let’s just agree that it is not cash on hand in any form, nor fungible in any extant market.  I still want to know what the real cash horizon is for the pension fund.  You think others would care as well.


What really ups my distemper over the whole notional asset is how if confused the public.  Maybe the asset makes sense, maybe it doesn’t.  But read the news coverage and tell me if you walk away with any appreciation for how much in $$ is really there to pay pension bills? No real appreciation that a large part (soon to be the majority) of all pension assets are no more than a promise from the city to itself to pay money in the future to the pension account.  It is a promise that I am pretty sure existed long before last December mind you.


So it is conincidence that Governning had a column last week on the public pension problems everywhere to a degree. Will pension plans run out of money? It talks of the “risk of depletion” for pension funds.  “depletion” isn’t quite a euphemism, but sure sounds a lot tamer than the what it would mean if it were to come true.


So what does it all mean here?   Here is what we know as to the state of the city’s collective pension fund. Forgive me for any errors in the decimal points, the city does not mail me the detailed pension accounting.

Total liability Jan 1, 2011 $1,012,027,241
Funding as of Jan 1, 2011 said to be 62% which gives me   $627 mil
Funding as of Sept 30, 2011 said to be 54%  so $549 mil
Value of notional asset said to be valued at $239 million which gives a net value of $307 mil
That in itself would give you 30% funding ratio.  It has been worse.    Still,, after all the extra $$ piled in and all the other machinations, in reality we are in my calculation below the 32% we were just about two years ago. No thanks to some big losses due to massive market timing bets.  I really wonder if they have really gotten all the cash back into the market in a portfolio that make sense.  Something tugging at me makes me wonder what is up with the investment. Anyone know more?
If this is how we define success, you have to wonder what failure looks like?  The only thing different today than a year ago is that an IOU was passed from one part of city government to another.  The truth is that IOU existed legally, morally, and in the accounting long before the latest accounting trick.  So what really is any different?
It really is worse than that. Realize also that there was what by definition was a one time transfer of the cash that was sitting in the not so locked ‘lock box’ built up from past budget surpluses. So just before the end of the year.. or so everyone is agreeing to even if the banks were closed, was the transfer of $45 million I believe it was to the pension fund. When thinking about trends, you really have to think about that as the one-time opportunity it was. No such surplus will be there for a long time again.  If you were to net that out the city would most likely have been at ~$262 mil or less, or just under 26% funding ratio.
I won’t pile on and say another year has gone by and while the rate of increase in the calculated total liability has slowed a bit, it would still seem an obvious projection that the total liability is higher as well which would push that % lower. That or that parts of the system are less well funded than these cumulative averages would imply.  But success.. keep saying it.. it all succeeded last year.

The reversal of reforms on the New Pension System?

In December 2002, the NDA made a very big move in pension reforms. They decided that from 1/1/2004 onwards, all new staff recruited into the government would be switched out of the traditional defined-benefit pension and instead placed into a new individual-account defined contribution pension system. This was one of the major achievements of the economic reforms of that period. For a conceptual picture of the New Pension System (NPS), see this article, and for a story of that period, see this article.

An essential feature of the NPS was that it was a defined contribution system. India has a long history with getting into trouble with guaranteed returns. UTI’s assured return schemes turned into a problem for the exchequer. EPS, run by EPFO, is bankrupt. When pension promises are made, they require peering into many decades into the future and arriving at estimates of longevity and asset returns. In the best of times, it is hard to make such estimates; honest mistakes are possible. In addition, when governance is weak, there are political pressures to make extravagant promises, which will look popular right now but generate staggering costs for the government in the future. As an example, rough calculations show that the implicit pension debt on account of the traditional civil servants pension in India (the one which was replaced by the NPS) stand at roughly 70% of GDP. This is a very big price to pay, for a tiny sliver of the workforce.

The NDA did the unpopular work of switching new recruits out of the defined benefit pensions. But the UPA did not follow through appropriately. At first, many years were lost in hoping that the CPI(M) would come on board the reform. After that, the legal engineering was put into place in order to get an NPS up and running without requiring the legislation. This process was slower than what one might have desired, but it has been making inexorable progress.

But now, a new existential threat seems to have come up : the Parliamentary Standing Committee on Finance seems to be saying that the fundamental idea of the NPS — defined contributions — should be scrapped. This would amount to a major reversal of India’s economic reforms.

On this subject, see:

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A Random Walk in Pension Accounting

PBT Today: Pittsburgh Pension Loses Out on Millions.

Personally I am going to send each member of the pension board a copy of a book just about everyone who invests in the market should have anyway:

Beyond that… there is a companion story with that: Lamb seeks answers to pension plan delay. Something does not add up to me.  If you were to dig into it, it sure sounded to me like the pension assets were not exactly converted to cash.. which is implied in the ‘delay’ in reinvesting into a more normal portfolio.. but it sure sounded like the intention as to buy some form of option which effectively created the same investment return as cash for precisely the 3 months in the fall the pension board was worried about.   If that is what they did, then once the option ran out, the portfolio would immediately begin to have the investment returns it should.  This option strategy should also give some advantages in not incurring the costs of moving several hundred $million out and then back into the market.  Apparently that isn’t what happened which raises its own questions.

The net result however it happened is really pretty sad.   Pension fund cashes out in fall 2010 which turns out to be quite a big run up in the market.  Delays getting back into the market in first quarter of 2011 which continued to be a great quarter for the market.  Assuming they finally got cash reinvested by April, it was just in time for the horrific returns from the market since then.  There you go.

The 20 million dollar decision

Speaking of pensions ever again. The last post on the vast ambiguity in the value of the City of Pittsburgh pension fund was mostly a reflection of the lack of hard numbers in this story from February. It all sounds like accounting by Ouija Board.

I was going to follow up with yet another rant on the lack of useful information made available by the City’s pension fund.  For the longest time the only interesting information there was a newsletter from 2007.   Yet, low and behold, there is all of a sudden real and recent news including the detailed performance of the pension plan for the 4th quarter of 2010.  It is indeed a brave new world.

Would be quite a step forward, except for what that report says. Be careful what you ask for may be the lesson learned.  Ignorance in indeed bliss. The report has a comparative metric of how the city’s pension fund did in the quarter compared to a large benchmark of other investment funds.  The answer is that the city’s pension plan came in at the 96th percentile.

So I would really love to know what were the 4% of funds out there that did worse. Give those folks bonuses.

The reason for such a pitiful performance, as clearly noted by the investment managers, was that the pension board’s decision to remove virtually all equity risk from the fund earlier in the year.  Take away the risk, you also take away the reward and it turns out the 4th quarter of 2010 was a pretty good period for investment return…  if you had exposure that is.
To remove all equity risk at a single point in time would be what is called a massive bet based on market timing.  Go ask your own financial advisor if they would ever recommend such a course of action.

So how much did that decision cost is the real interesting question?  A million or two?   Again according to the same report, the median return as 6% over the quarter, while the city came in at 0.3%.  Given an assumption that the average asset value was around $300 million, the counterfactual loss of 6% is nearly $18 million.

That decision could become quite a massive irony if the actuarial calculation of where the pension fund is with the notionally dedicated parking revenue comes in short by an amount less than $18 million.  Hold that thought for a future blog post I guess.

There are some real questions I would love to be in a position to get answers for.  The primary one is whether they are still lacking equity exposure.  At the end of 2010 it says they were 57% cash (I’d put that into that annoying html flashing tag if it was not just so annoying).  That’s what it says, really… I didn’t make it up. 57% cash and 29% fixed income.  You wonder how much in fees it took to get a few hundred million in equities liquidated to cash.. and how much it will cost to get back into the market assuming they did so.  Those fees could easily push up that notional $18 million ‘loss’ even further as a result of the decision last fall.

I really do wonder if they have remained out of equity markets.  Given that the Mercer contract is winding down, you could see the logic in holding the cash to turn over to the new fund manager to invest… but I have no idea.  If the new paradigm of data disclosure continues next quarter, then maybe we will see if and when they rebuilt an equity portfolio.  One would hope they did buy back into equity markets because the 1st quarter of 2011 had a pretty good return.  If they stayed in cash, that notional loss might be a fair bit larger still.

Pension singularities

You know, just reading your quarterly investment statement is not supposed to be an exercise in Bayesian statistics.

I don’t quite understand the story today with the latest quarterly information on the assets of the Pittsburgh Pension Fund. Should be a boring straightforward story as these things go, but it confused me more than it clarifies anything.  It seems to say they just don’t know how the investments did last quarter.  How can that be?  Certainly someone knows exactly what the quarterly statement from the investment advisor says for assets on hand, even if there is this odd question of how to value the promise of future tax revenues.. that does not mean it should confuse the reporting.

It seems to say, and again it does not quite add up to me so I will presume I have it wrong, that after the cash infusion of $45 million, the funds assets are $325 million.  Up from $290 million in the previous quarter.  A good thing….  But net of the $45 million that would have been $280 million which means the funds assets would have gone down.  Not sure anyone noticed, but the stock market in the 4th quarter last year had a pretty solid gain..  maybe +7% in the Dow.  7% over a quarter is what… 28% at an annualized rate which would make it an outstanding year as these things go. Those returns do not translate directly to what you would expect of a balanced public portfolio, but if you don’t gain ground in good quarters like that, what will happen in bad quarters?  There will be bad quarters.

So the story seems to be left with the City Controller guestimating what the pension is worth and he says even with the parking promise you get $525-550 million.  Thing is, as of January 1, 2009, the pension liability was already up to $989 million.  That was over 2 years ago and history is awfully clear the total liability is climbing steadily.  I would say it is a decent bet that the current liability is higher and certainly over a billion and close to $1.05 billion wold be my guess.  That would imply $525 million may fall short of providing the 50% funding level already.

So to add to all the paper accounting machinations of last year.. we are now going to be left with this metaphysicial question as to what the state of the pension fund is as of the very last moment of December 31, 2010 vs. the very first moment of January 1, 2011. As of December 31st everyone can play ostrich and pretend the 2 year old actuary numbers are still valid; as of January 1 there should be new actuary numbers used.  The difference will be whether the state takes over the pension system or not.  So it all comes down to a debate as to whether the instant of midnight on New Years is 2400 on December 31, or 0000 on January 1.  This is getting silly.

But I have a real metaphysical question.. This promise of future parking revenues and all.. does it exist in any document.  Is there a counterparty?   If it is a pension asset, does the Pension Board have some piece of paper it could use to say sue the city if the money is not delivered as promised?  Can the pension board sue the city, or is the Pension board itself part of the city?   The state’s argument was that the promise of parking revenues could be considered akin to say investment in a REIT.  OK, but even equity in a REIT would be managed by some form of investment manager.  I just and wondering what ‘asset’ or notional paperwork representing the asset, has been turned over to Mercer.  Could that be causing some of the issues at the moment?

Risk and Pensions

Ha.   you thought this was going to be about the doings downtown today.  Not quite, but everything is related somehow.

Can’t believe I missed this.  From the Detroit Free Press:  Risky bets cost Detroit pension funds $480 million.   and check out their side story: Where the Detroit pension funds went wrong. Note the picture they have there on the right.  Look familiar?  Their accounting..  a $97 million dollar investment in the casino here is now worth $100,000.   That would be called a high risk and illiquid asset.  Still wondering what specifically makes up our pension fund’s illiquid assets… and what return current (and past!) private equity investments have garnered in a final accounting.   Wonks can dream.

Does make you want to give 200 million working captial to people who make those decision. Doesn’t it.
We all know what one of the ‘bets’ the Detroit pension system made is right? Would be a sure thing casino in Downtown Pittsburgh.  That has turned out real well for them.  Not.  In fact, I really suspect that the bath (euphemistically the restructuring ) the Detoit pension system took on its investment here is why the debt rating of the casino here is considered a “selective default”.

Looks like they have a whole series on the problems the Detroit pension system has. The really really sad thing in all that is that the Detroit public pension system is in far far better financial shape than is the city of Pittsburgh’s pension fund. Really.. by far.  Also much more transparent if you believe that even.  That’s the thing that gets me about all the pension bruhaha here.  Folks on all sides debating over things that are mostly unknown to the public, and even to the folks who are supposed to know what is going on.

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