Wednesday, September 21, 2011

The Whole Year Inn

So the pension fund contains a tremendous hole. That hole might amount to 400 million dollars or 700 or some other number depending on who does the counting. But whatever the number is, it is large and it didn’t happen overnight. 

Let us not think in terms of dollars then, but in terms of the number of retirees relative to the number of working employees. The city’s pension fund owes benefits to over 1600 retired police, but currently there are only 800 active employees in paying in. That 2:1ratio of retirees to active employees is preserved in retired fire fighter’s fund, though it only owes benefits to 1200. Finally the municipal employee pension system is in the best shape. It has only a 1:1 ratio of current employees to retirees though it owes benefits to 1700 people.

So how did we get here?

In some sense this question assumes too much. It suggests that there was a time when we were not here and that some action pushed us over the brink and into the hole.

But it wasn’t like that. Pittsburgh’s pensions have never been adequately funded. Further, almost every effort to correct that situation has been a failure of one form or another.

In the distant past, i.e. before the 70’s, it appears that many local leaders conceived of Pittsburgh as a perpetual boom town. As such, there was little incentive to put aside adequate funds to keep pensions solvent. It seemed to be assumed that population would continue to grow and the size of city government would track that. So if not enough was put aside today, so what? Tomorrow the size of the workforce would increase and there would be even more new employees paying a pittance into the fund. True that wouldn’t cover the pensions that those employees were promised, but the current obligations were covered. Besides, the future would bring more employees and the cycle could begin again.

This is certainly short sighted leadership, since it, in effect, creates a Ponzi scheme. But it is not clear that it is short-sighted leadership of a particularly culpable sort. After all, many municipalities at the time thought to fund things this way. And, arguably, Social Security was set up on a similar model. 

Over the years the state introduced measures that helped make this situation even more untenable and seemed to launch the first calls for state assistance and state bailouts. Unions lobbied the state throughout the 40’s 50’s and 60’s for additional benefits. Typically these seemed to be benefits that they couldn’t add to existing contracts through the typical negotiation process with the City. These changed the ways union contracts were negotiated and increased pension benefits. Both directly and indirectly these increased pension costs in various ways. It is difficult to tell, but it doesn’t seem that the city was particularly proactive about ensuring that these new obligations were funded. In fact this seems to be the primary source of the attitude that much of the pension problem is the fault of Harrisburg and so it is they who should be required to contribute to the solution. 

There is a flaw in that argument however. For much of the 70’s Pittsburgh simply failed to pay into its pension fund. Pensions were allowed to dwindle in order to deal with the more pressing effects of depopulation. There is more than one culpable party here.

One of the first efforts at making the pension system whole came about in the mid 80’s with Act 205.  Act 205 made some of the first provisions for a commuter tax, but those were never triggered. Its main revenue stream was a tax on insurance policies sold by out-of-state companies.  For a time, things seemed to be going well. Although the level of funding was dismal – percentages hovering in the single digits – the fund began to show less of a shortfall each year. During these early days Pittsburgh was reaping almost 20% of the total pool of funds that Act 205 set up.  

But, ultimately Act 205 was not able to bring the pension fund back to financial health. Indeed, the failure of this bailout scheme foreshadows the failure of other efforts toward the same goal. Lobbying at the state level had left options in the act for allowing smaller municipalities to join. In some cases these newcomers were able to fully fund their own pensions through participation in the pool. As you might expect then, of those partaking of the revenue stream, it was Pittsburgh that bore the brunt of the burden to control costs. Even with state funds, the shortfall persisted. 

Of course, costs can be contained in more than one way. There are cuts and there are opportunities to raise more revenue. Without additional powers to levy taxes, and with cuts already being made, Pittsburgh pursued a program of high-risk investments designed to maximize returns and, for a time, it seemed to be enjoying moderate successes in that pursuit.

In the mid to late 90’s however it was clear that the fund was not growing fast enough and other measures would need to be taken. In response, the city started to issue Pension Bonds. Essentially this was a debt transfer from the pension fund to the city’s general fund. Those bonds were issued against the general fund while the funds realized from them went to pay down pensions. 

In some ways the opening stages course of action seems very similar to the scenario we have now seen play out. A hole was opened in the general fund on an ongoing basis in order to close a similar hole in the pension fund. We satisfied a promise, by making another promise. 

These bonds brought the pension up to the highest levels of funding it appears to have ever enjoyed. At one point the fund was almost 65% funded! However that aggressive investment strategy backfired when the internet bubble burst in the early 2000’s. At this point the pension fund was also paying out more money, more quickly than it had anticipated. Early retirement packages and other incentives to help the general fund reduce costs purchased those gains at the expense of the pensions. So at least some the debt that had been shouldered by the City’s general fund by way of the bonds was now being passed back to the pension account.  In any case, in less than ten years from the issuance of those bonds, Pittsburgh was in the same position it was before: sitting on a pension with funding levels, at best, in the high 20%’s. To add insult to injury it was also during this time that Act 205 was further amended to tie revenue availability to the number of active employees, rather than the number who are currently drawing a pension. As you might expect, for a city that had lost so many people, this measure only further eroded the support that the state was providing.

Then came Act 47 – Pennsylvania’s answer to municipal bankruptcy. At the end of ’03 Pittsburgh was declared a distressed municipality and an oversight team was created to present it with a plan for reform. Strictly speaking, this designation came about in response to the totality of Pittsburgh’s economic circumstance, not just the pension fund. Still the pension issue is the largest budget problem facing the city today. The Act 47 Team proposes 5 year budgets and has the power to withhold revenue until certain conditions are met. The silver lining to Act 47 was that the designation brought with it a new power to impose taxes. Specifically the idea of a commuter tax was revived. With it seemed the promise of finally being able to close the budget hole and stop passing it between the two accounts.

However, before the city really got a chance to flex any of this new taxation power, the Republican controlled state legislature passed Act 11. This act created the Intergovernmental Cooperation Authority. This was yet another oversight board - this one more highly politicized – that was to work alongside the Act 47 team. But Act 11 also removed the power to impose the new commuter tax for as long the new board was in existence.   
Act 11 enjoyed the strong support of suburbanites who worked in the city. There was a rather acrimonious debate over this measure. Those in the city argued that without the hospitals, universities and downtown infrastructure the suburbs simply wouldn’t be a desirable place to live. On that basis they reasoned that suburbanites should help shoulder the burden. The opposition argued that the new power amounted to ‘taxation without representation’ since suburbanites had no voice in the city. The measure passed, but the oversight board is set to expire this year. At which point, perhaps, we will get the power to tax commuters.

Finally came Act 44. This was the measure the required the pension to be funded to at least 50% by the end of last year of face takeover by the state. Incentives were included in this measure to encourage the city to privatize its parking assets- but we all know that didn’t work.

Instead, it was a dedication of parking tax that provided funding. But, once again, this came at the expense of the general fund. The debt looks to have been passed from one set of books to the other like it has many times in the past. I wait to see if this time will be any different.

Mea Culpa: Life intervened and I wasn't able to be as thorough in my research here as I would have liked. I also wasn't able to provide my usual references to the source material for all of this. Indeed, some parts of this essay are just a narration of this slide show. Those who are interested in researching this issue in more depth are urged to begin there.

1 comment:

Anonymous said...

Think about the lunacy of the parking tax fix. Council is running around saying "we did it.". Now the mayor gets to put less in the pension plan to balance the budget because "it is 62% funded.". There is nothing anyone can say about it. The pension fix through future income is ridiculous, but everyone is too busy slapping hands that the cycle continues.