Tuesday, November 25, 2014

Audit coming as Pittsburgh’s pension liabilities surge

11/25/2014


PITTSBURGH — The Steel City will soon undergo extra scrutiny as the state auditor general examines Pittsburgh’s public pension plans. This comes after a summer report shows a slide in earlier progress made by the city.

An August rundown by the Public Employee Retirement Commission shows Pittsburgh’s public pensions are funded at 58 percent, down from 62 percent in a 2012 snapshot. Pittsburgh’s pensions are still within the “moderately distressed” category.

Graphic by Auditor General, 2014 report
DISTRESS DEFINITIONS: This chart, from a 2014 report by the Auditor General’s office, shows the distinct distress levels for municipal pensions. Pittsburgh’s remain in “moderate distress.”
The current funding ratio is still markedly higher than the barrel-bottom rate of 28 percent seen in 2008.

It’s estimated Pittsburgh has $485 million in unfunded pension liabilities, out of the total estimated $1.2 billion pension debt. That means 
many of the promised obligations to current and future retirees aren’t budgeted.

Part of the blame lies with unrealistic discount rates, the assumed rate of return for investments of pension funds. By using unrealistic expected rates of return, the amount Pittsburgh needed to contribute appeared smaller, and the city contributed less.

During the 1990s, the city used a 10 percent discount rate, said James McAneny, executive director of PERC. Those high levels of expected return were never realized, and the plans lost 40 percent of their value within a decade.

Even after that, former mayor Luke Ravenstahl’s administration insisted on not using a rate below 8 percent — with the same results.

McAneny said that as Ravenstahl was leaving office, he knocked the assumed rate of return down to 7.5 percent. This created an instant increase in the unfunded liability. While this makes things more difficult for the current administration, it’s the wise thing to do, McAneny said.

Auditor General Eugene DePasquale announced at a Nov. 5 press conference his office would conduct a regularly scheduled audit of the city’s police, fire and municipal employee pension plans.

Though the plans are in distress, they are “not yet in a free fall and we want to keep it that way,” DePasquale said in a press release.

“There’s nothing that I would say is suspicious,” said Pittsburgh Mayor Bill Peduto at the press conference. “I just would say that it hasn’t been properly managed and certainly has never been dealt with in a responsible tone; it was more kick the can down the road.”

Peduto spokesman Tim McNulty said the office welcomes the audit.

“We’re open to help from anybody, when it comes to tackling pension reform,” he said.

The city Department of Finance didn’t return multiple calls for comment from Watchdog.org last week.

While Pittsburgh’s numbers seem high, they’re scant compared to Philadelphia’s $5.3 billion in unfunded pension liabilities and downright meager considering the $47 billion unfunded for state pensions.

There are also strange contrasts in the other direction. Palo Alto Borough, in eastern Pennsylvania, is funded at 3,500 percent. And no, that’s not a decimal-point error, said McAneny.

It’s a result of the pre-1984 state aid formulas, which were based on factors like population and miles of road, instead of need. Aid is now tied to the cost of the plan.

“So the Palo Altos of this world are no longer getting state aid” for this, McAneny said.

According a February auditor general report, nearly 600 municipalities — or 47 percent — of the 1,200 that administer pensions have plans classified as distressed.


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RELATED:  

Auditor General: Pension funds spend millions on investment fees, but PA taxpayers in the dark

Taxpayers are largely in the dark when it comes to Pennsylvania’s pension funds’ riskiest investments.

With nearly $8 billion invested in hedge funds, the state’s two public pension funds are chasing the promise of high investment returns — a necessity since both systems hinge on an expectation of earning at least 7 percent annually on their $77 billion in investments.

Source: PSERS Budget Book
FEES INCREASING: PSERS is spending more than ever before on investment fees as the pension system chases higher investment returns.
But those hedge funds carry not only risks for taxpayers, but also potentially expensive fees that have to be paid in both good times and bad.

On Thursday, Auditor General Eugene DePasquale called for changes in how the state’s pension systems choose investments and inform residents about potential risk and costs associated with those investments.

“Because of the risk often associated with hedge fund investments, it would be wise for PSERS, especially, to review the amount they have invested in such funds,” he said.

The Pennsylvania School Employees Retirement System and the State Employees Retirement System have more than $77 billion in investments between them. Of that total, PSERS has $5.7 billion invested in hedge funds; SERS has $1.9 billion invested in hedge funds, according to its most recent annual report.

That’s 12 percent and 7 percent of the two systems’ total investments, respectively.
DePasquale said the two systems should be more up-front about costs associated with those investments. For example, hedge fund managers typically earn 2 percent per year, plus a portion of the profits on their investments.

Each year, PSERS releases information detailing the investment manager fees paid by the system, which is posted online.

“Transparency is very important to PSERS and we take our fiduciary duty very seriously,” said Evelyn Tatkovski, spokeswoman for PSERS.

But that information is buried within a 133-page report PSERS draws up for the General Assembly each year. Even the most conscientious of lawmakers might have a hard time finding it.

For the record, PSERS spent more than $557 million on investment fees during the fiscal year that ended June 30, 2013. That’s well above the $191 million spent on such fees during the 2004 fiscal year.

It’s not just a Pennsylvania problem. Pension funds across the country have been chasing riskier investments in recent years in an effort to close the gaps created by years of inadequate funding and losses sustained during the 2008 economic downturn.

California’s largest public pension system announced earlier this year it would divest itself from high-risk hedge funds.

“While PSERS and SERS may publish information on the management fees, the information is incredibly difficult to locate and comprehend unless you are trained in the business of investments. These are public pension systems and the general public has a right to know where the money is going,” DePasquale said.


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