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Stocks can't fix Pittsburgh's pension system fiscal woes, experts warn

Bob Bauder
| Saturday, Aug. 17, 2013, 12:28 a.m.

Pittsburgh is headed for another financial mess because of how it handles its employee pension funds, pension experts say.

They believe the city is not pushing enough money into funds that owe about $1 billion to current and future retirees and bets too heavily on a fickle stock market in its plan to meet liabilities.

City officials said they can't boost payments into the system unless they cut funding for crucial services for residents, such as police and fire protection, garbage collection and street paving. Or, they added, unless state lawmakers give them another way to raise money.

“It's easy from the outside to say, ‘Put more money in,' ” city Finance Director Scott Kunka said. “Well, what would you cut?”

That's been the city's quandary since state law changed in 1984, requiring municipalities to back employee pension funds with cash and market investments.

Pittsburgh has about 62 percent of the money necessary for a $1 billion retirement liability. That means the city would need about $400 million more to cover current and future retirees.

The debate over how Pittsburgh, financially strapped and under state oversight, should sustain pension funds occurs as other debt-laden cities struggle to stabilize finances, even as investments rebound.

Detroit last month filed for bankruptcy, the largest U.S. city to do so. Teacher and city worker pension funds in Chicago need billions of dollars to fulfill long-term obligations in one of the country's largest public-pension shortfalls.

Pittsburgh officials count on steady returns from volatile investment markets and $5 million annually in state gambling tax collections to close the $400 million gap. Pension experts said the stock market is not the answer, and recent history shows the city's investment expectations are overly optimistic.

‘A balancing act'

Pittsburgh's pension fund managers assume an 8 percent annual return on investments, and they've met or exceeded that rate in a year six times since 2002, they claim. In two years there were devastating losses.

In an analysis of 134 state-level pension funds, dated Feb. 27, Wilshire Consulting, a California-based financial services firm, reported the median expected investment return was 6.9 percent.

“They are not going to earn their way out of the hole they're in,” said James L. McAneny, executive director of the Public Employees Retirement Commission. “Not putting the money in because ‘I don't have it' doesn't make the problem go away. It just means you're going to have to pay more later on.”

City officials hope market performance will boost the funds until 2019. Then the city's annual debt payments will drop by more than $40 million when bonds are retired.

“The unfunded portion of the pension was not created overnight, and it's not going to be solved overnight, but we are taking positive steps to do so,” Kunka said. “To whatever extent we can put more money into the fund, we have done that, but it's a balancing act.

“You have to have a fire department. You have to have a police force.”

4 main sources of money

Pittsburgh historically failed to put aside enough money for pension funds covering police officers, firefighters and municipal workers. Until the 1980s, it paid from its operating budget what it owed retirees each year.

Before the law changed, the funds operated for most of the 1970s with no fund balance, according to the City Council Budget Office.

In 2010, the city averted state takeover of the plans by promising to dedicate $736 million in parking tax money to them by 2041. That pushed the funding level above 50 percent.

The percentage has increased, largely through one-time payments and improved market performance: It earned an investment return of about $45 million last year.

But it's not equal to the 70 percent realized in 1998 when then-Mayor Tom Murphy's administration dumped $256 million of borrowed money into the plans, boosting it to the healthy 85 to 100 percent level that actuaries recommend.

In two bad years — 2008 and 2011 — the pension funds lost $98.7 million, according to the controller's comprehensive annual report. Even with the loss, the funds increased about $107.5 million during the past five years.

Experts say that is why Pittsburgh should not rely on market performance to bail out the funds.

The pension plans get money from four main sources: the city, its employees, state aid and investment earnings.

Controller Michael Lamb and the Intergovernmental Cooperation Authority, one of two state-appointed city financial overseers, said annual contributions should cover at least the annual payout to about 5,000 retirees. Last year's payout was about $84 million. Pittsburgh paid that with investment earnings, but Lamb noted the plans had a negative cash flow in 2008 and 2011.

“If you're not putting more than $85 million in, then you're losing ground, and sooner or later you find yourselves in the same situation as Detroit,” Lamb said.

Fix from Harrisburg

Many people point to Pittsburgh's stagnant revenue base as the root problem. The city lost much of its population and industrial tax base in the 1980s. Its economy is based mainly on tax-exempt medical and educational institutions.

Only state lawmakers could rectify the problem through pension and tax law changes. Legislators are reluctant to do that because of the political influence of public employee unions that are leery of any law to alter long-term benefits.

Financially distressed municipalities across the state have lobbied in Harrisburg for years for pension reform and changes in how cities can levy taxes.

Pittsburgh asked for an income tax, known as a commuter tax on people who work in the city. City officials lobbied for permission to collect its 0.55 percent payroll preparation tax from tax-exempt nonprofits.

“The fix has to come from Harrisburg,” McAneny said. “... But I'm going to tell you, it's ‘pay me now, or pay me more later.' ”

Lamb said the city should use money from a $90 million general fund surplus to make up ground, but Kunka said much of that money is earmarked for capital improvements and other unbudgeted projects.

Tapping the capital account could hurt the city's ability to pave roads, demolish condemned buildings and repair bridges.

“If you keep taking money out, you're not going to have a surplus,” Kunka said.

The strategy to pay down the liability is working, he said. The city makes money in the market and contributes more than the state-set minimum into pension funds, he said.

Bob Bauder is a Trib Total Media staff writer. Reach him at 412-765-2312 or Staff writer Jeremy Boren contributed to this report.

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