Pension-fund drama! Actuarial tables gone mad! You'll find it all here! | Blogh

Thursday, December 12, 2013

Pension-fund drama! Actuarial tables gone mad! You'll find it all here!

Posted By on Thu, Dec 12, 2013 at 4:37 PM

One of Mayor Luke Ravenstahl's last acts as mayor may be leaving behind a multimillion-dollar pair of handcuffs for his successor and long-time rival, Mayor-elect Bill Peduto.

This afternoon, Ravenstahl voted -- by phone -- with a majority of the city'sComprehensive Municipal Trust Fund to approve an accounting change that could compel Peduto to increase the city's contributions to its pension funds by between $5 million and $10 million a year.

The accounting change is one that Ravenstahl himself has opposed as mayor, and that his own public-safety director still opposes today. It is also, however, the kind of change that Peduto has previously supported. Yet Kevin Acklin, Peduto's future chief-of-staff, denounced the vote, calling it "politics as usual," and warning it could "be a multi-million-dollar hole in the budget."

"To do this in a transition period, the week before Christmas -- it doesn't smell right," Acklin told reporters after the vote was taken.

This post is going to be about pensions, I'm afraid, so you may find it even more boring and long-winded than you've come to expect from pieces on city-government finances. (Can I entice you to read further by promising to mention the battle for City Council president down below?) But here we go:

The city is required to pay a certain amount into its employees' pension funds each year. The amount of that payment is determined by projections from the seven-member board of the Comprehensive Municipal Trust Fund and its actuaries. Among those assumptions are projections about when city workers will retire, how long they will live afterward, and -- the issue in play this afternoon -- how much the pension fund will earn by investing their pension money before they need it.

Until today, the fund's board assumed it could earn an 8 percent return each year through investments. But critics like City Controller Michael Lamb have argued that assumption is too optimistic: Peduto himself has said that the city's historic rate is closer to 6 percent. Those critics argue that overestimating future returns is an Enron-style accounting trick. Sure, you can shortchange the fund today by predicting higher returns tomorrow. But sooner or later, the bill will come due, and it's better to start paying it now, so you don't end up bankrupt later.

For the past few years, Lamb has supported changing the estimated return to 7.5 percent. Lamb, who is a member of the Trust Fund board -- and who also participated by phone -- made that case again today. He noted that under the current schedule of payments, which assumes an 8 percent return, the city's contribution will decline in 2016 and 2017 before rising again. Given the pension fund's long-standing financial shortfalls, he said, "That's the last thing that we should be talking about."

Until last week, Ravenstahl opposed changing the threshold, or even discussing the idea. When Lamb broached studying the change last August, for example, Ravenstahl wouldn't hear of it. As the Post-Gazette reported at the time: "A lower investment projection would increase the city's required annual cash payments to the fund, Mr. Ravenstahl said -- and leave him scrambling to find funds in a lean budget or asking taxpayers for more money. 'To me, this is where this is going, and I'm not going to do it,' Mr. Ravenstahl said."

Those concerns apparently evaporated last week. With Ravenstahl's final budget in hand, and only a few more weeks left in his tenure, he suddenly reversed course and backed Lamb's position.

The shift was barely noted at the time, and Ravenstahl said almost nothing during today's meeting. But the effect -- and the intent, many political insiders believe -- could be to hamstring Peduto's own agenda by sticking him with a commitment Ravenstahl himself was unwilling to make. (ADDED: Though in fairness, Ravenstahl has done heavy lifting on the issue, including shelling out an additional $25 million to the pension fund in this year's budget.

The impact of the new projections won't be felt until 2015 -- Peduto's first budget. According to numbers released by the pension board today, under the new 7.5-percent-return scenario, the city's obligation could jump by just under $5 million in the first year, and by as much as $10.5 million later in Peduto's term.

There were, of course, political overtones to today's vote. The change was opposed by Ian Frankel, a paramedic whose union supported Peduto's mayoral bid. But Frankel was outgunned by the city's other two public-safety unions, the Fraternal Order of Police and the Firefighters, who vociferously opposed Peduto. Lamb, meanwhile, ran his own abortive mayoral campaign against Peduto this past spring, and the change was also backed by City Council President Darlene Harris, who leads a council faction opposed to Peduto. (Harris explained her vote by noting that council has been rocked by pension crises before, and said she wanted to ensure the funds' security.)

A conspicuous "no" vote, however, was that of public safety director Mike Huss, who has stuck with the administration position … even after the mayor himself had abandoned it.

The cynical take here is that Huss is hoping for a job in the Peduto administration. Peduto has previously said he encouraged Huss to apply for a post in the new administration. Huss' wife, former mayoral spokesperson Joanna Doven, though once a sharp critic of Peduto, has recently become active in a Peduto transition team, and has had warm things to say about it.

Then again, you can't accuse Huss of inconsistency. During the meeting, he noted he'd previously opposed the lower return assumptions to avoid "a budgetary impact on our operations." Accordingly, "I'm going to vote no for a change." Huss also noted that a new administration -- and a new pension board -- would take over in 2014, and that if a change in actuarial assumptions was needed for 2015, the board would have until the fall to make those changes effective.

Indeed, it might seem odd that both public-safety unions voted in favor of change: Paying more benefits to retirees could have an impact on the budget that pays for active employees. Joe King, who represents the firefighters on the pension board, allowed that the change could have an impact on the operating budget. But he said that in conversations with state-appointed overseers -- who must approve the city budget each year -- he made it clear that "if there's any outstanding debt [owed to the pension], it better not come out of the pockets of the men and women who work in the trenches every day."

"They'll find the money somewhere else," he added confidently.

King noted that Peduto himself has previously recommended that the pension board assume a lower rate of return: Peduto's own campaign, in fact, has urged that "We need to get real about our pension fund and putting an artificial 8% return assumption on paper doesn't help us do that."

Acklin acknowledged that Peduto favored a more modest assumption of investment returns. But Peduto's plan also included other reforms: Ravenstahl, Acklin charged, was "cherry-picking" Peduto's proposals. What's more, Acklin had previously urged Ravenstahl not to make binding decisions without consulting the incoming administration: Earlier today, he told me that the pension reversal was "probably the most egregious" example of Ravenstahl blowing that request off.

Acklin, who noted that Ravenstahl had "spent his whole career defending [the] 8 percent [assumption]" said he was unsure that today's vote would be binding on city government. He also suggested that in the new year, a newly constituted pension board could reverse today's action.

My initial read here is that Peduto can't touch some of the board members who voted against him today: Lamb is guaranteed a spot, as are the members representing police and firefighters. But two board's seven members are appointed by the mayor. Assuming that Frankel's position remains unchanged next year, that would give Peduto three votes and Lamb's side three votes. As for the seventh seat? It goes to the president of city council. Which means ... the tiebreaker vote may depend on whether Harris remains at the head of council when council's next session begins in January. This post is long already, so I won't get into the Byzantine political dynamics of the city council presidency. Suffice it to say that if I were a betting man, I'd wager on her being replaced in January by Bruce Kraus, a Peduto ally. In any case, the stakes of that choice just got a bit higher.

But until today, Peduto's own team has been slow to complain about what Ravenstahl was up to. While Ravenstahl's reversal became public last week, it was little noted at the time: Controversy over a Peduto proposal to offer early-retirement incentives to aging city workers has attracted much more attention. But today's vote may have a much bigger impact on the budget. According to numbers provided by Acklin, even the most generous version of Peduto's incentive plan -- which would be available to as many as 176 employees -- would have a one-time upfront cost of under $9 million a year. That's less than just one year's impact of today's changes.

Acklin didn't mention his concerns about the shift until this morning, at the tail end of a press conference that also focused on the early-retirement controversy. Though Peduto's camp sent out a Dec. 5 statement blasting Ravenstahl for his stance on other issues, it made no mention of the proposed change in investment assumptions. (And when I called in response to that statement last week, and left a message that asking specifically about Ravenstahl's new support of the 7.5 percent number, I didn't get a call back.)

Why had Peduto said so little about the change until today?

"I didn't think they would do it," Acklin said.

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