Even though Pittsburgh’s pensions haven’t performed on par with expectations about half of the time in recent years, the retirement fund’s managers don’t seem eager to greatly adjust the assumed rate of return.
Pittsburgh has barely more than half — 56 percent — of the $1.2 billion it owes to current and future retirees in the Comprehensive Municipal Pension Trust Fund.
Like most public-pension funds, city employees and their employers pay only a percentage of the amount they are guaranteed in retirement under the plan. The city relies on investments to make up the difference, with an assumed rate of return of 7.5 percent.
The problem is the city has exceeded a 7.5 percent rate of return in only seven of the past 12 years, and the outlook isn’t much better — Pittsburgh Finance Director Paul Leger revealed at the December meeting of the pension fund’s board of directors that the anticipated return for the 2017 fiscal year ending Sept. 30 is 5.3 percent.
The board considered dropping the assumed rate of return to 7.25 percent or 7 percent, but that would require Pittsburgh to funnel more of its general revenue into the pension fund. The board tabled a decision until a future meeting.
“My concern is how much money can we continue to shovel into a pension fund at the taxpayers’ expense without getting that money then from the taxpayers,” Leger said at that meeting. “That’s the balance that has to be hit.”
Leger asked the board to wait until 2018 to make any changes because the 2017 spending plan has already been established.
Leger did not return a request for comment. Although the pension board was scheduled to meet the fourth Thursday in February, according to its webpage, it did not meet last week. A representative of the finance office told Watchdog the next meeting will be May 4.
Bill Bergman, director of research at Chicago-based Truth in Accounting, told Watchdog.org he’s wary of Leger’s 5.3 percent projection, given the uncertainty of the market.
“As soon as people start putting decimal points on stuff like this, I start to get suspicious,” he said.
Pittsburgh’s dilemma is hardly unique.
Laws in many states, including Pennsylvania, allow cities to determine projections for investment earnings. The higher they set the assumed rate of return, the less they and their employees have to contribute to the pension funds.
That allows today’s leaders to kick the can down the road. When the projections don’t pan out, taxpayers in the future will have to pay, or pensioners will get squeezed.
Rick Dreyfuss, a senior fellow at the Commonwealth Foundation, told Watchdog that studies have indicated the odds of achieving 7.5 percent long term are less than 50 percent.
“Anyone doing long-term planning, you’d think they’d want a better-than-50-percent probability to meet projections,” he said.
Percentages of 5 to 6 percent are more realistic, he said, but there’s a budget trade-off to that — shuffling money from other areas and trimming budgets or raising taxes. The issue becomes a political football.
“They’re very content to leave things the way they are and put the onus on a future general assembly, governor or taxpayer,” Dreyfuss said.
Including higher rates of projected returns has another, more immediate effect as well.
Bergman said one side effect of the higher assumed rates is a trend toward fund managers making riskier investments to try to match those projections. If it works, everybody is happy. But if the riskier investments crash and burn, it’s Joe Blow taking it on the nose.
“The portfolios are riskier than they used to be and taxpayers are bearing the burden of the uncertainties,” he said.
Leger estimated the city would have to kick in an additional $4 million annually toward the pension fund for each quarter-percent the assumed rate of return is dropped.