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Wednesday, November 12, 2008

Portland pension liability may jump $400 million overnight

It's a heck of a time to be borrowing money, but the City of Portland is back at the Wall Street well, looking to borrow more than $15 million to fix up and rebuild a few fire stations. These will be "general obligation" bonds -- meaning the city agrees to pay in all events, come hell or high water -- and if they don't get a top rating from the trained bunglers brilliant analysts at Moody's, that will be big news.

But rating aside, the sales document for the new bonds contains a startling revelation about the city's unfunded liability for police and fire pension and disability benefits. As regular readers of this blog know, the last time the city estimated this unfunded liability, as of June 30, 2007, it stood at about $1.9 billion. Projecting the normal rate at which this amount has grown over the years, and adding in around $90 million of health care subsidies for retired city workers, our debt clock puts the frightening number at nearly $2.2 billion as of today.

But as it turns out, that estimate is way low, because the city's about to "restate" the police and fire pension liability at a much higher figure. The bond sales document explains:

As of June 30, 2007, the City’s actuary estimated that the unfunded actuarial liability of the FPDR Fund was $1.9 billion. That liability was calculated using a discount rate of 6.04 percent. The City has been reviewing and revising the discount rate and assumptions utilized in the calculations of the actuarial valuation, actuarial accrued pension liabilities, and net pension obligation, to match more closely the funding and investment returns that could be achieved given current economic conditions. In 2005, the FPDR Fund’s actuary used a discount rate of 6.63 percent to value the FPDR Fund, and in 2006 the FPDR Fund’s actuary used a discount rate of 6.04 percent. Based on discussions with the FPDR Fund’s actuary, the City may further reduce the discount rate used to value the FPDR Fund liabilities to a rate of between 4.5 and 5.0 percent. This change is projected to result in an increase to the unfunded actuarial liability of the FPDR Fund of between 13 and 20 percent. Any such change is expected to be reflected in the City's June 30, 2008, financial statements currently being finalized.
If we throw, say, an additional 18.25 percent onto the prior projections, the unfunded liability is more like $2.6 billion than $2.2 billion. Which means that the prior accounting was $400 million off. With a stroke of the pen, that's roughly another $700 in present value -- essentially another $700 on the credit card balance -- for every man, woman, and child who lives in the city. (The total city debt would sit at about $9,600 per person, and be heading toward $10,000 fast.)

Even if every police officer and firefighter in the system quit working today, the city would have to put $2.6 billion away in today's dollars to be sure there was enough to pay eventually all the pension and disability benefits that it already owes them all. Keep in mind, there has been no money put aside to pay this debt -- nada. It's all going to be paid off with future property taxes. Have a nice day, and remember, go by streetcar!

Comments (16)

Keep in mind, there has been no money put aside to pay this debt -- nada.

That's true, but that's how the law was written. The Fund could have been collecting more over the years, but it was restricted to collecting just what it needed each year.

Compare it to our social security taxes that HAVE been collected, but essentially spent while still showing on the books as cash --well, paper-- on hand.

but that's how the law was written.

That's like the captain of the Titanic saying, "But that's how the boat was designed."

This is some scary stuff, and it confirms that Portland is headed down a truly unsustainable path financially.

And that's just on the liability side. I'm afraid to even ask what's happened to the city's investments over the last three months.

We can't undo the past, but we can stop the insanity and stop building streetcars, soccer stadiums, and other junk. Pretty soon, it's going to be too late.

... we can stop the insanity and stop building streetcars, soccer stadiums, and other junk ...

Unfortunately, filling potholes and paying the bills won't earn you an eponymous esplanade.

"That's true, but that's how the law was written."

That's how Randy wrote it up. WHat are we supposed to do when a bunch of feeders who are financial incompetents set up a self-serving payback system? Rollover?

It's really funny hwo when these programs go south we always take the, sorry Mr Taxpayer, that's the law - pay up.

Side point - Any benefits from Randy's ballot measure last year to raise prop taxes for the next 30+ years?

At this rate, CoP is gonna be the next GM.

The only way to stop the insanity is to sell your house and move to another county or state.

Preferably, before they pass the new real estate transfer ("kick them on their way out") tax.

Isn't this just another example of the Portland City Council acting too much like the Bush administration? The housing bubble generated vast revenues, but it also gave government officials the feeling that revenue was on a magic carpet ride forever.
So the greatest wealth producing bubble in history came along and these officials here and in the Bush administration still managed to outspend it. We'd be in trouble already adjusting to the end of the bubble, but we are in even more trouble because we out-bubbled the bubble with spending during the giddy old days.
Isn't that it?

The answer is either downsize your Portland real estate or move out--or earn more income to pay higher property taxes. This is why I live in Milwaukie now.

Ironically, the streetcars are starting to look like a better investment than a SP500 index fund would have been for the P&F R&D fund.

For those thinking of moving may I suggest San Diego. I just read this on another cranky blog:
"There is NO avoiding Chapter 9 at this point, today a budget analyst is going to inform KFC Sanders and the Clowncil that the pension fund is short 4 BILLION dollars, and growing more everyday, and the retiree healthcare fund is short 1 BILLION, for a grand total of $5 BILLION dollars.
That is $4,166 dollars for every man woman and child in this City, and that number grows bigger every single day."

It's not much of a town but it is sunny most of the time. I prefer it here, at least partly because of those lovely, packed all the time, streetcars.

I'm so glad we're retiring at the end of next year and won't be dealing with these IDIOTS much longer. Best of all, we're buying a home out of state and establishing residence so we don't have to pay these clowns much longer.

I am glad I am not livning in Portland.

Okay, Jack, I have a very serious question for which I truly hope you have an answer. Not The Answer, because I don't think there is one. Considering what you've already relayed about Portland's existing debt, and adding Portland's current economic hole thanks to the real estate crunch, is it already too late to fix the situation? I'm dead serious here: is the city's bankruptcy inevitable at this point, or is there some way, painful or not, to reverse the damage or stanch the bleeding long enough for the city to recover?

"is it already too late to fix the situation? "

It's never too late, they could pull back on the streetcars and ball parks and CC Hotel. They could take the $30M annual surplus and use it to pay debt instead of doulas. They could get someone who kind of worries about debt instead of plastic bags.

But they won't. Portland voters like their idiots in positions of power.

You ought to take long range forecasts with a grain of salt. They are very sensitive to assumptions, as the change in interest rate demonstrates. It represents a "what if" scenario, specifically what if everything plays out exactly the way the forecaster thinks it will, which any decent actuary will be quick to say is unlikely.

What the forecast really tells you is whether the liability is manageable, for instance how much would you have to increase contributions starting next year to be funded? If the answer is 10-20% it's manageable, if the answer is 1,000% you've got a problem.

how much would you have to increase contributions starting next year to be funded?

Since the city does not contribute anything to future benefits, but pays as it goes, isn't the answer infinity?

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