New Portland police and fire pension tab: $2.2 billion
The City of Portland has in hand a new estimate of its unfunded liability for police and fire disability and retirement pensions. As of July 1, 2008, its new actuaries place the unfunded liability at $2,216,664,215. That is an increase of 15.84 percent over the year before.
It's difficult to judge the significance of the new figures, because the new report changes so many of the assumptions on which they are calculated. Increasing the amount substantially was a change in the discount rate that the actuaries hired to do the calculations use to present-value the city's future obligations to pay the pension benefits. Previously, the actuaries used 6.04 percent, but since rates of return on investment have declined so drastically in recent months, they're now using 4.50 percent.
On the other side of the coin, the actuaries changed a number of the other assumptions they use, and those changes partially offset the increase caused by dropping the discount rate. In this latter category were decreases in the estimated disability rates, future salaries, and officer lifespans; changes in anticipated retirement ages; and a new adjustment anticipating early termination of employment. With so many balls moving around, it's hard to tell how things are going, other than that the overall dollar number keeps rising at an alarming rate.
It's noteworthy that in estimating inflation for purposes of predicting future salaries, the actuaries used 2.75 percent, but the discount rate for purposes of present-valuing future payouts was 4.50 percent. Those are both extremely soft numbers, slight changes to which would probably result in big shifts in the bottom-line liability.
On the City of Portland debt "clock" that we keep in the left sidebar of this blog, we've been using an annual growth rate in the pension liability of 6.5 percent, based on recent year-to-year changes when the assumptions were kept steady. We see no reason to change that until future years' experience (under consistent assumptions) enables us to track true growth or shrinkage in the liability. Plugging the new figure in as of last July 1, adding in the $98 million last estimated for retiree health care subsidies, and playing out the 6.5 percent annual growth, at this writing the tab is roughly $2,399,000,000 -- down somewhat from what the debt clock previously showed. (We had been anticipating the discount rate change, but had no way of knowing the other assumptions would also be changed, in the city's favor.)
In any event, the situation is still as scary as ever.
| Posted at 5:13 PM | Permalink |
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Comments (12)
Why do a net present value calculation if the liability is being paid out of annual tax receipts (the funds will never be invested or have an opportunity to grow)?
Posted by Jennifer W. | January 21, 2009 5:20 PM
I believe the idea is to show the world how much money the city would have to have in hand right now to put aside in an investment fund and have the fund pay off the retired employees.
Posted by Jack Bog | January 21, 2009 5:33 PM
Now this is MUCH more relevant than the mayor lying about sex. This concerns me, the other proves that Sam, like any other politician or human will lie. Shocking.
But for PDX to have $2 Billion in unfunded liability for police and fire health care and pensions is something to be truly worried about.
Posted by kda | January 21, 2009 6:14 PM
I'd rather have an unfunded liability than a past contribution of $2Bn that was now worth $1.3Bn after the market declines, thanks.
But I wonder how the officers feel about the actuaries shortening their life span?
Posted by Allan L. | January 21, 2009 6:18 PM
I'd rather have an unfunded liability than a past contribution of $2Bn that was now worth $1.3Bn after the market declines, thanks.
When the cash flow crunch hits, as it inevitably will with the down economy, real borrowing will be required. With nothing put aside, the sooner that day comes. You think the potholes are bad now? Wait.
Posted by Jack Bog | January 21, 2009 7:07 PM
Actually real borrowing my not be needed. An alternative funding mechanism is to fire city employees.
Posted by Frank | January 21, 2009 7:21 PM
Firing the current employees does not remove the pension obligations for current retirees.
Firing the current employees is easy to say, but will never happen for obvious reasons.
Changing contracts so future hires rely on personally funded retirement plans will become inevitable, just like most of private industry has done.
As for other future ponderings:
- as jobs in other sectors decline, tax revenues will decline; Lost jobs of course will pay no tax revenues at all, compounding the issue.
- as Portland becomes a less attractive place to live, new jobs may never come as companies avoid locating here (think Detroit and Buffalo, and other rust belt cities).
- borrowing to pay these pension obligations will be difficult, as the city will not be able to demonstrate a future ability to pay the debt.
Cities like Portland will go hat in hand asking for bailouts from Uncle Sam.
I think San Diego is closer to this brink than Portland.
Declaring bankruptcy will provide Portland (and other government entities) the opportunity to break existing contracts with employees. Not sure what it will do to pensions. The fed guarantees certain pension obligations, but no where near as rich as future retirees might expect.
As for Sam...
Imagine any other official sitting across the table negotiating with the mayor for this or any other city matter. They really won't know when to believe what he is saying or promising. With his credibility shot, he will be an ineffective negotiator and decision maker.
Would you trust anything he brought to the bargaining table?
What currency will he have?
It's not Sam's fault that Portland is on this brink. But then again, his small ideas didn't even begin to address this very large pension obligation issue.
People have said that Sam is smart. So far, he hasn't demonstrated that at all, especially with all the small potato issues he has dealt with these past weeks, as the Venn diagram from a few days ago clearly showed.
Posted by Mike (I forgot which one) | January 21, 2009 7:49 PM
I had someone explain to me recently that under Oregon law, cities here cannot use the federal bankruptcy laws. That would leave the city's fate in the hands of the good folks in Salem. Good luck with that.
Posted by Jack Bog | January 21, 2009 7:56 PM
under Oregon law, cities here cannot use the federal bankruptcy laws
Where's that trusty notion of federal pre-emption when you really need it?
Posted by Allan L. | January 21, 2009 9:23 PM
Mike(I forgot), how is it not partially Sam's fault that "Portland is on this brink"? He has been through 16 years of budget meetings in all the backrooms and public hearings. That's more than anyone that you can scare up in the city's history that is presently living.
Posted by Jerry | January 21, 2009 10:01 PM
Jerry,
Good point. Yes, he certainly must know the financial issues very well.
Just didn't make it to his agenda.
Posted by Mike (I forgot which one) | January 21, 2009 10:22 PM
Those in favor of Adams remaining focus intently on the issue of privacy and sexual orientation.
Those calling for resignation focus on the issue of high standards of ethics in public service.
I'm confused--if a public figure lies publicly and repeatedly over three years, publicly and harshly trashes critics of the behavior and calls himself a victim of lies, uses his office and retainers to ask others to lie for him--then, *only* after a story was about to break *and* attaining the office he sought, he suddenly decides to confess his lie--how can Adams (or anyone) claim it's an "abberation"?
And Adams himself confessed in print the past two days that yes, he basically *did* lie to win the office.
how in the world does such a long-term, coldly calculated lie of convenience and expediency not make us pause and consider other leadership?
shall we call Adams, with a reputation for arrogance, boutique projects and snarky dismissal of opponents of his ideas, nothing more than a "hard-working wonk" who slipped up?
Posted by ecohuman.com | January 22, 2009 10:13 AM