Tuesday, May 5, 2009

Public Pension Pinch

"The market has changed and has caught up with the rest of the world, but raising taxes is really the last thing we want to do," said Jon Rupert, business manger of the Highlands School District In Natrona Heights.

No Mr. Rupert, the tide went out as it does and you got caught naked. The Pennsylvania school districts, and therefore the taxpayers, are about to get their private parts burned. It is one thing to raise an eyebrow and tsk, tsk a private pension plan when the company clearly ran it into the ground, but a public pension plan has broader ramifications.

Ironically one of the worst things that could have happened to us was the unrelenting bullish attitude and market of the 1980's and 1990's. Mutual Fund Wholesalers and pushers drew lines that went up and to the right infinitely. Insurance salesmen made assumptive illustrations that used 12% and more as sales pitches. Brokers explained 10% average returns over the years and created financial plans that never faltered and left legacies for children and charities. And school districts failed to make pension contributions because the charts showed they were fully funded forever.

No one explained that those 10% average returns over many years included decades long periods of zero return.

Much like the corner we are painting ourselves into nationally, local taxing authorities have a problem that won't simply go away.

Pittsburgh Public Schools, the largest district in western pennsylvnia, has 2,700 teachers and full-time professionals. Chris Berdnik, chief financial officer and chief operations officer, estimates that contributions to the pension fund will rise from $10.08 million this year to $33.18 million in the 2012 school year. So sometime in the next three years between the city and state another $20 million a year needs to be found. Property tax relief? Right.

In 2002, after the state raised pension benefits for public school teachers by 25%, contributions from school districts in the state were $539,000, and the state contributed $662 million. Say what?! As school districts and board members jockeyed for no tax hike platforms, Rome smoldered. The high returns of pension plan assets allowed school districts to glibly take a pass on funding. We seem to be a country that does love to let infrastructure and deferred liabilities slide to the next administration or next generation.

Much like the stories one hears of elaborate ice fishing houses left too long on the lake, the school districts acted as if the 8 inches of financial ice beneath their feet would never melt. The districts and tax payers all over the states are about to find the water deep and cold. Expect active school district bond floats and taxes hikes to cover the debt service. Another reason to hope interest rates down, hoping public financing costs stay lower?

As the effects of poor planning slip into every corner, public and private, thinking as if it is business as usual will not cut it for investors. New challenges will provide new risks and opportunities.

John Barnyak