Is this what's best for Pittsburgh? (sublease, leasing, house)

[pman]

Pittsburgh Mayor Luke Ravenstahl's blueprint for saving the city's pension account just might get it to the crucial half-funded level by the end of next year -- if the city's assumptions of robust investment returns, a big windfall from a parking garage lease, and very slow payroll growth are true, a state pension official said today.
The mayor wants time to get the fund up from 31 percent of its ideal funding level to above 50 percent, and plans to do that by raising at least $200 million through a long-term lease of parking garages and by plunking $60 million a year into the account.
Mr. Allen said that if the city can raise the $200 million, and if it can consistently earn 8 percent on its investments, and if its overall salaries grow at a very slow rate that he questions, and if the cost of managing the fund drops rather dramatically, then the city could hit its target.
PMRS only assumes a 6 percent return on its investments, and under legislation awaiting a possible Tuesday House vote the city would only be allowed to assume 7.5 percent earnings. Mr. Allen would not say whether 8 percent is reasonable. "This is a question of reasonableness that we're not going to get into."

Read more: http://www.post-gazette.com/pg/09247/995603-100.stm#ixzz0Q9d0VwTA
is leasing the garage and ploughing the proceeds into the pension fund the best use of money? The assumptions seem rather dubious. Yes, 8% is historical return but it's entirely possible that they won't be achieved withint the period of time in question. Since the city of Pittsburgh is also heavily in debt, would it be better to plought the proceeds into retiring debt which is a guaranteed return? this should allow the city to afford greater contributions to shore up its pension, though it would likely mean that the pension is "seized" by the state but is that a better option for citizens?


Read more: http://www.post-gazette.com/pg/09247/995603-100.stm#ixzz0Q9cvZjNH


Read more: http://www.post-gazette.com/pg/09247/995603-100.stm#ixzz0Q9csNuW8

[Hopes]

I can't make sense of what the parking garage lease means. The article is too vague. It could mean anything to someone who knows nothing about this. I'm one of those people.

On one hand, it seems they mean to raise funds through monthly leasing out of parking spaces. On the other hand, it seems to mean that there is one huge lease for multiple parking garages. Is this a plan to lease all city owned parking garages to a management company (or a different management company for a better rate if the garages are already leased out that way) which would in essence sublease spaces for profit? That's what this seems to me.

Regardless, it's never good when a pension fund is raided for other purposes. And I think that's your main question.

[BrianTH]

I just looked up Pittsburgh bonds, and they are priced to yield well under 5%. That doesn't seem like a particularly good investment to me--you should be able to do better with a diversified portfolio designed to match the projected liabilities, as indicated by the range of expected returns cited in the article (e.g., even the low estimate, 6%, is much higher).

By the way, my bigger question is why they are leasing rather than just selling the parking assets.

[Hopes]

Originally Posted by BrianTH

By the way, my bigger question is why they are leasing rather than just selling the parking assets.

Perhaps to maintain some control of city parking via the lease.

[BrianTH]

Originally Posted by Hopes

Perhaps to maintain some control of city parking via the lease.

Maybe, but that would make the lease less valuable, which means the City gets less money.

I'm hoping it is more that they really think they can get a better deal that way. And hoping they are right.

[pman]

Originally Posted by BrianTH

I just looked up Pittsburgh bonds, and they are priced to yield well under 5%. That doesn't seem like a particularly good investment to me--you should be able to do better with a diversified portfolio designed to match the projected liabilities, as indicated by the range of expected returns cited in the article (e.g., even the low estimate, 6%, is much higher).

By the way, my bigger question is why they are leasing rather than just selling the parking assets.

Debt reduction is a riskless investment though, is it not? It also frees up cash for things like pension payments, transit services, schools, or tax cuts. I'm assuming though, by "well under" you mean it's 3 or 4% though. OTOH, if the mayor's pension scheme doesn't pan out, you could end up with the city's current debt problems, a pension fund that is seized, and be forced to make extra payments into pension fund...so there is a risk even if you get 6%, it may not be enough. it's a bit more complicated than just comparing returns, especially without consideration of risk and potential outcomes. It's my understanding that 6% returns would result in the above scenario.

[BrianTH]

Originally Posted by pman

Debt reduction is a riskless investment though, is it not?

Yes and no. It is riskless in terms of the future cash flows, but those cash flows could end up being worth more or less depending on things like future inflation and interest rates.

I'm assuming though, by "well under" you mean it's 3 or 4% though.

All the debt was somewhere in the 4s, but of course when you are talking about enough years, even a few basis points can add up with compounding.

OTOH, if the mayor's pension scheme doesn't pan out, you could end up with the city's current debt problems, a pension fund that is seized, and be forced to make extra payments into pension fund...so there is a risk even if you get 6%, it may not be enough. it's a bit more complicated than just comparing returns, especially without consideration of risk and potential outcomes. It's my understanding that 6% returns would result in the above scenario.

If you invest all your available capital and only get a return in the 4s, you are still running the risk (in fact likelihood) of having an even greater shortfall, of having the pension seized, and of needing to make even higher contributions.

Basically, there is no way around the problem of not having enough capital to invest in the fund to bring it up to the requisite funding levels. And investing your capital in a way that brings in lower-than-necessary returns just makes that problem worse.

[BrianTH]

By the way, it may be worth reviewing why those bond yields are so low. Interest from municipal bonds is typically exempt from federal income tax as well as state income tax in the state of issue. That tax break is financially equivalent to federal and state subsidies of the return on those bonds. In turn, investors share those subsidies with the municipality by paying a higher price for the bonds, which is what results in low yields. This is all quite intentional: these tax exemptions are designed to lower borrowing costs for municipalities.

OK, but that means when a municipality buys back its bonds, it essentially has to pay back its chunk of the federal and state subsidies it got when originally selling the bond. So when you are looking at this as an investment, it starts deep in the hole because of the capital that went to paying back the subsidies. And so that is why it isn't going to be a very competitive investment.