Pittsburgh Mayor Luke Ravenstahl is no slouch on the golf course, carrying a 7.5 handicap, according to a website sponsored by the United States Golf Association.
Nor is he a slouch when it comes to defending assumptions about how much money the city's half-funded pension plan will generate.
Last month, Mr. Ravenstahl and three other pension board members beat back a proposal to study whether the assumption that the $593 million pension fund will produce annual returns of 8 percent is unrealistically ambitious.
Cynics wonder what's to study. After all, the beleaguered fund generated annualized returns of 1.9 percent over the last five years, 4.6 percent over the last seven years and 5.2 percent over the last 10 years.
Adopting what many consider to be a more down-to-earth assumption of 7.5 percent would mean Mr. Ravenstahl would have to drum up the difference some other way, either by cutting back city services or asking taxpayers to foot the bill. That's where Mr. Mayor draws the line in the sand trap.
"To me, this is where this is going, and I'm not going to do it," the mayor said at the board's Aug. 23 meeting.
When it comes to playing with numbers, there's more at stake when fudging on pension plan scorecards than there is on golf scorecards.
Their addiction to the game is proof that golfers have an innate talent for ignoring reality. They play tricks with their handicap on the putting green, where they graciously accept gimmies on putts that, upon sober reflection, they'd miss more often than not. They sometimes fail to report inflated scores that are unbecoming of someone of their ability or freakishly low scores that would reduce their handicap and therefore their competitive edge.
The prominent have even been known not to post scores, lest shareholders, taxpayers or some other group that -- at least on a theoretical basis -- they are answerable to discover how much time they spend out of the office. (The handicap of Mr. Ravenstahl, who played in a Penguins alumni charity event last week, is based on his 20 most recent scores, recorded from March through July.)
Those who play with pension numbers are given more slack, largely because of the plethora of inscrutable assumptions they have to make, including how long people will work, what kind of pay raises they will get and how long they will live in retirement. The assumptions, including the one about returns, determine how healthy a pension plan appears to be and how much cash its sponsor must contribute annually.
The city's plan was running a $380 million deficit and was 57 percent funded at the end of last year, meaning it had 57 cents for every $1 in benefits it is obligated to pay. Based on the 8 percent return assumption and the amount of benefits due to retiring workers, the pension plan is projected to be only 41 percent funded by 2036, according to Gleason & Associates, a Pittsburgh accounting firm hired by one of two groups overseeing the distressed city's finances.
That's bad enough. But things would be significantly worse assuming 6 percent returns: the fund would only be 15 percent funded by 2036, according to Gleason's accountant. (By the way, 6 percent is better than what the city earned over the last 10 years.)
"When they project an earnings rate they have not earned historically, it's very difficult to accept it as valid," says James McAneny, executive director of the Public Employee Retirement Commission, a state agency that advises the governor and legislature on pension issues.
"This is not a Pittsburgh-only problem," he added, a caveat that's not likely to get him a golf game this weekend with the mayor.
Public records indicate Philadelphia assumes its pension fund will earn 8.25 percent. Pension plans covering employees and retirees of Allegheny County assume 7.75 percent returns, while those covering state employees and state teachers assume 7.5 percent.
In the corporate world, metals producers Alcoa and Allegheny Technologies are counting on 8.5 percent returns, U.S. Steel and PNC Financial Services peg them at 7.75 percent, PPG Industries assumes 7.5 percent and Warren Buffett's Berkshire Hathaway sets it at 6.9 percent.
Actual returns may vary depending on how a pension fund allocates its money among stocks, bonds, private equity, real estate and other asset classes. Fees pension funds pay professional managers to invest their money and how well the managers perform also determine what pension funds earn.
A pension fund that is 65 percent invested in stocks and 35 percent in fixed income can be expected to generate annual returns of about 5 percent over the next 10 years, according to Chris Wiles of Rockhaven Capital Management in Mt. Lebanon. Mr. Wiles is outraged by Mr. Ravenstahl's refusal to study what he considers an outrageous assumption, but he understands where the mayor is coming from.
"He fully understands that reality bites, and he chooses to ignore it," Mr. Wiles wrote in an email to the Post-Gazette.
Golfers sometimes afford themselves of the opportunity to take a mulligan, replaying an errant shot without taking the penalty the rules of the game require. Perhaps our single-digit handicapper mayor is familiar with this custom and should take a mulligan when it comes to forecasting pension returns.
Len Boselovic: email@example.com or 412-263-1941.