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Sunday, January 18, 1998 By Brian O'Neill
I'm talking to a friend who knows a bit more about high finance than I (which hardly narrows the list of suspects). I'm asking about the city selling $250 million in bonds to bail out its pension fund, asking if it's a good idea for taxpayers, when he offers eight words of solace I'll never forget:
"If we're really stupid, we're not uniquely stupid."
It's such an encouraging phrase, it ought to be in needlepoint, framed on a wall somewhere. Those of us who shiver through moments of doubt as we follow the conventional financial wisdom of the late 20th century - investing in the stock market even as we take on massive debt - might mount the words above our desks.
If we're really stupid, we're not uniquely stupid.
The city is doing what so many homeowners have done. It's borrowing a big pile of money when interest rates are at a historic low. That part of this deal is a no-brainer, says Paul Hennigan, director of the city's Finance Department.
The tougher call is deciding where to plunk all the borrowed millions. More than half will be invested in the stock market. Following the pension fund's current practice, 40 percent of the money will go into fixed-income securities and 60 percent into ownership of small, medium and large companies here and abroad.
That highly diversified portfolio is expected to earn 8.75 percent each year, about 2 points better than the city's anticipated borrowing rate. If it comes in under The Big Number in any given year, it's expected to make that up over time.
Borrow money at one rate and invest with reasonable expectation of a better return. It's called "the spread," and makes the rich richer. Of course, if stocks crash worldwide and stay down too long, the spread's inverted; the system crashes. But what's a city to do? The pension fund has more than a half billion dollars in unfunded liability, a negative inheritance the city can't ignore. This deal is judged the prudent course.
Remember, kids. If we're really stupid, we're not uniquely stupid.
None of this suggests the city is out of the woods even if stocks soar. Sala Udin, chairman of City Council's finance and budget committee, sounded like a scientist in an old Japanese monster movie when he spoke of the city's pension deficit disorder. "If it is not attacked," Udin said, "it will consume us."
Pittsburgh's problem is the Social Security problem in miniature. As you know, when baby boomers retire, there will be relatively few workers paying Social Security taxes to support them, so the system is taking more of our money now to pay for aging Beatles fans later. Likewise, though the city's population and work force has shrunk, its list of pensioners grows. So the pension fund needs more income to reduce the contributions necessary in the 21st century. Even with this deal, taxpayers in the year 2024 should cuss their ancestors.
On the other hand, the city could get more help from the state, and in 26 years, when the last of these bonds would be paid, the Triangle might be Golden again. The city budget could be flush. Until then, Pittsburgh follows the financial herd - except where it's a pioneer.
These pension bonds will be issued competitively over the Internet next month. The city made its first Internet bond sale in November, the first such sale in the nation. Hennigan called it an outstanding success. Wall Street types, fond of their lucrative traditions, say the city would have done better the old-fashioned way.
Who's right? Dunno, but for once anyway, if we city taxpayers are stupid, we're uniquely stupid.
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