A universal wish in the region is for the city of Pittsburgh to get past its seemingly perpetual and miasma-like financial crisis. As painful as the Act 47 process has been, if it leads toward a stable financial future for the city, most will welcome its prescriptions.

		Christopher Briem, a former analyst at the Congressional Budget Office, is a regional economist at the University Center for Social and Urban Research, University of Pittsburgh (cbriem@pitt.edu). The Race for Mayor    This is part of a series of Forum essays about the 2005 Pittsburgh mayoral campaign. The primary election will be held on May 17 and the general election on Nov. 8.

Yet, the Act 47 process has done little to address the city's core financial problem: the vast unfunded liability in its pension funds.

The scale of the pension crisis will easily overwhelm any short-term fixes put in place to get through the next few years. The warnings have been raised repeatedly, yet the topic is missing in action in the current mayoral race. First and foremost, the candidates for mayor need to address what they will do to prevent the city's pension funds from reaching a breaking point.

What is the crisis? The city of Pittsburgh has an obligation to generations of retired workers who have qualified for pensions after completing careers working for the city. Seven different pension funds for the city and related city authorities were paying benefits to just under 5,000 retirees in 2003. Future benefits are estimated to amount to $799 million in costs. The funds accumulated to pay those future expenditures are insufficient to pay them by large measure.

That bill will come due -- a lot sooner than most have anticipated.

As of 2003 the unfunded liability of the three primary city of Pittsburgh pension funds amounted to over $453 million, a $163 million increase from just two years earlier. Yet that amount masks the real scale of the problem that will eventually become apparent. Buried in arcane accounting footnotes, the truth is that the core assumptions used to generate that number include life expectancy tables dating back to 1984.

It should be no surprise that life expectancy has risen dramatically over the last two decades. As the pool of current and future retirees lives longer, their future payouts will unavoidably be much larger than the current accounting anticipates. More future payouts translates directly into a larger unfunded liability. Assuming that decades-old actuarial tables are still valid is nothing more than obfuscating the issue, and pretending the problem does not exist.

One result of this actuarial assumption is that the calculated contribution required for the city to make into the pension fund each year is insufficient to even maintain the funding ratio at its current level. To try and catch up, the city's pension funds have been forced into an aggressive investment strategy. Aggressive investment means a greater mix of riskier stock investments and less in more predictable bonds. Recent years have not been kind to the city's investment portfolio. Investment losses and persistent underfunding has one key result: The city is falling further behind each year.

How soon will one of the pension funds run out of money? The funding ratio is the percentage of future liabilities actually covered by current assets in the pension funds. In the early 1990s, the funding ratio was estimated at to be under 20 percent at best. That was such a dire level that the city issued nearly $300 million in bonds in 1996 and 1998 to infuse capital into the pension funds and prevent a cash flow crisis that was then considered imminent.

The bond proceeds raised the funding ratio to over 67 percent in 1999 and seemingly set the fund on a path to future solvency. That percentage has decreased precipitously in recent years, to 59 percent in 1999 and then to under 41 percent in 2003. The most underfunded city pension fund is the Policemen's Relief and Pension Fund, with a fund ratio of under 33 percent in 2003. If recalculated using current actuarial assumptions, and with continued underfunding, the total unfunded liability may already exceed the level it was at before the 1998 pension bond was issued. The current fund ratio is well below the 60 percent threshold that the Act 47 team itself points out is a major warning level for rating agencies.

Again: How soon will one of the pension funds run out of money? The answer is: soon.

The Act 47 consultants have given strong warning about the state of the city's pension fund crisis, but have proposed little in the way that materially alleviates the crisis. Clearly, there is no easy solution. In some fundamental ways, the Act 47 plan has heightened the city's pension fund crisis. The most recent unfunded liability calculation from 2003 does not take into account the changes the Act 47 plan mandated in city retirement policy and the mass of retirements it precipitated. The recent rash of retirements of hundreds of police officers, firefighters and other municipal employees will lower the city's operating budget but will simultaneously boost pension costs.

The unanticipated new retirees will draw pension benefits for longer periods and cause the pension funds' assets to be drawn down much faster than before. Overall it was a more complex version of what has become the norm for the city, trading short-term financial windfalls for long-term costs that will come due down the road. The ironic result is that the plan intended to set the city's current financial house in order may be the straw that breaks the back of there being any chance for long term financial stability.

How did pension fund finances become so dire? Past underfunding is the result of decades of strained city finances. City payments into the pension funds were minimal when economic and population decline hit the city hardest. Many, if not most, of the taxpayers who received services from the city's retirees moved out of the city decades ago.

Thus the conundrum of how a municipality can ever pay such a large unfunded liability on its own. Potential future city residents can and will choose to live in jurisdictions where they do not have to pay for the unpaid bills of past residents. The situation reinforces population decline in the city, in turn decreasing the tax base and further compounding the problem.

Compare the city's dilemma to the outlook for the Social Security system.

The worst-case fear is that the Social Security system will someday need to support one payee for every two workers paying into the system. The city is far past that. With Act 47-induced retirements and city work force reductions, the city now has more pensioners than active employees.

Ironically, state aide to municipal pension funds across the states is based on the number of current employees, not the number of current retirees being paid -- a formula that puts the city at a further disadvantage.

The problem can be ignored for only a few more years. The next mayor will likely be unable to escape a full-blown pension fund crisis. Eventually it will become a current cash flow crisis as the pension funds' assets are drawn down completely. At that point it will become apparent that the city will not be able to solve the pension crisis on its own. The next mayor may face his biggest challenge in finding a way to work with the state to find a workable plan for joint funding of past pension liability.

Like all such problems, the longer it is ignored the harder it will be to devise a solution.