Study says Philly pension fund is in serious trouble. Is it time to panic?

It's no secret that Philadelphia's pension fund isn't in great shape, but a new report released today by the Kellogg School of Management at Northwestern University says things are worse than we realize. According to the study, Philadelphia does not have close to enough money to pay benefits promised to city workers.

“Philadelphia has a pension fund that had $3.4 billion in assets as of June 2009,” says Professor Joshua Rauh, who co-authored the report. “They have made promises to workers -- some of whom have retired, some of whom are still working -- that yields a liability of $13 billion.”

That number -- a $13 billion liability -- is shocking. It's about $4 billion higher than the city's official estimate of the gap between the pension fund's assets and obligations.

Has the city been pulling a fast one? No, not exactly. There's a huge gap between the report and the official numbers because the authors of the study used a different formula to calculate the liability level of municipal pension funds than many cities do. Other cities like Boston and Chicago were also found to have a much higher liability than their official projections.

In Rauh's view, though, the municipalities have it wrong. He says that rules put in place by the Governmental Accounting Standards Board (GASB) allow municipalities to underestimate their true liability by overestimating returns on investments.

“Imagine you had a mortgage on a house and the house was worth less than the mortgage,” explained Rauh. “Now, imagine if you had $10,000 in savings. A person can't move the money into the stock market and claim they are less underwater with their mortgage because they expect to make money from investments. A pension fund can do that. They can move money into stocks and claim a lower rate of liability.”

What does this mean for Philadelphia?

For now, we'll take some solace in the fact that nothing in the report is Philly-specific. If the GASB guidelines are wrong -- and we're not in a position to say whether they are or not -- that's a national problem that may require a national solution. But obviously, the possibility that Philly's pension fund is in even worse shape than the city thought is cause for concern.

Still, before anyone really starts to freak out about this latest report, it's important to remember that Rauh and his co-author take a fairly radical position in their study. They believe that the accounting rules used by municipal and state pensions funds are fatally flawed and need to be completely overhauled. Based on their previous  research, that was a foregone conclusion before the study was even conducted. That should certainly color how we view the report and the findings about Philadelphia. 

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