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My local transit authority (h/t Atrios) is on strike, idling the subway lines and busses that 300,000+ people use to move around the urban core as well as working-class neighborhoods in the South and North.  (It should shock nobody that the suburban railroad continues to bring in commuters from the Main Line, but that's for somebody else's diary.)

The sticking point in the negotiation between the union and management appears to be the soundness of the pension fund after it took massive losses last year.

From the  Inquirer:

SEPTA's pension fund, which has become a key issue in the three-day-old transit strike, contained about $640 million at the end of September, down from $719 million in June 2008.

The fund, affected by rising and falling stock markets, has rebounded from its level in March, when it was down to $471 million. But it remains well short of being "fully funded" - able to meet all potential payments to current and future retirees.

In essence, SEPTA is playing AIG in this drama:  as the pension fund misses its investment targets it seems less of a sure thing, and the people it's supposed to pay demand to see real cash.  Here's SETPA's general manager trying to explain:

Casey said the fund would eventually be fully funded if there were no changes in benefits payments and if it met its investment goal of an annual 8 percent return.

From 1991 through June, the annual return was 6.42 percent. That was down from a year earlier: From 1991 through June 2008, the fund earned 8.36 percent a year. [emphasis mine]

"Have we ever missed a pension payment? No," Casey said. "Is there any risk we will miss a pension payment? No."

Perhaps unsurprisingly, the union is demanding more actual money and less hoping for good luck.  Given that there isn't money readily available, Philadelphia residents are stuck.

Is it any wonder that policy makers are trying any kooky thing they can come up with to raise asset prices?  How many other local governments and agencies are sitting on budgetary bombs if they can't generate 8--10% risk free returns?

Update: tr GW diaries the strike from a less antiseptic perspective here.

Update x2: burrow owl points us at the note on pp 45–48 of SEPTA's 2008 financials with the commentary:

In the back of the transit authority's financials, the pension has pretty vanilla investments (which isn't to say well-balanced....), w/ the bulk (~65%) in regular equities and a lot in corporate bonds.  That explains how they got rocked. (I didn't see anything exotic, and interestingly not even any alternatives [although if they had hedging derivatives, it wouldn't show up per GAAP])

Originally posted to theran on Fri Nov 06, 2009 at 03:46 PM PST.

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Comment Preferences

  •  Hello cruel world n/t (5+ / 0-)

    "Dream for just a second and then do it!" -- Kolmogorov

    by theran on Fri Nov 06, 2009 at 03:42:09 PM PST

  •  The implosion of municipal govts is s-o-o-o 2010. (2+ / 0-)
    Recommended by:
    theran, janmtairy

    Philly jumps the gun.

    •  Cities are better positioned (1+ / 0-)
      Recommended by:
      Sparhawk

      since they have something besides property tax to fall back on and much better infrastructure.  Suburbs are much more rickety and will go Detroit with much less of a push.

      Obama and the Dems have to get in front of this, though.  Trying to get all the pension funds to pile into stocks and commodities is not going to fix the problem.

      "Dream for just a second and then do it!" -- Kolmogorov

      by theran on Fri Nov 06, 2009 at 04:06:29 PM PST

      [ Parent ]

      •  Philadelphia infrastructure VERY old and will (2+ / 0-)
        Recommended by:
        burrow owl, theran

        need TONS of money in the future to upgrade.  The regional rail train that caught on fire, in part because it was 40+ years old, is a perfect example.  The water & sewer system is a MESS, with water main breaks all over the place.  I was really hoping that the stimulus would help the really really old cities like Philly, NY, and Boston with really old infrastructure, but so far, not so much.  

        Leave it all on the road. Make the Republican Party small enough to drown in a bathtub.

        by janmtairy on Fri Nov 06, 2009 at 04:12:22 PM PST

        [ Parent ]

        •  The stimulus was unduly influenced (2+ / 0-)
          Recommended by:
          Sparhawk, janmtairy

          by the Senate's rural skew, which dumped a lot of money to areas that don't need it and don't contribute much to the GDP as it is.  Plus, a desire to bail out car-suburbia put a cap on what cities could get as well.

          "Dream for just a second and then do it!" -- Kolmogorov

          by theran on Fri Nov 06, 2009 at 04:38:21 PM PST

          [ Parent ]

  •  I diaried/ranted about the strike (3+ / 0-)
    Recommended by:
    burrow owl, theran, janmtairy

    this morning - exploring the perspective of most Philadelphians I've talked to, who blame the union for having the nerve to fight for its benefits.

    This is great information about the sticky pension issue, adds another layer to this mess, thanks for bringing it up here.

    And yet, I hear rumours of an anti-union protest on Sunday. That leaves me speechless - that might be the most ignorant, counterproductive protest since.. yesterday's in front of the Capitol!

    •  They're screwing people by striking. (2+ / 0-)
      Recommended by:
      theran, tr GW

      It's just stupid to be surprised when people resent having their lives thrown into disarray.

      Revolutionary Road was an awful, awful film.

      by burrow owl on Fri Nov 06, 2009 at 04:12:45 PM PST

      [ Parent ]

    •  I didn't want to get into my opinion (2+ / 0-)
      Recommended by:
      janmtairy, tr GW

      but it's that this is an essential city service, and binding arbitration should be automatic.

      "Dream for just a second and then do it!" -- Kolmogorov

      by theran on Fri Nov 06, 2009 at 04:14:45 PM PST

      [ Parent ]

    •  Sorry I missed your diary. (2+ / 0-)
      Recommended by:
      theran, tr GW

      I'm with you on this, at least mostly.  I am minimally affected because I take the train (although I am in the city), which has been incredibly crowded and late, although they've done a pretty good job, considering.  Anyway, about the union.  The big mistake was going on strike at like 3 in the morning, so that all the commuters were kind of left in the dark.  Septa has actually had a couple of pretty good years, financially, after losing money for years.  It is really stupid for management to NOT figure out a way to settle.  They are just driving commuters back into their cars (or bicycles, or carpools).  And it sounds like the big issue is that management's pension is pretty much fully funded whereas the union's not nearly as much.  Which, I have to say, doesn't sound remotely fair.

      Leave it all on the road. Make the Republican Party small enough to drown in a bathtub.

      by janmtairy on Fri Nov 06, 2009 at 04:24:52 PM PST

      [ Parent ]

  •  My understanding is that pensions and schools (2+ / 0-)
    Recommended by:
    theran, Norm DePlume

    wrote a lot of CDSs, just like AIG did.  And they got pwned on those deals, just like AIG did (Harvard just paid some enormous figure to get out of its CDS contracts)

    Revolutionary Road was an awful, awful film.

    by burrow owl on Fri Nov 06, 2009 at 04:11:52 PM PST

    •  Based on reporting (2+ / 0-)
      Recommended by:
      burrow owl, Norm DePlume

      Pension funds used illiquid assets, PE investments, interest rate swaps, and basically every other exotic means available to boost returns.  I am sure that they are in as bad shape as other vehicles that did the same thing.

      The problem is that with AIG the principle was established: if you short the market the way Goldman or union workers did, you'll get paid off by the government injecting cash into your counterparty.  I don't see workers taking a much worse deal than Goldman.

      "Dream for just a second and then do it!" -- Kolmogorov

      by theran on Fri Nov 06, 2009 at 04:17:19 PM PST

      [ Parent ]

  •  Re (2+ / 0-)
    Recommended by:
    burrow owl, theran

    Interest rates for T-bills are like 3%. I can't imagine that this pension fund thinks returns of 8% are possible. It's delusional.

  •  The Muni Bond Market is in BIG trouble (2+ / 0-)
    Recommended by:
    Sparhawk, theran

    Only slight off topic from this informative diary and that is the condition of the Muni Bond Market in general.  Many municipalities are facing very large cash calls to fill in the gap in their unfunded pension liabilities post-crash.  In most instances these are legal requirements that have to be met.  This is at a time when revenues across the board for municipalities are collapsing.  

    If you have a brokerage account at Fidelity you know that your core account (a muni MMKt account) is yielding one basis point.  Why?  It's because Fidelity has good enough sense to see what is on the horizon with muni bonds and they have opted not to take the risk.  

    Moodys, S&P and Fitch are once again asleep at the wheel.  Why has there not been an avalanche of credit downgrades for municipal debt?  Are they too busy looking at the sovereign debt of Ireland?  The premium risk for municipal bonds is grossly understated.  If you are in muni bonds ... I suggest you get out ASAP.

    In California alone I expect Vallejo X 50.  Yes, at least 50 municipalities in CA are going to go the route of BX unless the Fed and Treasury are successful in creating another equity bubble that will bail out Calpers.

    •  Unless it's rescued (1+ / 0-)
      Recommended by:
      Norm DePlume

      This diary isn't going to get much more commentary, so thanks for the interesting diversion.

      I wanted to put this specific example out there as a way of explaining the desire to blow up an asset bubble: the alternative is going to be a wave of government bankruptcies.

      "Dream for just a second and then do it!" -- Kolmogorov

      by theran on Fri Nov 06, 2009 at 05:59:39 PM PST

      [ Parent ]

      •  Reaching The Rescue Limit (1+ / 0-)
        Recommended by:
        theran

        I think the Federal Government has blown its rescue wad on Wall Street and the housing sector (Fannie, Freddie and soon to be FHA).  We can't have rescue to infinity.  There are not enough buyers of Treasuries to accommodate that (not to mention the debasement of the dollar).

        We don't have a lot experience in municipal bankruptcies.  Vallejo CA bankruptcy (18 mos ago) is going to take years to unwind in the courts.  The interesting question is whether a municipality's general obligation bonds are required to continue to tax into perpetuity to repay GO debt ... or ... does a BX extinguish GO debts.  Investors buy GO bonds with the assumption that they are backed by the issuer's taxing authority into perpetuity.  

        •  I guess we'll find out (1+ / 0-)
          Recommended by:
          Sparhawk

          The thing is, most of it won't matter.  After the first 10--15 muni BKs the bond market will shut down, and the penalty for defaulting will be non-existent.  This could get ugly.

          "Dream for just a second and then do it!" -- Kolmogorov

          by theran on Fri Nov 06, 2009 at 09:50:01 PM PST

          [ Parent ]

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