Who Is Pension Consultant PFM?

Bruce Maples (bruceinlouisville@gmail.com)
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Yesterday we heard the third and final report from PFM, the consulting firm hired by the state to analyze the Kentucky pension systems. We thought it would be good to learn more about PFM, and about their other work, to see if there are patterns or insights to be gained.

One Mission, Multiple Companies

On their website, they state that the firm was “a financial services firm founded exclusively for the benefit of governments and charitable institution clients.” Although it’s not stated as such on their site, the PFM initialism most likely came from the first company, Public Financial Management.

If you go on to their Disclosures page, you learn that “PFM is the marketing name for a group of affiliated companies providing a range of services. All services are provided through separate agreements with each company.”

Here’s a list of the services and which PFM entity provides them (most are LLCs):

  • Financial advisory – PFM Financial Advisors, Public Financial Management
  • Investment advisory – PFM Asset Management
  • Swap advisory – PFM Swap Advisors
  • Consulting – PFM Group Consulting
  • Institutional purchasing card – PFM Financial Services
  • Financial modelling – PFM Solutions

It’s important to note, and could be relevant to the pension discussion, that it is possible for PFM to consult on pension issues through their consulting arm, and then be involved in advising or even managing the same pensions through other parts of the company. We’re not saying that is their goal here, just that they do offer both services.

PFM Work Elsewhere

We spent some hours doing OSINT on PFM. (That’s “open-source intelligence,” which in this case is a fancy name for using the Google Machine.) We found examples of PFM work from across the country, and have listed a sample below.

Wilkes-Barre – Wilkes-Barre used PFM to analyze the city’s financial position. PFM recommended privatizing certain services. (Citizens Voice)

Scranton –  The school district was facing a $40 million deficit. PFM was brought in to analyze the system, and wound up recommending numerous cuts. The president of the Scranton Federation of Teachers called the report “one-sided” and said the union was disappointed the report did not mention the district’s no-bid busing contracts and change orders and cost over-runs for construction projects. (Times-Tribune)

Erie – In an analysis of the school system’s financial situation, PFM recommended that the district eliminate the health benefit for retirees, but only for new hires. (Go Erie)

Scranton – The city hired PFM to manage their pension funds of $48 million for approximately $240,000 a year, a management fee of about 0.5%. (That fee is about normal for passive management, and very low for active management. And yes, this is the same city that also used PFM for their school analysis, above.) (Times-Tribune)

Memphis – PFM was rehired to serve as financial advisor to the Memphis Airport board, at an annual fee of $400,000. They had served in this capacity since 2009, and the renewed contract runs through 2022. There was some complaining that local firms were not considered, but in the end PFM retained the contract. (Commercial Appeal)

Kentucky – PFM has been hired by the Kentucky Transportation Cabinet to advise transportation officials on the Ohio River Bridges Project, at a cost of $300,000 a year. (WDRB)

An Interesting Contrast

As you can see, many times PFM is brought in when the financial situation is dire, and often their recommendations including cutting. One could conclude from these stories that their consulting approach consists of one word—cut—but a story out of Tennessee provides some contrast.

Brought in to analyze the Hamilton County (Chattanooga) school system, PFM made these recommendations:

  • Reduce the number of schools and teachers to boost efficiency and student outcomes.
  • Increase teacher and principal salaries with savings from the consolidation of schools and reduction in staff, and align teacher compensation to quality.
  • Improve accountability by the county hiring two full-time performance auditors and the district employing a chief information officer, chief operating officer, and a chief talent officer.
  • Establish a new tax dedicated to schools infrastructure, tech, and innovation.
  • Make the district a part of the planning commission approval process.

PFM’s consultant said that “many across the county are hesitant to invest in the county’s school system, believing the money will be wasted. But instead, the report concludes the district’s central office is understaffed and operating on a very lean budget.”

“To unlock the significant savings we think are there, there has to be new investment [in the school district,]” he said. ” I don’t think the school system has had the ability to effectively make the case for the need for more funding.”

The Montgomery County Debacle

Much of PFM’s work is relatively quiet and behind the scenes. However, their work for Montgomery County, Maryland, was anything but quiet.

PFM was paid $149,000 by the County Council to research the effect on the local economy of raising the minimum wage to $15 an hour. The report predicted “47,000 jobs would be lost in the county, and an aggregate income loss of $400 million, if the county increases the minimum wage from the current $11.50 to $15 per hour by 2022.”

Proponents of the minimum wage increase attacked the report for both its conclusions and its methodology. The job loss predicted would be higher than the rate of job loss in the Great Depression, noted one article. And when it was revealed that the conclusions came from a push survey of small business owners through a Survey Monkey survey, the reputation of the study descended to “junk science” and “completely unreliable.”

(Editor’s note: As someone who has done statistical research in the past, the findings would have been a clue that something was off. Looking into the methodology would have been my first question, and discovering that the firm used an anonymous Survey Monkey poll and only counted those who responded would have completely invalidated the study for me. Your mileage may vary.)

Some Final Thoughts

PFM has grown quite a bit through the years, now employing hundreds of people in multiple locations across the country. Their work product is professionally developed and delivered, and it seems apparent that they have expertise in a variety of fields relevant to their mission.

It also seems apparent that at least as far as their customers are concerned, they do good work. Their analysis work at least seems relatively well-grounded in the facts on the ground, although their subsequent recommendations sometimes seem aimed at a certain approach to financial management within government.

After looking at all of the stories listed above, though, there is one question that remains unanswered: Do they shape their recommendations to fit the facts on the ground, or to please the persons paying them? Obviously, if the only time you are called is when the financial situation is dire, many of your recommendations are going to focus on cutting spending. But even in the Chattanooga study noted above, where there was talk of a tax increase, was that recommendation included because it was something the funders wanted to hear? And are things left out of their final reports because the funders want them left out, as noted by the teachers’ union leader?

In listening to the PFM presentation on Monday, I was struck by the lack of any mention of funding streams as part of the answer. We all know that Kentucky’s tax system needs work. Were there not any ideas from PFM on how to address this as part of the pension discussion? Or were they waved off from including that?

Over the coming days, we will dig deeper into their work for Kentucky. They are obviously a mature and respected firm, but that doesn’t mean that their work is always equally mature, or well done. Digging into both their analyses and their recommendations will help keep Kentucky from becoming the next Montgomery County.

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