Thursday, March 20, 2014

Pay now or pay later? What happens if you can't pay?

The Wall Street Journal editorial page presented a scary view of the public pension problems facing many state and local governments. Chicago, California, New Jersey, Stockton, Vallejo, the list keeps getting longer and longer. 

The Detroit bankruptcy is offering a hard education in the risks of lending to deadbeat governments, which are increasing as state and local pension obligations swell. Investors who have enabled these unsustainable promises may be in for a lot more pain.

Public pension funds have posted double-digit gains four of the last five years, and asset levels have never been higher (KF note: True with PERS) Yet government pension costs are soaring as the bills that politicians postponed during the hard economic times come due. No less than Warren Buffett warned this week that "local and state financial problems are accelerating, in large part because public entities promised pensions they couldn't afford." Moody's last month advised investors that "contribution requirements for pensions will remain high and trending upward in most cases."

Perhaps the biggest pension landmine outside of Detroit is Chicago. The Windy City next year must make a $1.07 billion balloon payment—equal to a third of the city's operating budget—on $19.4 billion of pension debt. The pension payment could cover salaries for 4,300 police officers or the resurfacing of 16,000 blocks of road, and Mayor Rahm Emanuel has warned that property taxes may have to double to pay the bill.

Meantime, the required pension contribution for Chicago schools this year is tripling to $613 million. Chicago unions are pressing the state government to raise property, sales, income and corporate taxes to bail out worker pensions. Chicago's pension funds are only half as well-funded as even Detroit's, if you can believe it, and could run dry by 2020. With state politicians up for re-election this November and Chicago's mayoral race next February, it's more likely that investors will foot the bill.

Last month, Chicago's city council approved the issuance of $500 million in commercial paper and $900 million in general-obligation bonds purportedly to refinance existing debt and improve public works. There's little to stop politicians from pouring the proceeds into pensions—or later reneging on this unsecured debt if it were to file for bankruptcy.

Detroit plans to repay its general-obligation bondholders a mere 20 cents on the dollar and has sued to invalidate $1.4 billion in certificates of participation, which were used to backfill the pension funds in 2005. Banks that helped the city hedge this pension bet with an interest-rate swap will be lucky to recover 30%. Unions refuse to support a readjustment plan that repays banks even a penny since this would be a "gift" to investors.

Retirees' pensions will be cut between 4% and 34%, but unlike investors they could recoup their losses if pension investments perform well. Workers will also get to keep their defined-benefit plans with modest adjustments going forward.

Back in Stockton, California, which declared bankruptcy in 2012 due partly to soaring retirement obligations, Franklin Templeton Investments is recovering only $94,000 of the $35 million it furnished the city to modernize public works. Investors who lent the city $125 million for pensions will get 50 cents on the dollar. Worker pensions will remain intact.

Moody's last month warned that California municipalities "will likely continue to pay a steep price if bankruptcies remain venues for restructuring debt obligations but pension liabilities remain untouched" and that Stockton's fiscal challenges could resurface. The Bay area suburb of Vallejo, which didn't modify pensions in its recent bankruptcy, faces a structural deficit of "$8.9 million without corrective measures" and "the risk of a second bankruptcy."

Pension costs are increasing across California. In the last year, the California Public Employees' Retirement System (Calpers) has raised pension bills of municipal employers by up to 50% to amortize its unfunded liability and compensate for its erroneous mortality assumptions. Local governments won't feel the full brunt until 2020 since the pension behemoth softened the blow by phasing the increase in over several years.

Calpers also voted last month to dun state taxpayers for an additional $1.2 billion a year. And lo, the state Legislative Analyst's Office says that California State Teachers' Retirement System (Calstrs) says it needs $5.3 billion to $5.7 billion more annually by 2020 to pay down its $71 billion shortfall. That's more than California spends on the University of California and Cal State colleges.

Not worried enough? Governor Chris Christie in New Jersey has declared that modest pension reforms in 2011, which suspended retirees' cost-of-living adjustments and raised the retirement age to 65 from 55 for new workers, were too little, too late. The state's pension bill has gone from zero to $2.4 billion in the last four years and will increase to $4.8 billion by 2018, which will crimp public services.

As Mr. Christie has explained, politicians goosed benefits during good times to curry favor with public unions, knowing that the bills wouldn't come due for many years. Unions now argue that retirement promises are de facto contracts that the U.S. and state constitutions protect from impairment, and they're going to court in states like Illinois to try to prove it.

Governments have sought to reduce their pension bills by tweaking benefits for new workers, but this won't save much cash for decades. So taxpayers are now footing the bills in reduced services and higher taxes. Yet as Detroit shows, there's only so much pain the public can endure. Investors shouldn't be surprised if they're asked for more "gifts" to bail out union pensions. Editorial


Smoke Detector said...

Indepth exploration of this phenomenon will reveal that the 'pensions' you address are typically going to be large municipalities with unionized workforces. Additionally, most of those pensions include enormous payouts including continued health insurance costs.

Mississippi has no unionized public employees and no retirement system that covers such things as insurance, medical and drug coverage all the way to the grave. The only ones who have that are unions and congress.

Anonymous said...

I have worked 30 years + with the state but cannot retire due to my health ins. costing over $1200 dollars a month when I retire. This is what is keeping a lot of folks on the State payroll.

Kingfish said...

Or states. I'm not implying this is the case in Mississippi. However, I think such articles are worthy in educating the public.

Anonymous said...

About the only positive note in this article is the double digit gains that the existing funds have posted. Watch out if the stock market takes a plunge. Heard just this morning that David Stockman has just warned that the fed has painted us in a corner with all the Quantitative Easing that has been keeping this economy/market afloat. I havent read his entire article but it appears that he believes we have reached a critical stage with regards to QE practices.

Anonymous said...

David Stockman - This Financial Collapse Will Be Catastrophic-----

The Fed's massive trading room is a weapon of financial mass destruction. That’s the point that people need to understand. The people running the Fed today have no clue of the danger that they are creating through this massive market intervention and manipulation....The whole market is not trading on any kind of fundamentals. It’s trading entirely on the word clouds being emitted by the Fed speakers and the cash which is being massively injected into the market each day.
They have totally disabled and corrupted the heart of our financial system. They have turned everyone in the financial markets into Fed-followers and front-runners. It is an extremely foolish and destructive policy, and yet it is now the mainstream view that all of this is for the good. It’s a very crazy time when you really think about where this is leading.”

Anonymous said...

Educate the public? Better would be to educate the damn state employees who are paying into an underfunded mess. Instead of hollering for a raise they should raising holy Hell with the numbskulls in the Legislature about the teetering financial status of their retirement plan.

Johnny Weir said...

Kingfish, How can you educate a public that are living on 3rd generation public handouts & assistances?

Ah,goes back to LBJ and the Great Society.

Anonymous said...

I'm in the same boat with you, 9:59.
60 years of age with over 25 years service. Will continue working as long as possible because insurance will take BIG chunk out of retirement check.

Anonymous said...

PERS employees can opt to continue with a state plan by paying the exorbitant premium; however, that plan will NOT cover prescription drugs. If you knuckleheads will just wait and retire at 65 you'll have medicare for whatever it's worth, but you'll have to buy a supplemental plus a drug plan, which is what I do.

The plans that are devastatingly broke are union employee retirement plans, which is not at all representative of Mississippi PERS.

Anonymous said...

The state employees here are still largely arguing about the position of the deck chairs on the Titanic. Whether the municipal jobs are unionized or not is irrelevant. Retirement ages for existing working are too low and, coupled with increased longevity, means benefit payments are paid for far longer than the fund can support. Any double-digit gains for the last four years are also coming from an asset allocation oriented towards equities, which means extreme volatility once QE can no longer inflate the stock market bubble. Pensions were traditionally invested in corporate bonds and real estate holdings. This will not end well.

Anonymous said...

Mississippi hasn't issued pension bonds like IL or other states, but don't thing PERS is fiscally sound. It is underfunded as well, and the taxpayers of MS will have to cover the shortfall. "Which taxpayers?" you ask. Simple.....those not receiving retirement income of any form, as it is exempt from state income tax. Also any property owner. The money to fund these benefits will have to come from someone or the benefits will have to be reduced. Which option do you think the legislature will choose? My bet is on the former.

Answering Extreme Arrogance said...

It's not 'irrelevant' at all, 8:34. All of he comparators Kingfish presents are union plans. Not sure how you view that as irrelevant. Aside from your haughty, bullshit, misquided, pretend-analysis of the market (which falls flat), there is absolutely no comparison between Mississippi PERS and the hundreds of union pension plans that are going belly-up in the ditch. Stick that up your volatility QE.

Anonymous said...

I am a "working" contributor to p.e.r.s.. Municipal, County & State employees don't do a lick of work. We spend most of the day on personal sh##. We use public vehicles, equipment, supplies and fuel for ourselves. We know to never to report fraud or misconduct. It goes all the way up and in porportion to the office level. We get a months vacation a sick day a month and yes it accumulates. We kiss a## and sick or vacation is rarely deducted. Get ready to bail p.e.r.s. out of insolvency. If all public employees vanished no one would notice. Hey dupes, bid it all out.

Anonymous said...

8:55. Might wish to read the PERS report and how short it presently is after 4 years of double digit returns before dumping on someone. It's true union pensions may be faring worse than non unions (you post no link to anything to support such), but 8:34's comments about PERS as a solvent defined benefit plan are on point whether you like it or not. Being snarky or profane doesn't change math.

Anonymous said...

Hey 8:55, your rant has just made PERS fully funded. Care to have a few more drinks and rant the deficit away? Some people.....

Anonymous said...

Hey, 10:43.....for which municipal, county, or state agency do you "work"?

And you accumulate 20 DAYS a month; i.e. "...a months vacation...a month..."???

Do tell.

Anonymous said...

Why provide links to the obvious. This whole thread is based on the link that proves the point. How many more links do you catterhoulas need? There is no comparison with belly-up, broke-ass union pension plans and the Mississippi PERS system. Regardless of your desire to see it fail.

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Trollfest '09

Trollfest '07 was such a success that Jackson Jambalaya will once again host Trollfest '09. Catch this great event which will leave NE Jackson & Fondren in flames. Othor Cain and his band, The Black Power Structure headline the night while Sonjay Poontang returns for an encore performance. Former Frank Melton bodyguard Marcus Wright makes his premier appearance at Trollfest singing "I'm a Sweet Transvestite" from "The Rocky Horror Picture Show." Kamikaze will sing his new hit, “How I sold out to da Man.” Robbie Bell again performs: “Mamas, don't let your babies grow up to be Bells” and “Any friend of Ed Peters is a friend of mine”. After the show, Ms. Bell will autograph copies of her mug shot photos. In a salute to “Dancing with the Stars”, Ms. Bell and Hinds County District Attorney Robert Smith will dance the Wango Tango.

Wrestling returns, except this time it will be a Battle Royal with Othor Cain, Ben Allen, Kim Wade, Haley Fisackerly, Alan Lange, and “Big Cat” Donna Ladd all in the ring at the same time. The Battle Royal will be in a steel cage, no time limit, no referee, and the losers must leave town. Marshand Crisler will be the honorary referee (as it gives him a title without actually having to do anything).

Meet KIM Waaaaaade at the Entergy Tent. For five pesos, Kim will sell you a chance to win a deed to a crack house on Ridgeway Street stuffed in the Howard Industries pinata. Don't worry if the pinata is beaten to shreds, as Mr. Wade has Jose, Emmanuel, and Carlos, all illegal immigrants, available as replacements for the it. Upon leaving the Entergy tent, fig leaves will be available in case Entergy literally takes everything you have as part of its Trollfest ticket price adjustment charge.

Donna Ladd of The Jackson Free Press will give several classes on learning how to write. Smearing, writing without factchecking, and reporting only one side of a story will be covered. A donation to pay their taxes will be accepted and she will be signing copies of their former federal tax liens. Ms. Ladd will give a dramatic reading of her two award-winning essays (They received The Jackson Free Press "Best Of" awards.) "Why everything is always about me" and "Why I cover murders better than anyone else in Jackson".

In the spirit of helping those who are less fortunate, Trollfest '09 adopts a cause for which a portion of the proceeds and donations will be donated: Keeping Frank Melton in his home. The “Keep Frank Melton From Being Homeless” booth will sell chances for five dollars to pin the tail on the jackass. John Reeves has graciously volunteered to be the jackass for this honorable excursion into saving Frank's ass. What's an ass between two friends after all? If Mr. Reeves is unable to um, perform, Speaker Billy McCoy has also volunteered as when the word “jackass” was mentioned he immediately ran as fast as he could to sign up.

In order to help clean up the legal profession, Adam Kilgore of the Mississippi Bar will be giving away free, round-trip plane tickets to the North Pole where they keep their bar complaint forms (which are NOT available online). If you don't want to go to the North Pole, you can enjoy Brant Brantley's (of the Mississippi Commission on Judicial Performance) free guided tours of the quicksand field over by High Street where all complaints against judges disappear. If for some reason you are unable to control yourself, never fear; Judge Houston Patton will operate his jail where no lawyers are needed or allowed as you just sit there for minutes... hours.... months...years until he decides he is tired of you sitting in his jail. Do not think Judge Patton is a bad judge however as he plans to serve free Mad Dog 20/20 to all inmates.

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Relax at the Fox News Tent. Since there are only three blonde reporters in Jackson (being blonde is a requirement for working at Fox News), Megan and Kathryn from WAPT and Wendy from WLBT will be on loan to Fox. To gain admittance to the VIP section, bring either your Republican Party ID card or a Rebel Flag. Bringing both and a torn-up Obama yard sign will entitle you to free drinks served by Megan, Wendy, and Kathryn. Get your tickets now. Since this is an event for trolls, no ID is required. Just bring the hate. Bring the family, Trollfest '09 is for EVERYONE!!!

This is definitely a Beaver production.

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Trollfest '07

Jackson Jambalaya is the home of Trollfest '07. Catch this great event which promises to leave NE Jackson & Fondren in flames. Sonjay Poontang and his band headline the night with a special steel cage, no time limit "loser must leave town" bout between Alan Lange and "Big Cat"Donna Ladd following afterwards. Kamikaze will perform his new song F*** Bush, he's still a _____. Did I mention there was no referee? Dr. Heddy Matthias and Lori Gregory will face off in the undercard dueling with dangling participles and other um, devices. Robbie Bell will perform Her two latest songs: My Best Friends are in the Media and Mama's, Don't Let Your Babies Grow up to be George Bell. Sid Salter of The Clarion-Ledger will host "Pin the Tail on the Trial Lawyer", sponsored by State Farm.

There will be a hugging booth where in exchange for your young son, Frank Melton will give you a loooong hug. Trollfest will have a dunking booth where Muhammed the terrorist will curse you to Allah as you try to hit a target that will drop him into a vat of pig grease. However, in the true spirit of Separate But Equal, Don Imus and someone from NE Jackson will also sit in the dunking booth for an equal amount of time. Tom Head will give a reading for two hours on why he can't figure out who the hell he is. Cliff Cargill will give lessons with his .80 caliber desert eagle, using Frank Melton photos as targets. Tackleberry will be on hand for an autograph session. KIM Waaaaaade will be passing out free titles and deeds to crackhouses formerly owned by The Wood Street Players.

If you get tired come relax at the Fox News Tent. To gain admittance to the VIP section, bring either your Republican Party ID card or a Rebel Flag. Bringing both will entitle you to free drinks.Get your tickets now. Since this is an event for trolls, no ID is required, just bring the hate. Bring the family, Trollfest '07 is for EVERYONE!!!

This is definitely a Beaver production.

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