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

17 comments:

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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