Public pension funds have posted double-digit gains four of
the last five years, and asset levels have never been higher. 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'sMCO -0.08% 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.
Source: Wall Street Journal,
March 7, 2014 6:27 p.m. EThttp://online.wsj.com/news/articles/SB10001424052702304815004579419371878171830
Comments:
Defined Benefit Pension Plans became suspect
in the 1980s, due to heavy inflation and recession in the 1970s, and stock
boom/bust cycles. Pensions were heavily
invested in stocks, but couldn’t handle the downsides. Losses in the value of
these funds meant that employers had to find scarce cash to make up the
difference.
In the 1990s, The Senate passed draconian regulations
and many of us converted our pension plans into age-weighted defined
contribution plans and added these to our 401k plans. We were no longer obligated to cover the
downside years or pay for other companies’ pension failures through our PBGC
premiums. Government, of course, didn’t
follow industry in abandoning the defined benefit model. That led to municipal
bankruptcy and that is happening now.
Norb Leahy, Dunwoody GA Tea Party Leader
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