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The
cover story of Barron's is on public pensions, an issue I have been railing
about for years, and heatedly so for several months. Please consider The $2 Trillion
Hole.
LIKE
A CALIFORNIA WILDFIRE, populist rage burns over bloated
executive compensation and unrepentant avarice on Wall Street.
Deserving
as these targets may or may not be, most Americans have ignored at their own
peril a far bigger pocket of privilege -- the lush pensions that the 23
million active and retired state and local public employees, from cops and
garbage collectors to city managers and teachers, have wangled from
taxpayers.
Some
80% of these public employees are beneficiaries of defined-benefit plans
under which monthly pension payments are guaranteed, no matter how stocks and
other volatile assets backing the retirement plans perform. In contrast, most
of the taxpayers footing the bill for these public-employee benefits
(participants' contributions to these plans are typically modest) have been
pushed by their employers into far less munificent defined-contribution plans
and suffered the additional indignity of seeing their 401(k) accounts shrivel
in the recent bear market in stocks.
Most
public employees, if they hang around to retirement, can count on pensions
equal to 75% to 90% of their pay in their highest-earning years. And many
public employees earn even more in retirement than their best year's base
compensation as a result of "spiking" their last year's income by working
ferocious amounts of overtime and rolling in years of unused sick and
vacation days into their final-year pay computation.
THE PROSPECTS ARE BLEAK for many state and local governments as a
result of all this. According to a survey last month by the Pew Center on the
States, a nonpartisan research group, eight states -- Connecticut, Illinois,
Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island and West Virginia --
lack funding for more than a third of their pension liabilities. Thirteen
others are less than 80% funded.
The
more likely outcome is dramatic cuts in essential services, such as police
and fire protection, health spending, education and infrastructure
improvements, in order to cover ballooning pension payments. State and
municipalities, after all, must do something: Most have a legal obligation to
pay out earned pension benefits. And some don't even have the courage to
switch new teachers, bureaucrats and police to a defined-contribution system,
to prevent the funding problem from worsening as time rolls on.
THUS,
MORE DEBT DEFAULTS and bankruptcy filings probably lie
ahead, unsettling the $2.7 trillion municipal-bond market. The possibility of
taxpayer revolts and likely insolvencies has shaken some investors'
confidence in general-obligation bonds -- those backed by the "full
faith and credit" of the states or localities. Once the gold standard
for munis, GOs are under a cloud in financially troubled areas.
The
size of the legacy-pension hole is a matter of debate. The Pew report puts it
at $452 billion. But the survey captured only about 85% of the universe and
relied mostly on midyear 2008 numbers, missing much of the impact of the
vicious bear market of 2008 and early 2009. That lopped about $1 trillion
from public pension-fund asset values, driving down their total holdings to
around $2.7 trillion.
Other
observers think the eventual bill due on state pension funds will be
multiples of the Pew number. Hedge-fund manager Orin Kramer, who is also
chairman of the badly underfunded New Jersey retirement system, insists the
gap is at least $2 trillion, if assets were recorded at market value and
other pension-accounting practices common in Corporate America were adopted.
Finance
professors Robert Novy-Marx at the University of Chicago and Joshua Rauh of
Northwestern University asserted in a recent paper that the funding gap for
state pension plans alone might exceed $3 trillion, in part because state
funds are using an unrealistic long-term annual investment return of 8% to
compute the present value of future payments to retirees, as is permitted in
government standards for pension-fund accounting.
MAKING
THE STATE AND local pension problem all the more trying is that
government entities can do little to wriggle out of their exposure, even if spending
on essential services is threatened. The constitutions of nine states,
including beleaguered California and Illinois, guarantee public-pension
payments. And most other states have strong statutory or case-law protections
for these obligations. "One shouldn't be surprised by this, since state
legislators, state and local judges and the state attorneys general are
beneficiaries of the self-same public pension funds that they've done so much
to promote and protect," Orin Kramer notes wryly.
True,
a dozen or so states, including New York, Nevada, Nebraska, Rhode Island and
New Jersey, are attempting reforms such as raising retirement ages, cutting
pension-benefit formulas, boosting employee contributions, curbing income
"spiking" and partially switching employees to less costly
defined-contribution plans. But these changes affect almost exclusively new
employees and do little to solve the existing funding gap.
Populist
Rage
That was page one of a three page article. I encourage everyone to read it
all.
I am very grateful to Barron's for the opening sentence "LIKE A
CALIFORNIA WILDFIRE, populist rage burns over bloated executive
compensation and unrepentant avarice on Wall Street."
I get a lot mail suggesting I have been giving too much attention to unions
and pensions. In reality, I have not been giving enough attention to the
issue, or at least bloggers in general haven't.
There are a dozen blogs covering every aspect of the housing bubble, bailouts,
and wall street salaries. Yet I am aware of no other major blogs covering the
enormous pension problem in depth. Moreover, I have hardly shied away from
bailout fraud, calling for the indictment of Geithner, Lewis, Bernanke and
others on numerous occasions. Here is a list.
March 2, 2010: Geithner's Illegal
Money-Laundering Scheme Exposed; Harry Markopolos Says “Don’t
Trust Your Government”
January 31, 2010: 77 Fraud, Money
Laundering, Insider Trading, and Tax Evasion Investigations Underway
Regarding TARP
January 28, 2010: Secret Deals
Involving No One; AIG Coverup Conspiracy Unravels
January 26, 2010: Questions Geithner
Cannot Escape
January 07, 2010: Time To Indict
Geithner For Securities Fraud
October 20, 2009: Bernanke Guilty of
Coercion and Market Manipulation
July 17, 2009: Paulson Admits
Coercion; Where are the Indictments?
June 26, 2009: Bernanke Suffers
From Selective Memory Loss; Paulson Calls Bank of America "Turd in the
Punchbowl"
April 24, 2009: Let the Criminal
Indictments Begin: Paulson, Bernanke, Lewis
Who Is Covering The Pension Issue?
I recently spoke with Barry Ritholtz at the Big Picture blog about unions and
his reply was something to the effect of ... don't you realize how much
unions have shrunk over the years?
I explained about public pensions and their problems and received a comment
"Mish, it's just not my issue."
Indeed none of the other top blogs give this critical issue even a smattering
of a glance.
The Pension Tsunami
Those who want to follow the pension crisis daily need to subscribe to Jack
Dean's Pension Tsunami feed (click on
sign up in the upper right). Jack Dean does not write a blog, rather he posts
links to every article that comes his way on the subject.
Jack told me a couple years ago, he would only see a few stories a week. Now
there are a dozen stories a day, typically in local newspapers. However,
there is seldom a major story in a national publication like what just
appeared in Barron's.
Steven Greenhut's Plunder!
I encourage you to read Plunder! How Public Employee Unions are Raiding
Treasuries, Controlling Our Lives and Bankrupting the Nation by Steven
Greenhut.
Plunder! is a fantastic book. I finished it weeks ago, but have not had time
yet to do a review. I will. In the meantime I assure you it is well worth a
read. It will open your eyes as to what is happening and why in regard to
public unions.
Plunder! is now on my recommended reading list on the left.
Public Unions and Pensions are the #1 Issue Affecting States
Public union salaries and pension promises are the number one budget issue
affecting cities and states. $2-3 trillion is a lot of money, and that is how
deep in the hole public pensions are.
Cities at least have the option of declaring bankruptcy, states don't.
However states can default, and unless something is done soon, some state
like Illinois or California is going to decide that is the proper thing to
do.
And even if states don't default, many cities and counties will. It's just a
matter of time, and probably sooner rather than later. Yet all the focus by
hyperinflationists is on a US default which may never happen.
Forget about hyperinflation because jobs are not coming back, and cities and
counties will be defaulting on debt. Defaults, by definition are anything but
inflationary.
Speak Out, If You Don't, Who Will?
To
see what others are doing please read ...
·
Inspired Reader
Stands Up To Union Mobs
·
God Bless Justin In Albany; Won't Be Bullied In Phoenix; You
Can Speak Out Too!
Another action you can take is to vote against any candidate from any party,
backed by public unions.
One thing is certain: The longer we put off addressing public union salaries
and public union benefits, the worse off we will be. If you don't speak up,
and take action who will?
Mish
GlobalEconomicAnalysis.blogspot.com
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Mish's Global Economic Trend Analysis
Thoughts
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