Tag Archives: Underfunded Pensions

Public Sector Pensions: The Parasite Devours Its Host

The Wall Street Journal recently highlighted a better method of analysing the impact of public sector pensions on state and local budgets.

https://www.zerohedge.com/sites/default/files/inline-images/5b4f11d9dda4c8a4428b45d4.jpg?itok=Y9ox0EwA

The results are ominous for government finances, the bond markets, and pretty much everything else:

Why Your Pension Is Doomed

A new study shows that benefits are rising faster than GDP in most states.

Pension costs are soaring across the country, and government unions blame politicians for “under-funding” benefits. Lo, if only taxes were higher, state budgets would be peachy. The real problem, as a new study shows, is that politicians have promised over-generous benefits.

In anovel analysis,the Illinois-based policy outfit Wirepoints compared the growth of state pension liabilities relative to state GDP and fund assets. Most studies have examined “unfunded” pension liabilities, which is the difference between current assets and the present value of owed benefits. But this obfuscates the excessive pension promises that politicians have made.

https://www.zerohedge.com/sites/default/files/inline-images/Top6states.png?itok=ii6N4fxL

According to the study, accrued liabilities—how much states are on the hook for—between 2003 and 2016 grew more than 50% faster than the economies in 28 states and more than twice as fast as GDP in 12 states. Leading the list are the usual suspects of New Jersey (4.3 times faster than GDP), Illinois (3.23) and Connecticut (3.18), as well as New Hampshire (3.46) and Kentucky (3.08).

Between 2003 and 2016, New Jersey’s pension liability ballooned 176%. Unions blame lawmakers for not socking away more money years ago, though lower pension payments helped them bargain for higher pay. The reality is that New Jersey’s pension funds would be broke even had politicians squirrelled away billions more.

Ditto for Illinois, where the pension liability has grown by 8.8% annually over the last 30 years. Yet when the Illinois Supreme Court in 2015 blocked state pension reforms, the judges rebuked politicians for inadequately funding pensions. The solution, according to unions, is always to raise taxes. But no tax hike is ever enough because benefits keep growing faster than revenues.

New Jersey recently raised corporate and income taxes on high earners, but the state would need to spend billions more on pensions each year to adequately finance promised benefits. Illinois’s Democratic Legislature last year overrode GOP Gov. Bruce Rauner’s veto of a corporate and income tax hike. Yet the Democratic candidate for Governor, J.B. Pritzker, and unions are now campaigning to kill the state’s flat tax rate and raise taxes again.

Stanford University lecturer David Crane has calculated that every additional penny that California schools have received from the state’s 2012 “millionaire’s tax,” which raised the top individual rate to 13.3% from 10.3%, has gone toward retirement benefits. The only salve to state pension woes, as the Wirepoints study notes, is to rein in current worker benefits.

A case can be made – and was made a long time ago by F.D.R among many others – that the whole idea of public sector unions is misguided. As F.D.R said, “It is impossible to bargain collectively with the government,” because when government unions strike they strike against taxpayers, which he considered “unthinkable and intolerable.”

We’re seeing the truth of this now, as public sector unions use their growing clout to convince politicians to write checks that taxpayers can’t cover.

The inevitable result of a parasite that grows faster than its host is the death of the host. In this case that means municipal bankruptcies on a vast scale in the next recession, default on hundreds of billions of municipal bonds necessitating a government bailout – culminating in a system-wide crisis that pops the Everything Bubble here and around the world.

Unless something else blows up first. These days it’s not if, but when and in what order the world’s unsustainable imbalances tip over.

Source: ZeroHedge

Advertisements

California Officials Avoid ‘p-word’ When Selling Higher Taxes to Voters

Why are officials so unwilling to tell their voters (tax donkeys) that pension costs are the underlying factor in their requests for tax increases?

https://i0.wp.com/www.zerohedge.com/sites/default/files/imagecache/fp_thumb/images/user3303/imageroot/20171006_donkey.jpg

While public and media attention to this week’s primary election focused – understandably so – on contests for governor, U.S. senator and a handful of congressional seats, there were other important issues on Californians’ ballots.

One, which received scant attention at best, was another flurry of local government and school tax and bond proposals.

The California Taxpayers Association counted 98 proposals to raise local taxes directly, or indirectly through issuance of bonds that would require higher property taxes to repay.

The proposed taxes on legal marijuana sales and other retail sales and “parcel taxes” on pieces of real estate were particularly noteworthy for how they were presented to voters.

Most followed the playbook that highly paid strategists peddle to local officials, advising them to promise improvements in popular services, such as police and fire protection and parks, and avoid any mention of the most important factor in deteriorating fiscal circumstances – the soaring cost of public employee pensions.

City, county and school district officials howl constantly, albeit mostly in private, that ever-increasing, mandatory payments to the California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) are driving some entities to the brink of insolvency.

However, those officials are just as consistently unwilling to tell their voters that pension costs are the basic underlying factor in their requests for tax increases.

Why?

Tying tax increases to pensions, rather than popular services, not only would make voters less likely to vote for them but make public employee unions less willing to pony up campaign funds to sell the tax increases to voters. It is, in effect, a conspiracy of silence.

This week’s local tax and bond measures are just a tuneup for what will likely be a much larger batch on the November ballot.

It’s a well-established axiom of California politics that low-turnout elections, such as a non-presidential primary in June, are not as friendly to tax proposals as higher-turnout general elections, such as the one in November. Primaries tend to draw older white voters who often shun taxes, while general elections have younger and more ethnically diverse electorates easily conditioned through social media to believing they might receive a few crumbs from voting in favor of socialist wealth transfer tax schemes.

As local officials make plans to place those proposals on the November ballot, a bill making its way through the Legislature could skew local tax politics even more.

Senate Bill 958 would allow one school district, Davis Unified, to exempt its own employees from paying the $620 per year parcel tax that its voters approved two years ago.

The Senate approved SB 958 on a 24-19 vote last month, sending it to the Assembly. It’s being carried by Sen. Bill Dodd, a Napa Democrat whose district includes Davis.

The bill’s rationale is that housing is so expensive in Davis that teachers and other school employees cannot afford to live there, and that exempting them from the parcel tax would, at least in theory, make housing more affordable.

However, if SB 958 becomes law, it would set a dangerous precedent. It doesn’t take much imagination to see local government and school unions throughout the state demanding similar exemptions from new taxes with the threat, explicit or implicit, that they would refuse to finance tax measure campaigns.

The very people who benefit most from additional taxes by receiving higher salaries and/or better fringe benefits thus would be able to avoid paying those taxes themselves.

Source: The Mercury News

 

What CalPERS On The Brink Of Insolvency Means

https://d33wjekvz3zs1a.cloudfront.net/wp-content/uploads/2017/02/calpers-r.jpg

The largest public pension fund in the United States is the California Public Employees Retirement System (CalPERS) for civil servants. California is in a state of very serious insolvency. We (Martin Armstrong) strongly advise our clients to get out before it is too late. I have been warning that CalPERS was on the verge of insolvency. I have warned that they were secretly lobbying Congress to seize all 401K private pensions and hand it to them to be managed. Mingling private money with the public would enable them to hold off insolvency a bit longer. Of course, CalPERS cannot manage the money they do have so why should anyone expect them to score a different performance with private money? Indeed, they would just rob private citizens to pay the pensions of state employees and politicians.

CalPERS has been making reckless investments with retiree capital to be politically correct with the environment rather than looking at projects that are economically based. Then, CalPERS has been desperate to cover this and other facts up to deny the public any transparency. Then, because stocks they thought were overpriced last year, they moved to bonds buying right into the Bond Bubble. Clearly, California’s economy peaked right on target and ever since there has been a steady migration of residents out of the state.

https://d33wjekvz3zs1a.cloudfront.net/wp-content/uploads/2017/05/Jerry-Brown.jpg

Meanwhile, Governor Jerry Brown has been more concerned about bucking the trend with Trump effectively threatening treason against the Constitution. The insolvency at CalPERS has exceeded $100,000 owed by every private citizen in California to government employees. It was $93,000 that every Californian owed back in 2016 for their state employees. In January 2017, Jerry Brown wanted a 42% increase in gas taxes to bailout CalPERS. California is an extremely liberal state – but that means they are also LIBERAL in spending the FUTURE earning of residents on public employees.

The pension crisis at CalPERS is getting worse by the day. The State looks to be totally bankrupt by 2021-2022. CalPERS has just decided to increase the contribution of local governments and cities to their fund. The cities say they are approaching bankruptcy because of rising subsidies, but CalPERS itself is approaching insolvency. The problem is that there really is no honest reform in sight. The choice is clear – CUT pension benefits of government employees or RAISE TAXES! 

CalPERS simply needs a bailout and very soon. It looks like they are hunting for it by sharply increasing taxes where ever they can get away with it, for state employees to grab whatever they can of your future income for themselves. This is a trend that will bring down Western society as a whole – a Sovereign Debt Crisis of untold proportions.

Board Member Steve Westly even told The Mercury News that a bailout was needed and soon. Currently, CalPERS manages approximately $350 billion of future pension claims of its members. Recently, CalPERS passed an amendment to the statutes, which resulted in higher contributions for the California municipalities. The amount of contributions has been increased several times over the past few years and this time the cities do not appear to be able to handle the increased costs. With the Trump tax reform, the real incompetence of local government is coming to a head.

Once CalPERS was 100% funded with assets under management. In fact, they had a surplus in the good old days before Quantitative Easing. Right now, the system no longer has more than two-thirds of future claims covered. CalPERS itself expects an annual return of 7% on its financial investments when it needs 8% minimum. Most pension funds run by the States are insolvent or on the brink of financial disaster. This is what I have been warning about that the Quantitative Easing set the stage for the next crisis – the Pension Crisis. The Illinois Pension Fund needs to borrow up to $107 billion to meet its payment obligations with no prayer of repayment. Promises to state employees are over the top and off the charts. This is why Janet Yellen at the Fed kept trying to raise rates stating that interest rates had to be “normalized” for this was the crisis she knew was coming. And guess what – Europe is even worse and Draghi will not raise rates for fear that government will be unable to fund themselves. The ECB is creating a vast European Pension Crisis while trying to keep member state governments on life-support. It has purchased 40% of all sovereign debt and appears trapped and cannot reverse this process. The choice is pensions collapse or state collapse.

There is NO WAY OUT of this crisis. The portfolio would have to be completely restructured and benefits reduced. Lame Duck Jerry Brown will do everything in his power to raise taxes and fees to try to hold CalPERS together. That is by no means a long-term solution. If you can transfer to one of the 7 states without state income tax – do it NOW before it is too late.

Source: Martin Armstrong | Armstrong Economics

California Cities Spiking Taxes to Pay Spiking Pension Costs

https://i0.wp.com/media.breitbart.com/media/2015/07/CalPERS-640x480-640x480.jpg

California cities are being forced to spike taxes to pay for spiking public employee pension funding costs.

California Public Employees’ Retirement System (CalPERS) has just reported that its $344.4 billion defined benefit pension plan, which covers most state and local government employees, has fallen from a $2.9 billion surplus in 2007 to a $138.6 billion deficit as of June 2016. The rate of funding decline accelerated over the prior year by $27.3 billion.

With the pension plan’s funded ratio — equal to the value of plan assets divided by present pension obligations — having fallen to 68 percent, far below what actuaries call the 80 percent minimum for adequate fund, CalPERS is demanding that cities increase payments.

A recent report warned that CalPERS’ poor investment return of just 4.4 percent over the last decade could be further reduced by large and politically motivated “environment, social and governance” investment strategies. These so-called ESG strategies have drastically underperformed other pension plan returns, which explains why CalPERS is “in the midst of a plan to lower its investment return assumptions to 7% from 7.5% by July 1, 2019.”

CalPERS will pay out $21.4 billion in benefits to retirees and beneficiaries in 2017, a 5.5 percent increase from 2016 and more than double the $10.3 billion in 2007. But most of the 1.93 million retirement system members and 1.4 million health care participants who receive administration services from CalPERS are associated with local governments that are directly responsible for paying spiking benefit costs.

At the September CalPERS meeting in Sacramento, eight cities told the pension plan’s trustees that they are experiencing spiking pension funding costs. Representatives from the largest local governments in the Sacramento area claimed that pension funding costs are set to spike by 14 percent next fiscal year.

The city manager of Vallejo, which recently emerged from bankruptcy, said that the city’s police pension funding costs are expected to jump from about 50 percent to 98 percent of payroll over the next decade. Both Lodi and Oroville officials stated that they have had to cut a third of their staff over the last decade.

El Segundo mayor pro tem Drew Boyles told the CalPERS board last month that his city’s CalPERS required pension contribution will be $11 million next year, or about 16 percent of the general fund’s revenue. But the cost in five years is expected to hit $18 million, or 25 percent of general fund revenue. He blamed the increase on funding for police and fire pension costs that are set to spike from 50 percent to 80 percent of payroll.

https://martinhladyniuk.files.wordpress.com/2017/08/dollarslave-jpg.png?w=375&h=300&zoom=2

The California legislature passed SB 703, which will allow Alameda County and its local cities to raise about $148.9 million by exceeding the 2 percent local sales and use tax rate cap. The City Council of El Segundo plans to spike the local sales tax by an additional 3/4-cent to 10.25 percent to generate $9 million to pay for spiking pension funding costs.

All the local government representatives that have been addressing CalPERS’ monthly meetings complain that even after eliminating of services, slashing infrastructure spending, and planning for layoffs, they will still be forced to raise taxes to fund pension costs.

Despite California already being the highest-taxed state in the nation, the California Tax Foundation warned in June that Sacramento politicians were proposing another $16.9 billion in “targeted taxes and fees.” If passed, much of that tsunami of new cash could end up at CalPERS to fund pension shortfalls.

By Chriss W. Street | Breitbart

Update:

CalPERS Goes All-In On Pension Accounting Scam; Boosts Stock Allocation To 50%

Starting July 1, 2018 stock markets around the world are going to get yet another artificial boost courtesy of a decision by the $350 billion California Public Employees’ Retirement System (CalPERS) to allocate another $15 billion in capital to already bubbly equities.

Required Pension Contributions of California Cities Will Double in Five Years says Policy Institute: Quadruple is More Likely

https://s17-us2.ixquick.com/cgi-bin/serveimage?url=http%3A%2F%2Ft3.gstatic.com%2Fimages%3Fq%3Dtbn%3AANd9GcQ4BVb2QD1UrFUE0WMYVFHq0V8WBgSI3oiXC-MFdNQ17VHQTmP0&sp=d17535ff245e7aefe89982f2ed8a22e8&anticache=46972

The California Policy Center estimates Required Pension Contributions Will Nearly Double in 5 Years. I claim it will be much worse.

In the fiscal year beginning in July, local payments to the California Public Employees’ Retirement System will total $5.3 billion and rise to $9.8 billion in fiscal 2023, according to the right-leaning group that examines public pensions.

The increase reflects Calpers’ decision in December to roll back the expected rate of return on its investments. That means the system’s 3,000 cities, counties, school districts and other public agencies will have to put more taxpayer money into the fund because they can’t count as heavily on anticipated investment income to cover future benefit checks.

Including the costs paid by cities and counties that run their own systems, the fiscal 2018 tab will be at least $13 billion to meet retirement obligations for public workers, according to the analysis, which is based on actuarial reports and audited financial statements.

Barring any changes to pensions, “several California cities and counties will find themselves forced to slash other spending,” the group wrote in its report. “The less fortunate will simply be unable to pay the bills they receive from Calpers or their local retirement system.”

Quadruple is More Likely

https://mishgea.files.wordpress.com/2017/04/city-of-berkely-projections.png?w=625

The California Policy Center Report details 20 cities and counties reporting pension contribution-to-revenue ratios exceeding 10%. San Rafael, San Jose, and Santa Barbara County head the list at 18.29%, 13.49%, and 13.06% respectively.

The report “reflects the impact of CalPERS’ recent decision to change the rate at which it discounts future liabilities from 7.5% to 7%.

Lovely.

A plan assumption of 7.0% is not going to happen. Returns are more likely to be negative than to hit 7% a year for the next five years.

As in 2000 and again in 2007, investors believe the stock market is flashing an all clear signal. It isn’t.

GMO 7-Year Expected Returns

https://mishgea.files.wordpress.com/2017/03/gmo-7-year-2017-02a.png?w=625

Source: GMO

*The chart represents local, real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward‐looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward‐looking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forward looking statements. Forward‐looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forward‐looking statements. U.S. inflation is assumed to mean revert to long‐term inflation of 2.2% over 15 years.

Forecast Analysis

GMO forecasts seven years of negative real returns. Allowing for 2.2% inflation, nominal returns are expected to be negative for seven full years.

Even +3.0% returns would wreck pension plans, most of which assume six to seven percent returns.

If we see the kinds of returns I expect, even quadruple contributions will not come close to matching the actuarial needs.

by Mike “Mish” Shedlock