Sunday, April 5, 2009

AP: $1 Trillion Hit to Pension Funds Could Cost Taxpayers, Workers

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We discussed this topic of the coming horror that are state & municipal pension funds a month ago [Mar 4, 2009: Bloomberg - Hidden Pension Fiasco May Foment $1 Trillion Bailout], but at this point it seems no disaster cannot be fixed without some good ole currency printing. I'll post it just for informational purposes since there are no crisis anymore - only opportunities to stash trillions on the Federal Reserve Balance sheet when the future "loan" (bailout) is created.

I used to think these situation augured higher taxes for the peasant class, putting yet another strain on broken personal balance sheets in both the near and long term.... I used to think the dislocation between wages/benefits of the public worker v private worker would be a major issue now and in the long term future. I used to think like this as I wrote in March

While this is specific to pensions it really is a parallel to almost every major program in the U.S. at both federal and state level. Promises that had no chance to be fulfilled in the name of "kicking the can down the road". Unfortunately multiple roads are converging at a dead end. If the federal government is going to bail these all out it is basically a transfer of wealth from those without these pensions to those that do....many of which are government employees as the vast majority of private enterprises have done away with the pension plan. (this story just deals with the PUBLIC pensions - we are not even touching the underfunded corporate pensions)


I was wrong. There are no longer any worries - we can print money to our hearts desire and no one has to take an ounce of pain. I didn't realize how valuable incessent money printing can be... keep the presses going, keep pushing those paper bills of (valuable) I.O.U.'s into the system; which in turn inflate the value of all assets who have fixed supply (i.e. stocks for one example). Poof - problem fixed. We're all winners here.

Via the AP
  • Massive investment losses sustained by public pension funds are pressuring state lawmakers from New Mexico to New York to spend more taxpayer money to shore up their programs, boost the retirement age for newly hired government workers and seek more from employee paychecks.
  • Pensions need $270 billion in additional contributions over the next four years, and more than $100 billion annually for two decades hence, according to the Center for Retirement Research at Boston College. (that's just 1-2 AIG bailouts a year - peanuts for PrintAmerica. Why the press is raising a fuss over this is beyond me - liberal elites at it again. Once we inflate the stock market back to where it "should be" via printing of an epic sort these problems disappear)
  • The pension trouble is just one more economic challenge for states. Income and sales tax collections are dropping fast as unemployment rises. Jobless benefits funds are running dry, requiring federal borrowing. (which surely will be paid back as the economy recovers in 6 months) And because of substantial budget holes, states are cutting back on a wide range of services, including child care subsidies for low-income families and aid to public schools, and in some cases laying off workers.
  • But as bad as the budget picture looks, it is dwarfed by the size of the gaps in states' pensions, which have collectively lost at least $1 trillion as financial markets swooned over the past year. (again a near term issue which will be soon solved as we print enough currency to get this market back to all time highs - don't sweat it) Public pensions cover about 14 million state and local employees and paid out almost $163 billion to seven million retirees in 2006-2007, according to the Census Bureau.
  • Because pensions involve long-term obligations and investments, there's no immediate risk that states will be unable to pay retiree benefits. But replenishing pensions could squeeze states for years to come, forcing lawmakers and governors to juggle their spending priorities -- pitting pensions against schools, colleges, health care, prisons and other government services. (clearly they missed out on the "solution" that is coming down the road)
  • "What you hear concern about out there right now is, 'We the taxpayers are going to be stuck with a bill paying for public pensions. And we don't want taxes raised to pay for public pensions.' And that is understandable," says Mike Burnside, executive director of the Kentucky Retirement Systems. (that used to be my concern too - subsidizing unreasonable and unrealistic promises to public workers with private workers taxes. However it's a new era...)
It's up to legislatures to appropriate money to cover pension funding for state workers. With questions swirling around the future of public employee pensions nationally, legislation is pending in at least 28 states to change funding and benefits:
  • In New Mexico, where pensions for educators and state employees are underfunded by a combined $4.6 billion, lawmakers approved longer work requirements for public employees hired starting in 2010. They'll be able to retire with full benefits at any age after working 30 years, up from 25 years. Current workers will pay an extra 1.5 percent into their pension plans and higher amounts for retiree health care.
  • In New York, Gov. David Paterson has proposed increasing the minimum retirement age for new hires to 62, up from 55.
  • In West Virginia, whose pension fund for teachers has a $4 billion shortfall, the governor has proposed additional taxpayer money to close the gap.
  • Illinois, Oklahoma and Florida are among a half dozen states considering defined contribution pension plans, like a 401(k), for public employees rather than automatically enrolling them in a traditional defined benefit pension that pays a guaranteed annuity to retirees.
  • Two states -- Alaska and Michigan -- have dropped defined benefit programs for at least some newly hired public employees, according to the National Association of State Retirement Administrators. But slashing benefits for current workers isn't an option for states because statutory or constitutional provisions usually safeguard an employee's earned benefits. (funny how the constitutional provisions protects benefits in the public sector, but not the private? were these benefits written in the state constitutions? I think not... but once promised....)
Hmmm...
  • Public employees and their unions are fighting measures that would reduce the value of their compensation packages, such as higher payroll contributions for health care or pensions.
  • Leslie Boyadjian, a 7th grade social studies teacher in Albuquerque, estimates that higher pension payments approved by New Mexico lawmakers and expected increases for health care could cost her $1,000 a year. "For me, $1,000 a year is a huge financial hardship," said Boyadjian, 26. "Between car payments, rent, student loans, I'm barely making ends meet as it is."
In summation...
  • The market value of state and local pension fund assets has declined by a third, from a peak of about $3.3 trillion in the fall of 2007 to $2.4 trillion at the end December, according to the retirement administrators association.
  • Investment earnings account for $4 of every $5 in pension financing, according to the Census Bureau. The rest comes from employee and government contributions. Almost three-fifths of public pension fund assets were invested in domestic and international stocks and slightly more than a quarter in bonds.
  • Because of the way accountants measure the value of pensions, market losses and gains are averaged over several years. That will give states more time to respond to the recent financial market meltdown.
  • "I don't think they can invest their way out of it," says Alicia Munnell, director of Boston College's Center for Retirement Research.
Oh yes they can Alicia. Ben Bernanke will make sure of it... we're embarking on an inflation of assets program that would make Greenspan blush in shame of impotency, for what he laid the groundwork down in 2002-2004. In Ben we trust (to inflate).

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