But for today, let us focus on the public pension issue - one of the many reasons it's in the "national interest" to make sure the stock market goes in the "right direction". We've already used up almost every accounting trick known to man to obfuscate the problem. Just this weekend in the Wall Street Journal, we have Illinois:
- Illinois routinely covers those gaps with short-term measures, putting off bills and paying less than is recommended into the state's pension fund. The pension plan has unfunded liabilities of nearly $80 billion -- among the worst in the nation, with no solution in place for catching up.
So after the accounting tricks, the next step will be for states to issue new debt to pay for these obligations (akin to paying off 1 credit card with new borrowings on a 2nd credit card) This is already happening.
- Messrs. Quinn and Hynes said spending decisions by past governors left the state in a deep hole that the recession made deeper. In 2003, for example, Illinois under then-Gov. Rod Blagojevich sold $10 billion in 30-year bonds to cover two years' worth of payments to the pension fund. The proceeds from the bond sale went into an investment portfolio that included stocks; the expected profits haven't materialized, leaving Illinois far behind
That is but one state... we looked at the entire country in a story not even a year ago, and Bloomberg pegged the potential bailout at $1 Trillion. [Mar 4, 2009: Bloomberg - Hidden Pension Fiasco May Foment Another $1 Trillion Bailout] The latest FT.com story, using figures by New Jersey's pension fund chairman, says to think $2 Trillion. The states, if private corporations, would of went bankrupt long ago and shed these financial promises they simply cannot make. But since they are public entities - instead we shall go down the long and winding path outlined above. The tax obligations on the American people - which in this specific case is simply a transfer of monies from the general citizenry to the public worker so he/she can retire early with benefits available to almost no one in the private sector below C-level executive - shall be enormous. The (ahem) partial "solution" (I don't believe "new taxes" will pay for it all) will be further loss of purchasing power (living standard) when the Fed has to continuously print money to bail out the system in the coming 2 decades. As frightening as the public pension figures are - Medicare liabilities in the decade ahead will make it look like peanuts.
But for now... as good citizens of the modern Roman Empire we "party on dude". Everything is fine... Uncle Ben made all our problems go away, and our head is firmly under the sand... who has some stock for me to buy? After all the best solution to massive unfunded pension liabilities is for
- The US public pension system faces a higher-than-expected shortfall of more than $2,000bn that will increase pressure on many states’ strained finances and crimp economic growth, according to the chairman of New Jersey’s pension fund.
- The estimate by Orin Kramer will fuel investors’ concerns over the deteriorating financial health of US states after the recession. “State and local governments are correctly perceived to be in serious difficulty,” Mr Kramer told the Financial Times. “If you factor in the reality of these unfunded promises, their deficits will rise exponentially.”
- Estimates of aggregate funding requirement of the US pension system have ranged between $400bn and $500bn, but Mr Kramer’s analysis concluded that public funds would need to find more than $2,000bn to meet future pension obligations.
- A shortfall of that size could force state governments to take unpalatable decisions such as pouring more public money into their funds or reducing pension benefits. State and local governments have already cut spending to close budget deficits.
- Mr Kramer, chairman of New Jersey’s investment council and also a senior partner at the hedge fund Boston Provident, warned that outdated accounting models and unrealistic expectations of future returns had led states to underestimate their pension requirements. (something we've argued in multiple blog pieces - but remember, in America, if you are unhappy with the math, just change the accounting. The national accounting board - under political pressure - did it for the banks early in 2009 and it's been smooth sailing since then. Magically, almost all our banking problems went away once you said what is on the balance sheet is not what it used to be, but in fact something much higher in value via new accounting.)
- Public pension funds do not use mark-to-market accounting, relying instead on actuarial numbers that average out value of assets and liabilities over a number of years – a process known as “smoothing”. Mr Kramer’s analysis used the market value of the assets and liabilities of the top 25 public pension funds at the end of the year.
- “The accounting treatment of public retirement plans is the political leper colony of government accounting. It is a no-go zone,” he said.