Posted on 02/04/2020 6:13:07 AM PST by karpov
Kicking pension problems into the future is popular with politicians, enabling them to make promises and let voters worry later about borrowing costs.
But large, unfunded state pension liabilities are a costly problem—and the cost is already reflected in current bond prices, research by Chicago Booth PhD candidate Chuck Boyer suggests. “The public pension funding crisis is not merely about future insolvency,” he writes. “Future obligations are having an effect on debt spreads right now.”
To many Americans, it may seem unimaginable that states would fail to fully pay pensions promised to teachers, firefighters, and other public-service workers. It has been almost 90 years since the last state default: during the Great Depression, Arkansas owed over $160 million to debt payments, which was nearly half of the state’s annual revenue (and equivalent to roughly $3 billion in 2019 dollars). The debt was restructured and “debtholders were eventually made whole,” Boyer writes in recounting this history.
However, pension obligations are mounting in many states, and officials are struggling to cut costs and raise taxes to pay what is owed. And he argues that the effects can be seen in the $3.8 trillion capital market for US municipal bonds, which includes bonds issued by 50,000 state and local governments.
When a company defaults, there is a clear legal framework for who gets paid back first. This isn’t the case for states, however, as there is no such legal structure, nor much precedent. The markets’ expectations, then, are built into bond prices. Bondholders, wary of how a default could play out, demand a premium.
Using annual fiscal reports released by state governments, Boyer looked at the ratio of unfunded pension liabilities to GDP from 2002 to 2016 and estimates that every 1-standard-deviation increase is associated with a 27–32 basis-point increase in bond spreads
(Excerpt) Read more at review.chicagobooth.edu ...
I will get a state pension but I have been loading up the 403b to the max for years just in case.
Not to me.
ML/NJ
When the overpromised pensions are based on fuzzy math, we cannot pay. Same people who thought the numbers would work designed the app for the Iowa caucus.
Iowa Democratic Party Chairman Troy Price told The Wall Street Journal he was “confident in the security systems we have in place.” The app was tested and verified by the Department of Homeland Security, The New York Times reported.
But the app was tested by Homeland security? Are those the ones you would have test it?
Let’s see. It’s not privately funded pensions but publicly funded pensions all over the country that are in trouble. What does that say about the government being able to run the programs they enact.
Bm
Illinois teachers union is the largest group of thieves the world has ever seen. The rest of the unions in Illinois are almost as bad. Two things need to happen. Illinois has to default on bonds. Bond owners think that can’t happen so Illinois can always sell more bonds. Puerto Rico is the same. These unions keep demanding raises. And each teacher in Illinois who gets a full mention is a millionaire if you count the value of their pension. Everyone in Illinois with a million dollar home has an exit plan. Our homes are the same value as 1997. And our property taxes are over $25000 per year. And that is with 11% sales tax on food and everything else. And now they are moving up the income tax. And the population is leaving faster than any other state.
Many, many Americans probably have a bigger issue with the fact that our money is confiscated - under threat of incarceration - to pay people not to work. Kind of like welfare.
I drove from Illinois to Crown Point Indiana. In Illinois there were old farms. As soon as I crossed the boarder, there were new subdivisions as far as the eye could see. Some were 20 years old, some were 5 years old. And at least half were still building homes as fast as they could. Amazing that the taxes can be so high that people choose to live in the same county as Gary Indiana.
We were going to take a tour of Purdue. A great engineering program that has not raised tuition in 7 years. Unbelievable.
Actually, it IS IMAGINABLE that States should fail to pay.
The sun has risen and the sun has set and here we are in Illinois yet, paying taxes.
When they portion out the remains, they may hold that against you and pay you less because "you can afford it". That's how they reward the sloths and spendthrifts and punish the savers who act responsibly. That's their modus operandi.
We make employees pay into the pension from their check (5%) so it is probably in much better shape
“To many Americans, it may seem unimaginable that states would fail to fully pay pensions promised to teachers, firefighters, and other public-service workers. “
Only to the dumbassed ones.
I’m pretty sure most Americans know it’s a house of cards soon to fall.
And anyone who buys state and municipal bonds is not smart enough to keep their money.
This was the scam in California. Note: the union usually “owns” 2-3 members of the pension board (CAL-Pers)
CAL PERS has billions invested but the payouts are also huge. When Gay Davis became governor, the union had him in their pocket. Others paid Davis 100,000 for a private meeting. The unions (teachers, correctional officers, nurses) paid nothing, they already gave millions.). They could walk into the governors office. I know union attornies who went into legislators offices and types new bills right into the Legitech Legislature System
So they wanted an increase in the pension formula. The cops and correctional officers were getting 2.5 at age 55, Times years of service.
They showed Davis the projected dividend on CALPERS investments 7.5%. Enough to raise the retirement benefit to 3% X years of service at age 50 with a maxi of 90%. Davis and the legislators who had been bribed by the unions approved the benefit. Notice, not only does the union own the people who they negotiate the pay and benefits, those people are supposed to represent the public interest.
Then there was downturn in the economy and the 7.5% projected dividend was 0 % for 1 year and then rebounded to 2.3% instead of the projected 7.5% (my numbers many be off a decimal point or two).
Did they lower the pension benefit of course not, under collective bargaining the unions would have to agree to it unless management (the governor) took a string stance., Are you kidding bite the hand that feeds you.
That’s why we Californians now have a long term projected pension deficit of 249 billion in Calif. The state pensions are protected by the state constitution.
I forgot to mention when the state raises the benefits so do the locals. You can’t hire cops in LA and SF if the state is paying the CHP and corrections more with better pension. And if LA raises theirs then the state has to keep up. Some unions have this in their contract. The correctional officer receive no less than the CHP and the average of the top 5 PDs in the state. It’s called whipsawing.
Then I guess the California constitution is a living breathing document that will have to change.
Indiana has a reserve.
It also has one heck of a public pension liability.
Just not as bad as Illinois.
I guarantee you that every state in the nation thinks it will get a bail out from Uncle Sugar.
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