Posted on 05/30/2012 3:23:17 PM PDT by Lorianne
Across New York, state and local governments are borrowing $750 million this year to finance their contributions to the state pension system, and are likely to borrow at least $1 billion more over the next year. The number of municipalities and public institutions using this new borrowing mechanism to pay off their annual pension bills has tripled in a year.
The eagerness to borrow demonstrates that many major municipalities are struggling to meet their pension obligations, which have risen partly because of generous retirement packages for public employees, and partly because turbulence in the stock market has slowed the pension fund’s growth.
The state’s borrowing plan allows public employers to reduce their pension contributions in the short term in exchange for higher payments over the long term. Public pension funds around the country assume a certain rate of return every year and, despite the market gains over the last few years, are still straining to make up for steep investment losses incurred in the 2008 financial crisis, requiring governments to contribute more to keep pension systems afloat.
Supporters argue that the borrowing plan makes it possible for governments in New York to “smooth” their annual pension contributions to get through this prolonged period of market volatility.
Critics say it is a budgetary sleight-of-hand that simply kicks pension costs down the road.
(Excerpt) Read more at nytimes.com ...
No mention of the obvious issue - the interest rate. The cities should pay the interest rate that the pension fund is assuming that it will earn, usually 7.5% or more. If the rate they pay to the fund is lower, the pension funds assumed 7.5% rate is even more wacky than it was before these ridiculous “loans.”
Talk about kickin’ a can down the road. Apparently holding office has some great perks. Those who are now in office are doing everything they can to stay in office. And one thing they’re doing is borrowing money to keep the freebies flowing for one more year so they can stay in office one more year.
So it’s like taking out a loan from your 401K so you can contribute into your 401K. Huh?
Another inch toward the solution. After bond investors get a “haircut,” all who depend on their money will take one, too.
I predict NY, CA, and IL will be allowed to issue state bonds with a federal guarantee in the next two years.
Not that the federal guarantee means much, but it will buy a couple years.
That will not happen if the current make up of the House stays even remotely similar to what it is now.
I hope you’re right, but I’m conjecturing that Baraq would do it via executive order carried out by Geithner and Bernanke.
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