Reply #17: Checkmate for Pensions? by Leo Kolivakis, publisher of Pension Pulse.

[Demeter]

http://www.nakedcapitalism.com/2009/04/guest-post-checkmate-for-pensions.html

The FT reports that investment losses hit public sector pensions:

The crisis facing pension plans for US state and municipal employees is deepening as investment losses deplete the resources of retirement funds for teachers, police officers, firefighters and other local government workers.

The largest state and municipal pension plans lost 9 per cent of their value of more than $2,000bn in the first two months of this year, according to data from Northern Trust. That followed a loss of 30 per cent in 2008, equal to about $900bn. Smaller funds, which underperform the larger ones, lost more, experts say.

The losses have left retirement plans about 50 per cent funded – that is, they have only half the money needed to cover commitments to 22m current and former workers, experts say. State governments typically put the funding figures closer to 60-70 per cent, although most experts use different calculations.

“There is a massive national underfunding problem,” said Orin Kramer, chairman of the New Jersey pension fund. ”

Unlike company pension plans, state and municipal retirement funds have no federal guarantee fund. This has led to predictions of benefit cuts and possible federal intervention.

“The federal government will get involved, without question,” said Phillip Silitschanu, analyst at Aite Group, a consultancy. “They could provide federal loans, or demand cutbacks as a condition of stimulus money, or there could be a federalisation of some of these pensions.”

Without investment income, funds are liquidating assets at huge losses to pay pensions.

Police pensions are in especially poor shape, in part because states have promised earlier retirement on full pensions, but seldom increased contributions.

In late January, Terry Savage wrote that the pension tsunami is about to hit:

One day soon you may have to decide whose retirement comes first: yours or the fireman’s? Or the policeman’s? Or your child’s schoolteacher’s?

Your city and state have made generous pension promises to all those public servants—funded with your tax dollars. Only suddenly it turns out that those pensions aren’t very well-funded, after all!

While you’ve been worried about your shrinking 40l(k), our public servants have been smiling. They know their defined-benefits pensions are guaranteed by your local taxing body.

And while barely 20% of private-sector employees are eligible for defined-benefit pension plans, fully 90% of state and local workers get that coverage, according to the Federal Reserve Bank of Minneapolis.

But now, because of a combination of too-high estimates on investment returns, too-low annual contributions, and the current stock market losses, those pension funds are woefully underfunded!
...The National Bureau of Economic Research says the value of pension promises already made by US state governments will grow to approximately $7.9 trillion in just 15 years. But the same report points out that states are unlikely to be able to keep those promises: “We conservatively predict a 50% chance of aggregate underfunding greater than $750 billion and a 25% chance of at least $1.75 trillion in underfunding.” Put in current dollars, to bring those pension funds up to appropriate levels would cost almost $2 trillion. And while the Federal government can just “print” the money, the cities and states have no such option. That means we, the taxpayers, are facing hefty local tax hikes to pay for required pension plan contributions. Or we’ll face other cuts in state and municipal spending, for safety or education or Medicaid.

The Web site www.pensiontsunami.com has been tracking these issues as they arise around the country. California is the epicenter of the crisis for now—but this is certainly a national issue.
Could the cities and states simply default on their obligations when the time comes? At a recent Federal Reserve conference, attorney James Spiotto of Chapman and Cutler in Chicago noted: “There are varying levels of protection, ranging from strict constitutional rights to general statutory provisions, that might allow for some renegotiation of benefit levels in light of adverse conditions.” In other words, if the cities and states try to cut back on promised benefits, they will face a huge court battle.

Spiotto notes that since 1937, more than 564 cities have filed for Chapter 9 bankruptcy reorganization, which allows a city to renegotiate its union contracts and potentially abrogate previous pension deals. And while the federal Pension Benefit Guarantee Corporation protects at least some amount of private pension (up to $51,750 in 2008), there is no similar agency to protect public pensions.

As pension-fund losses are disclosed and the extent of the underfunding is revealed, unrest will mount. Do you think those firemen, and policemen, and teachers are going to keep working—knowing that there is a question about their pension at the end of the line? And as a taxpayer, are you willing to make up the difference?

Unfortunately, these are the issues I have been writing about for months. We have reached a dangerous level of underfunding in pension plans across the world and politicians have not addressed this issue. In fact, the pension crisis was totally ignored at the G20 last week.

And let there be no doubt, the scale of this problem is global. DISCUSSION OF STATE OF PENSIONS IN VARIOUS NATIONS...INCLUDING BRITAIN'S



I am not going to debate the solvency of the Pension Protection Fund, but I believe when the full fury of the pension tsunami hits, its solvency will be severely tested. And as I have written in this blog, the solvency of the U.S. Pension Benefit Guarantee Corporation will also be severely tested as corporate insolvencies skyrocket.

The weakest pension funds are the smaller ones because they are heavily exposed to stocks and typically lack the resources to navigate through this financial crisis. But the larger pension funds are not faring that much better.

And are you ready for the kicker? Reuters reports that at least a dozen U.S. public pension funds, including the nation's biggest, are mulling whether to put money behind the federal government's plans to rid banks' balance sheets of toxic assets: SO, INCLUDE PENSIONS IN BAILOUT BY HAVING THEM BUY FAIL-PROOF TOXIC WASTE FROM BANKS WITH TAXPAYER FUNDING? WHY NOT JUST GO TO A NATIONAL PENSION PROGRAM (AND BRING SOCIAL SECURITY PAYMENTS UP TO COST OF LIVING. IF IT'S ALL COMING OUT OF TAX REVENUES, THEN SHARE THE WEALTH EQUALLY)



Are you worried? You should be because the IMF warned today that toxic debt at global banks could spiral to $4 trillion: MORE DOOM AND GLOOM STATISTICS


Before pension funds throw billions of dollars behind the Geithner plan, we need a second opinion.

The pension tsunami has arrived and these dangerous policies will only exacerbate the pension crisis, enriching the financial oligarchs while the masses watch their retirement dreams turn into retirement nightmares.

If you ask me, it's checkmate for pensions.