Moody"s Considers Municipal Ratings Changes That Could Push Illinois Into Junk Territory

A few weeks ago, we expressed some level of astonishment that the rating agencies, in their infinite wisdom, decided to bestow an investment grade rating upon a new $3 billion bond issuance by the City of Chicago.  Of course, this wouldn"t be such a big deal but for the fact that the state of Illinois is a financial disaster that will undoubtedly be forced into bankruptcy at some point in the future courtesy of a staggering ~$150 billion funding gap on its public pensions, a mountain of debt and $16.4 billion in accrued AP because they can"t even afford to pay their bills on a timely basis.  Here are just a couple of our recent posts on these topics:

• Illinois Pension Funding Ratio Sinks To 37.6% As Unfunded Liabilities Surge To $130 Billion


• Illinois Unpaid Vendor Backlog Hits A New Record At Over $16 Billion


• The State Of Illinois Is "Past The Point Of No Return"

Alas, as Capitol Fax notes this morning, it seems as though Moody"s may finally be waking up to the farce that is their own municipal ratings system and is currently in the process of seeking comments from market participants on proposed changes for states’ general obligation credit ratings, which would include an increased emphasis on debt and pension obligations.  Of course, with their GO rating just one notch above junk, all of those long-only bond funds that have scooped up billions in "juicy" 4% Illinois paper over the past couple of months should probably take notice.

Under the proposed changes, debt and pension obligations will have a 25% weight on state credit ratings, up from 20% currently. The individual state’s economy, another factor in Moody’s ratings, will also have a 25% weight, up from 20%. Governance will fall to 20% from 30% and finances will be maintained at 30%.

 

The debt and pension factor “is critical because debt and pension obligations are the primary long-term liabilities that states have,” Moody’s said in an announcement on the proposed changes Tuesday. “As these liabilities grow, states face rising expenses to pay debt and pension benefits. High fixed debt service and pension costs can crowd out other budgetary priorities and force states to raise taxes in order to meet them. Debt and pensions can curtail a state’s budgetary flexibility and heighten the risk that it will seek to deleverage through a debt restructuring.”

Of course, the proposed changes come just after Fitch put out their 2017 State Pension Update which showed that Illinois’ pension crisis is the worst in the nation with an underfunding of more than $151 billion...or $60 billion more than second worst state: New Jersey.

“Six states have long-term liability burdens that Fitch considers elevated [in excess of 20 percent of personal income],” the report said, “with Illinois carrying the highest liability burden at 28.5 percent of personal income.”

 

Fitch Senior Director Doug Offerman said taxpayers should care because the burden takes up more than 28 percent of all personal income in Illinois, “which is essentially a proxy for the wealth level, the resource base of a given government.”

 

“For the last several years the [pension] increases did grow faster, and I would say do crowd out other spending that might have otherwise taken up organic revenue growth,” [Fitch Ratings Senior Director Karen Krop] said.

Meanwhile, State Senator Dan McConchie (R) noted, as have we on multiple occasions, that people are already fleeing Illinois in droves because of its financial crisis and resulting tax burdens.  “Whether it’s through their property taxes or because of the recent income tax increase, they just can’t afford to [stay here],” McConchie said. “This day of reckoning is fast approaching us. I don’t think we want to wait until the absolute last minute to try and do everything we can to really right the ship.”

Unfortunately, Mr. McConchie, we"re afraid your proverbial ship is taking on so much water at this point that it hasn"t a hope of surviving the crushing weight of your state"s mounting debts...perhaps it"s better at this point to simply seek a life raft and follow your constituents to Texas.

Yale"s Endowment CIO Has Some Really Bad News For Public Pensions...

Public pensions all around the country like to play a clever little game that allows them to drastically understate the current value of their future liabilities and therefore pretend that their ponzi schemes are something other than insolvent frauds.  Of course, we"re talking about the artificially high discount rates that pension boards consistently use to understate their net underfunding levels...a topic that we"ve written about frequently over the years.

Alas, at least in the opinion of Yale"s Chief Investment Officer David Swensen, those 7.5% annual returns that pensions love to rely on, even if they"ve never managed to actually achieve them, are going to be increasingly difficult to hit over the coming years.  As Swensen told Bloomberg, despite achieving a 13.5% annual return over the past 32 years, he is now preparing university officials for much lower returns averaging around 5% for the foreseeable future.

The investment chief, who was interviewed by former U.S. Treasury Secretary Robert Rubin, also said he’s expecting lower returns for the university’s endowment, which he’s run for 32 years with a 13.5 percent average annual rate of return.

 

For the past 12 to 18 months, Swensen said he has been warning university officials to expect much lower returns in the future, as little as 5 percent annually, which would be down from previous assumptions of 8.25 percent.

 

“It’s not a very popular change,” he said. “We’re victims of our own success.”

Meanwhile, as we pointed out a couple of months ago (see: Pension Ponzi Exposed: Minnesota Underfunding Triples After Tweaking This One Small Assumption...), the state of Minnesota recently provided a beautiful illustration of exactly what happens when public pensions decide to ditch their inflated discount rates for more realistic assumptions...their net underfunding tripled to $50 billion...here"s more

from Bloomberg:

Minnesota’s debt to its workers’ retirement system has soared by $33.4 billion, or $6,000 for every resident, courtesy of accounting rules.

 

The jump caused the finances of Minnesota’s pensions to erode more than any other state’s last year as accounting standards seek to prevent

governments from using overly optimistic assumptions to minimize what they owe public employees decades from now. Because of changes in actuarial math, Minnesota in 2016 reported having just 53 percent of what it needed to cover promised benefits, down from 80 percent a year earlier, transforming it from one of the best funded state systems to the seventh worst, according to data compiled by Bloomberg.

 

The Minnesota’s teachers’ pension fund, which had $19.4 billion in assets as of June 30, 2016, is expected to go broke in 2052. As a result of the latest rules the pension has started using a rate of 4.7 percent to discount its liabilities, down from the 8 percent used previously. As a result, its liabilities increased by $16.7 billion.

Unfortunately, lower returns was only part of the bad news that Swensen had for U.S. investors as he described the current disconnect between "fundamental risks that we see all around the globe with the lack of volatility in our securities markets" as "profoundly troubling."

David Swensen, Yale University’s longtime chief investment officer, said the lack of market volatility in the current geopolitical environment is a major concern and warned that another crash is possible.

 

“When you compare the fundamental risks that we see all around the globe with the lack of volatility in our securities markets, it’s profoundly troubling,” Swensen, 63, said Tuesday during remarks at the Council on Foreign Relations in New York. That “makes me wonder if we’re not setting ourselves up for an ’87, or a ’98 or a 2008-2009,” he said, referring to previous market crises.

 

“The defining moments for portfolio management” came in those years, “and if you ignore that you’re not going to be able to manage your portfolio,” Swensen said.

 

Asked why Yale’s uncorrelated assets are higher now than in 2008, he said, "I’m not worried about the economy so much, what I’m concerned about is valuation."

Of course, we"re sure these warnings will provoke pension managers all around the country to promptly reassess their optimistic return assumptions and adjust future pension benefits accordingly to preserve the solvency of their funds for future generations of pensioners...

Pension Panic In Paradise: Maui Residents Outraged Over 52% Spike In Pension Contributions

Earlier this year, Maui County residents in the island state of Hawaii were somewhat less than ecstatic to learn that their property taxes were going to increase by approximately $29.7 million for fiscal 2018.  According to County Council member statements at the time, the additional funding was needed to help provide better public services for Maui residents.

That said, fast forward just a few months and it looks like a substantial portion of those tax increases won"t go to provide better public services for Maui residents at all but rather will be plowed into the state"s massively underwater pension fund.  As The Maui News points out today, Maui"s contributions to the state Employees’ Retirement System will surge 52% over just the next couple of years...and that"s if everything goes to plan.

“This is a massive, massive increase,” Williams said.

 

Maui County paid $31 million into the pension fund in fiscal 2017. But now, its payments will increase to approximately $34 million in fiscal 2018, $36 million in fiscal 2019, $42 million in fiscal 2020 and $47 million in fiscal 2021.

 

This amounts to a total of $36 million in extra payments by Maui County over the next four years alone — and its contributions are set to remain just as high every year afterward.

 

Williams said the extra payments were needed to help the public pension system avert a crisis in unfunded liabilities, currently estimated at about $12.4 billion.

Meanwhile, as we"ve pointed out multiple times before, the victims of Hawaii"s ponzi failure will inevitably be the kids as funding gets diverted from public schools and into the pockets of a few retired public employees.

Williams is correct that the increased payments will help the state pay down its unfunded liabilities and return to being able to meet its current obligations to state and county employee retirees. But a new crisis has begun — the crisis of taxpayers feeling the pressure to bail out the system.

 

Williams acknowledged that the counties would be under more financial pressure.

 

“We know over time it really crowds out other goods and social services that are required, whether it’s education or roads or hospitals, or you name it,” he said. “There are limited revenues available, and these are commitments that have been made and need to be paid.”

But, maybe there"s a better way...we happen to know of a guy who recently paid $100 million for a large chunk of Kauai and is eager to settle a dispute with locals over his massive border wall (see: Protesters Plot "Border Wall" Rally For Tomorrow...At Zuckerberg"s Sprawling $100mm Hawaiian Estate)...perhaps a 1x gift to the Hawaii retirement ponzi is the perfect solution?

What Kentucky’s Retirement Rush Says About The Future of State Pensions

Via The Daily Bell

Just because a Ponzi scheme is run by a government doesn’t mean it won’t collapse.

The situation in Kentucky serves as a dire warning about larger pension systems including Social Security.

What Kentucky is currently facing in like a bank run. When people hear that a bank is failing, they all scramble to get their money out before it goes bust. This snowballs and the bank runs out of cash that much quicker.

Kentuckians are retiring in droves, hoping to get a piece of the pension funds they were promised. Worried that the money might not be there in a few years, they are opting to start collecting now, lest they get nothing. But this is causing a run-on-the-bank effect. The pension system is collapsing that much quicker.

Politicians have long kicked the can down the road. The idea is that there will always be a future generation, unborn children to pay for the promises they make today. There will always be new suckers to pay for their unfunded liabilities.

But the bubble bursts. Unless a population grows exponentially, this cannot work. That is why it is a Ponzi scheme. There’s always a bottom layer that holds up the rest of the pyramid.

Of course, the government of Kentucky has assured potential retirees that they don’t need to panic. The state claims that even if the legislation passes to fix the problem, government employees will have time to retire on the old plans if they choose.

But that hasn’t seemed to ease the high retirement numbers. In past months, between 24-64% more people have retired (depending on the sector) compared to 2016. And with officials floating the idea of raising the retirement age, many have a better safe than sorry attitude.

This also shows that people don’t trust the government assurances. And of course, they shouldn’t. After all, the government also told them not to worry, the pensions they promised were funded. After a history of governments at all levels reneging on their promises, it is better to take the money and run.

And it’s the same old story for how they got into the mess. Spend now, worry about funding it later. There’s never enough money for the government, have you ever noticed that? Companies balance their sheets or go bust. Governments keep chugging along despite breaking promises, overspending, and failing to plan.

PFM mostly blames the approach used to fund the systems, one used by most public pension plans across the country, which based the government’s contributions to the plans on a percentage of a growing payroll. It says that’s like a homeowner basing mortgage payments on a percentage of future income he expects, or hopes, will grow.

Translation: it was a Ponzi scheme. And that same scheme is used by most government retirement plans. The money in these accounts is reinvested. But you don’t control where they are putting the money. Turns out Kentucky made some bad decisions on placing retirement money in certain hedge funds that didn’t do so hot after the 2008 recession.

Also, in the 1990s when the pension plans were fully funded, the General Assembly approved benefit increases without funding them — including an expensive cost of living benefit increase for Kentucky Retirement System members in place between 1996 and 2012.

The bottom line is that you never want to be dependent on the government, or even a private company for your pension. The only way to truly safeguard your retirement is to take it into your own hands.

Maybe some of your retirement goes into a hedge fund, but certainly not all of it. But a better plan is to do the research for what kinds of stocks and investments make sense. Spread the risk across different sectors, and maybe even different country’s stock markets. If you can’t do the research for proper investments, at least do the research to find out who the best person or organization is to inform you.

Your plan may be in part a company pension or retirement plan. But it should not stop there. It is always better to diversify savings (foreign accounts, cash, precious metals) and diversify investments (property, foreign and domestic stocks). Then you can also spend what you can afford to lose on riskier, but potentially high yielding, speculations (cryptocurrency, startups).

But you know the old saying about doing the same thing over and over and expecting different results. With their track record, it’s time to stop putting trust in government to take care of your finances.

One Chart Explains What Bernie Madoff And Kentucky Public Pensions Have In Common

If Bernie Madoff taught us anything it"s that every successful ponzi scheme requires precisely one critical component to keep it afloat: a steady stream of fresh capital to fund redemptions.  Absent that key component, even the most carefully crafted ponzi, with the best, most creative accounting fabrications in the world, will inevitably fail from a lack of real, cold, hard cash to keep the illusion going.

Unfortunately, it seems that Kentucky"s public pensions are now running into the very same problem that ultimately brought down Madoff"s multi-billion dollar "empire".  As the Lexington Herald Leader points out today, it"s no coincidence that the Kentucky public pension system is suddenly collapsing just as the number of retirees (redemptions) has surged beyond the number of active employees (fresh capital) required to keep the ponzi going.

It’s impossible to know exactly who, where or when, but one day in 2016, a Kentucky state employee packed up her desk, said goodbye to her colleagues and retired.

Once she hit the exit, the number of retirees drawing a pension from the Kentucky Employees Retirement System (Non-Hazardous), the struggling $2.6 billion fund that serves most of state government, officially topped the number of active workers paying into it.

The 60-year-old fund has been mathematically upside down from that day forward.

Social Security, by comparison, has a roughly 3-to-1 ratio of workers supporting retirees, but KERS’ ratio is less than 1 to 1. Its numbers are expected to worsen as state government continues to cut its work force and aging baby boomers keep heading into retirement. The average age of a worker in KERS is 45, up from 43 just a few years ago. And they retire at age 57 on average to draw a lifetime pension.

“You just can’t depend on this model anymore,” said state Sen. Joe Bowen, R-Owensboro.

As Senator Joe Bowen notes, "it creates a cash flow problem"...

Bowen is working with Gov. Matt Bevin and other GOP lawmakers on proposed changes to Kentucky’s public pension systems, which face tens of billions of dollars in unfunded liabilities due to inadequate contributions and unrealistic financial assumptions by state government over much of the past two decades.

Bowen said Wednesday that an outline of their pension proposals could be unveiled within the next week, with a special legislative session to enact those changes possible later this year.

“The model of a defined-benefits plan doesn’t work for us anymore because we can’t raise enough money from this work force to pay for everyone who is going into retirement,” Bowen said. “This is why moving to 401(k) accounts, moving to defined-contribution plans, and then committing to paying down the existing liabilities … that’s really the only option we have.”

“It creates a cash-flow problem,” said David Eager, interim executive director of Kentucky Retirement Systems, which manages KERS (non-hazardous) and other state and local government pension funds. “The benefit payments are going to continue to go up. The contributions are going to continue to go down. That’s just the math of it.”

Of course, the demographics of the Kentucky pension system are hardly unique.  A surge in Baby Boomer retirements over the next couple of decades, combined with technological advancements that ensure that only a fraction of those retirees will have to be replaced with actual human workers, will inevitably result in a wave public pension ponzi failures as they meet with the same "cash flow problem" as Bernie Madoff.

That said, unlike the Madoff ponzi, no one will go to jail when the public pension ponzi schemes of the U.S. are exposed because, for some reason, defrauding taxpayers, as opposed to investors, is perfectly legal.

Stanford Says Soaring Public Pension Costs Devastating Budgets For Education And Social Services

A new study from Joe Nation of Stanford"s Institute for Economic Policy Research entitled "Pension Math: Public Pension Spending and Service Crowd Out in California, 2003-2030," says that the devastating consequences of the ill-advised, Cadillac pensions doled out to America"s public employees over the past several decades are only getting started. 

Looking back at taxpayer contributions to public pensions in California, Nation found that they"ve increased by 5 times since 2002-2003 and are very likely to double again by 2029-2030.  Not surprisingly, that kind of hyper-inflationary growth has massively outstripped increases in tax revenue, even in the great progressive state of California (shocking, we know), meaning that pension contributions now account for 11.4% of California"s operating budget, up 3x from the 3.9% it consumed in 2002-2003.

For more than a decade, public pension costs have been rising sharply in California. There is contentious debate about what is driving these cost increases—significant retroactive benefit increases, unrealistic assumptions about investment earnings, operational practices that mask or delay recognition of true system costs, poor governance, 1 to name the most commonly cited. But there is agreement on one fact: public pension costs are making it harder to provide services that have traditionally been considered part of government’s core mission.

• Employer pension contributions (i.e., pension contributions plus debt service on any Pension Obligation Bonds) from 2002-03 to 2017-18 expanded on average 400%, i.e., contributions in nominal dollars are now five times greater.


• Employer contributions are projected to rise an additional 76% on average from 2017-18 to 2029-30 in the baseline projection and 117%, i.e., more than double, in the alternative projection.


• Employer pension contributions from 2002-03 to 2017-18 have increased at a much faster rate than operating expenditures. As noted, pension contributions increased an average of 400%; operating expenditures grew 46%. As a result, pension contributions now consume on average 11.4% of all operating expenditures, more than three times their 3.9% share in 2002-03.


• The pension share of operating expenditures is projected to increase further by 2029-30: to 14.0% under the baseline projection—that is, even if all system assumptions, including assumed investment rates of return, are met—or to 17.5% under the alternative projection.


• The average employer funding amount expressed as a percent of active member payroll, i.e., the employer contribution rate,5 has increased from 17.7% in 2008-09 to 30.8% in 2017-18. By 2029-30, it reaches 35.2% under the baseline projection and 44.2% under the alternative projection.


• On a market basis, the average funded ratio fell from 58.5% in 2008 to 43.0% in 2015. By 2029 it improves to 48.2% in the baseline projection, but falls to 39.0% in the alternative projection. The unfunded liability per jurisdiction household on an actuarial basis also rose from an average $1,682 in 2008 to $5,071 in 2015; the unfunded liability per household on a market basis is $21,491, up from $9,127 in 2008.

Here"s a graphical depiction of California taxpayers getting steamrolled...

...or as a percent of total operating expenditure, if you prefer...

What"s getting cut from California"s budget to make room for these exorbitant pension payouts?  Well, basically everything else...

As discussed above, the pension expenditure share of the state’s operating budget increased from 2.1% in 2002-03 to 4.9% in 2008-09; it is estimated at 7.1% in 2017-18. This increasing share, despite an expanding budget, has shifted $6.0 billion in 2017-18 from other state expenditures to pensions.

Changes in state expenditures by agency and department suggest that this reduction has come primarily from social services and higher education. For example, the expenditure share for the Department of Social Services (DSS) fell from 10.7% in 2002-03 to 6.0% in 2014-15 before climbing to 7.0% in 2017-18. The higher education share of operating expenditures fell from 11.3% in 2002-03 to 9.8% in 2014-15, although it increased to 10.5% in 2017-18.

In addition, expenditure shares fell in several smaller departments from 2002-03 through 2014-15: the Department of Justice (0.4% to 0.2%), Department of Parks and Recreation (0.2% to 0.1%), and Department of Water Resources (0.2% to 0.1%).

So good luck with that whole education thing kiddos because you"re grandparents are about to crush your future.

Here is the full study:

Mauldin: Americans Don't Grasp The Magnitude Of The Looming Pension Tsunami

Authored by John Mauldin via MauldinEconomics.com,

Total unfunded liabilities in state and local pensions have roughly quintupled in the last decade.

You read that right—not doubled, tripled, or quadrupled—quintupled. That’s nice when it happens on a slot machine, not so nice when it’s money you owe.

You will also notice in the chart that much of that change happened in 2008.

Why was that?

That"s when the Fed took interest rates down to nearly zero, meaning it suddenly took more cash to fund future payments.

According to a 2014 Pew study, only 15 states follow policies that have funded at least 100% of their pension needs. And that estimate is based on the aggressive assumptions of pension funds that they will get their predicted rate of returns (the “discount rate”).

Kentucky, for instance, has unfunded pension liabilities of $40 billion or more. This month the state budget director notified local governments that pension costs could jump 50–60% next year.

That’s due to a proposed reduction in the system’s assumed rate of return from 7.5% to 6.25%—a step in the right direction but not nearly enough.

Think About This as an Investor: How Can You Guarantee 6–7% Returns These Days?

Do you know a way to guarantee yourself even 6.25% average annual returns for the next 10–20 years? Of course you don’t. Yes, some strategies have a good shot at doing it, but there’s no guarantee.

And if you believe Jeremy Grantham’s seven-year forecasts (I do: His 2009 growth forecast was spot on), then those pension funds have very little hope of getting their average 7% predicted rate of return, at least for the next seven years.

Now, here is the truth about pension liabilities. Let’s assume you have $1 billion in funding today. If you assume a 7% compound return—about the average for most pension funds—then that means in 30 years that $1 million will have grown to $8 billion (approximately).

Now, what if it’s a 4% return? Using the Rule of 72, the $1 billion grows to around $3.5 billion, or less than half the future assets in 30 years if you assume 7%.

Remember that every dollar that is not funded today means that somewhere between four dollars and eight dollars will not be there in 30 years when somebody who is on a pension is expecting to get it.

Worse, without proper funding, as the fund starts going negative, the funding ratio actually gets worse, sending it into a death spiral. The only way to bring it out of the spiral is huge cuts to other needed services or with massive tax cuts to pension benefits.

The Situation Is Dire Even in the Best-Case Scenario. But What If…

The State of Kentucky’s unusually frank report regarding the state’s public pension liability sums up that state’s plight in one chart:

The news for Kentucky retirees is quite dire, especially considering what returns on investments are realistically likely to be. But there’s a make or break point somewhere.

What if pension plans must either hit that 6% average annual return for 2018–2028 or declare bankruptcy and lose it all?

That’s a much greater problem, and it’s a rough equivalent of what state pension trustees have to do. Failing to generate the target returns doesn’t reduce the liability. It just means taxpayers must make up the difference.

But wait, it gets worse.

The graph we showed earlier stated that unfunded pension liabilities for state and local governments were $2 trillion. But that assumes an average 7% compound return. What if we assume 4% compound returns?

Now the admitted unfunded pension liability is $4 trillion.

But what if we have a recession and the stock market goes down by the past average of more than 40%? Now you have an unfunded liability in the range of $7–8 trillion.

We throw the words a trillion dollars around, not realizing how much that actually is. Combined state and local revenues for the US total around $2.6 trillion.

After the next recession (whenever that is), the unfunded pension liabilities for state and local governments will be roughly three times the revenue they are collecting today, and that’s before a recession reduces their revenues.

Can you see the taxpayer stuck between a rock and a hard place? Two immovable objects meeting? The math just doesn’t work.

We are starting to see cities filing for bankruptcy. That small ripple will be a tsunami within 7–10 years.

It Goes Beyond a Financial Crisis. It’s a Social, Political Catastrophe

Many state and local governments have actually 100% funded their pension plans. Some states and local governments have even overfunded them.

What that really means is that the unfunded liabilities are more concentrated, and they show up in unlikely places. You think Texas is doing well? Look at some of our cities and weep.

Look, too, at other seemingly semi-prosperous cities all over the country. Do you think the suburbs of Dallas will want to see their taxes increased to help out the city? If you do, I may have a bridge to sell you – unless you would rather have oceanfront properties in Arizona.

This issue is going to set neighbor against neighbor and retirees against taxpayers. It will become one of the most heated battles of my lifetime. It will make the Trump-Clinton campaigns look like a school kids’ tiddlywinks smackdown.

I was heavily involved in politics at both the national and local levels in the 80s and 90s and much of the 2000s. Trust me, local politics is far nastier and more vicious. And there is nothing more local than police and fire fighters and teachers seeing their pensions cut because the money isn"t there. Tax increases of up to 100% are going to become commonplace.

But even these new revenues won’t be enough… because we will be acting with too little, too late.

Kentucky Public Employee Retirements Surge As Fears Of Pension Collapse Mount

Slowly but surely it is becoming increasingly clear to public workers in states with massively underfunded pensions that they"ve been lied to for the past several decades as their states can"t possibly afford to pay for the retirement they"ve all been promised.  As a local radio station in Bowling Green points out today, fears over potential pension changes in Kentucky have resulted in a surge of early retirements as workers move to lock in payouts before any potential cuts go into effect.

More state workers retired last month than the year before amid concerns that the legislature and Gov. Matt Bevin will make changes to state retirement plans.

David Smith, executive director for the Kentucky Association of State Employees, said state workers have been retiring after consultants hired by the state recommended drastic changes to the pension systems.

“There are folks that are saying you know what, I don’t care, I’m going to lock in my retirement now and get out while I can and fight it as a retiree if they go and change the retiree benefits,” he said.

The Lexington Herald-Leader reports that there was a 20 percent jump in state worker retirements last month.

“Who are they going to replace them with if they truly offer up what they’re proposing or what was proposed? Who is going to want to work for state government? I wouldn’t,” Smith said.

As we pointed out last week, Kentucky"s public pensions face a daunting funding hole of $33-$84 billion, depending on your discount rate assumptions, according to a recent analysis conducted by PFM Group.

The problem is that the aggregate underfunded liability of pensions in states like Kentucky have become so incredibly large that massive increases in annual contributions, courtesy of taxpayers, can"t possibly offset liability growth and annual payouts.  All the while, the funding for these ever increasing annual contributions comes out of budgets for things like public schools even though the incremental funding has no shot of fixing a system that is hopelessly "too big to bail."

So what can Kentucky do to solve their pension crisis?  Well, as it turns out they hired a pension consultant, PFM Group, in May of last year to answer that exact question.  Unfortunately, PFM"s conclusions, which include freezing current pension plans, slashing benefit payments for current retirees and converting future employees to a 401(k), are somewhat less than "perfectly acceptable" for both pensioners and elected officials who depend upon votes from public employee unions in order to keep their jobs...it"s a nice little circular ref that ensures that taxpayers will always lose in the fight to fix America"s broken pension system.

Be that as it may, here is a recap of PFM"s suggestions to Kentucky"s Public Pension Oversight Board courtesy of the Lexington Herald Leader:

An independent consultant recommended sweeping changes Monday to the pension systems that cover most of Kentucky’s public workers, creating the possibility that lawmakers will cut payments to existing retirees and force most current and future hires into 401(k)-style retirement plans.

If the legislature accepts the recommendations, it would effectively end the promise of a pension check for most of Kentucky’s future state and local government workers and freeze the pension benefits of most current state and local workers. All of those workers would then be shifted to a 401(k)-style investment plan that offers defined employer contributions rather than a defined retirement benefit.

PFM also recommended increasing the retirement age to 65 for most workers.

The 401 (k)-style plans would require a mandatory employee contribution of 3 percent of their salary and a guaranteed employer contribution of 2 percent of their salary. The state also would provide a 50 percent match on the next 6 percent of income contributed by the employee, bringing the state’s maximum contribution to 5 percent. The maximum total contribution from the employer and the employee would be 14 percent.

For those already retired, the consultant recommended taking away all cost of living benefits that state and local government retirees received between 1996 and 2012, a move that could significantly reduce the monthly checks that many retirees receive. For example, a government worker who retired in 2001 or before could see their benefit rolled back by 25 percent or more, PFM calculated.

The consultant also recommended eliminating the use of unused sick days and compensatory leave to increase pension benefits.

Even if all of that is accomplished, State Budget Director John Chilton said Kentucky would still need to find an extra $1 billion a year just to keep its frozen pension systems afloat. Moreover, absent tax hikes the state will ultimately be forced to cut funding for K-12 schools by $510 million and slash spending at most other agencies by nearly 17% to make up the difference.

Meanwhile, PFM warned that the typical "kick the can down the road approach" would not work in Kentucky and that current retiree benefits would have to be cut.

“This is the time to act,” said Michael Nadol of PFM. “This is not the time to craft a solution that kicks the can down the road.”

“All of the unfunded liability that the commonwealth now faces is associated with folks that are already on board or already retired,” he said. “Modifying benefits for future hires only helps you stop the hole from getting deeper, it doesn’t help you climb up and out on to more solid footing going forward.”

Of course, no amount of math and logic will ever be sufficient to convince a bunch of retired public employees that they have been sold a lie that will inevitably fail now or fail later (take your pick) if drastic measures aren"t taken in the very near future. 

Nicolai Jilek, the legislative representative for the Kentucky Fraternal Order of Police, said expecting first responders to work until they are 60 is problematic given the physical requirements of the job.

“We’re very grateful that PFM is just offering recommendations … that they are not lawmakers because his plan would be horrible for first responders,” Jilek said.

Stephanie Winkler, president of the Kentucky Education Association, shared a similar sentiment.

“The PFM had some pretty drastic recommendations that we think are not what’s in the best interest of public school employees and public school students,” Winkler said.

Jim Carroll, president of Kentucky Government Retirees, said his group would likely sue if the legislature proceeds with PFM’s recommendation to roll back the cost of living adjustment that retirees received between 1996 and 2012.

“We think its very clear that the cost of living adjustments that were granted to us are ours as long as we are retirees in the system,” Carroll said.

As such, no matter the long-term consequences, we suspect the "kick the can down the road" approach to pension reform will continue to win right up until the plans actually run out of money...then we"ll all lose together.

Pension Ponzi Exposed: Minnesota Underfunding Triples After Tweaking This One Small Assumption...

Defined Benefit Pension Plans are, in many cases, a ponzi scheme.  Current assets are used to pay current claims in full despite insufficient funding to pay future liabilities... classic Ponzi.  But unlike wall street and corporate ponzi schemes no one goes to jail here because the establishment is complicit.  Everyone from government officials to union bosses are incentivized to maintain the status quo...public employees get to sleep better at night thinking they have a "retirement plan," public legislators get to be re-elected by union membership while pretending their states are solvent and union bosses get to keep their jobs while hiding the truth from employees.  

So what allows this ponzi to persist?  It all comes down to one simple assumption: Discount Rates.  You see, if you simply discount future liabilities at a high enough discount rate then you can make any massively underfunded pension ponzi look like a stable, healthy retirement gold mine. 

In fact, just over a year ago we took a look at what would happen if we calculated the true underfunded level of America"s public pensions at more reasonable discount rates.  The result showed that the media"s highly referenced underfunding of $2 trillion soared to something closer to $5-$8 trillion when more reasonable discount rates were employed.

We decided to take a look at what would happen if all federal, state and local pension plans decided to heed the advice of Mr. Gross. As one might suspect, the results are not pleasant.  We conservatively assume that public pensions are currently $2.0 trillion underfunded ($4.5 trillion of assets for $6.5 trillion of liabilities) even though we"ve seen estimates that suggest $3.5 trillion or more might be more appropriate.  We then adjusted the return on asset assumption down from the 7.5% used by most pensions to the 4.0% suggested by Mr. Gross and found that true public pension underfunding could be closer to $5.5 trillion, or over 2.5x more than current estimates.  Others have suggested that returns should be closer to risk-free rates which would imply an even more draconian $8.4 trillion underfunding.  

 

Now, the state of Minnesota has gracefully stepped forward to beautifully illustrate our point.  Upon making a few minor "tweaks" to their various funds" discount rates, the state found that their aggregate pension underfunding more than tripled from roughly $16 billion to over $50 billion.  Here"s more from Bloomberg:

Minnesota’s debt to its workers’ retirement system has soared by $33.4 billion, or $6,000 for every resident, courtesy of accounting rules.

The jump caused the finances of Minnesota’s pensions to erode more than any other state’s last year as accounting standards seek to prevent governments from using overly optimistic assumptions to minimize what they owe public employees decades from now. Because of changes in actuarial math, Minnesota in 2016 reported having just 53 percent of what it needed to cover promised benefits, down from 80 percent a year earlier, transforming it from one of the best funded state systems to the seventh worst, according to data compiled by Bloomberg.

The Minnesota’s teachers’ pension fund, which had $19.4 billion in assets as of June 30, 2016, is expected to go broke in 2052. As a result of the latest rules the pension has started using a rate of 4.7 percent to discount its liabilities, down from the 8 percent used previously. As a result, its liabilities increased by $16.7 billion.

But other factors also helped boost Minnesota’s liabilities: Eight of Minnesota’s nine pensions reduced their assumed rate of return on their investments to 7.5 percent from 7.9 percent, while three began factoring in longer life expectancy.

All of which resulted in this:

Of course, Minnesota"s underfunding didn"t just magically "soar by $33.4 billion" as Bloomberg puts it...in reality, the state"s pensions were always underfunded by ~$50 billion...the only difference is that that some pension administrators finally decided to stop lying to their retirees and report reality.

All of which rendered this Bloomberg map from just two months ago showing an 80% funding ratio for Minnesota completely obsolete...

...Sorry, Minnesota teachers but you"re almost as screwed as your counterparts in Illinois...you just didn"t know it until your bosses finally decided to stop lying to you.

Record Number Of Dallas Police Officers Quit In July Amid Ongoing Pension Crisis

We first introduced readers to the Dallas Police and Fire Pension (DPFP) crisis last summer in a post entitled "Dallas Cops" Pension Fund Nears Insolvency In Wake Of Shady Real Estate Deals, FBI Raid."  For those who have managed to avoid this particular storyline for the past 15 months, here is a brief recap of how it all started from our original post on the topic:

The Dallas Police & Fire Pension (DPFP), which covers nearly 10,000 police and firefighters, is on the verge of collapse as its board and the City of Dallas struggle to pitch benefit cuts to save the plan from complete failure.  According the the National Real Estate Investor, DPFP was once applauded for it"s "diverse investment portfolio" but turns out it may have all been a fraud as the pension"s former real estate investment manager, CDK Realy Advisors, was raided by the FBI in April 2016 and the fund was subsequently forced to mark down their entire real estate book by 32%.  Guess it"s pretty easy to generate good returns if you manage a book of illiquid assets that can be marked at your "discretion".

To provide a little background, per the Dallas Morning News, Richard Tettamant served as the DPFP"s administrator for a couple of decades right up until he was forced out in June 2014.  Starting in 2005, Tettamant oversaw a plan to "diversify" the pension into "hard assets" and away from the "risky" stock market...because there"s no risk if you don"t have to mark your book every day.  By the time the "diversification" was complete, Tettamant had invested half of the DPFP"s assets in, effectively, the housing bubble.  Investments included a $200mm luxury apartment building in Dallas, luxury Hawaiian homes, a tract of undeveloped land in the Arizona desert, Uruguayan timber, the American Idol production company and a resort in Napa.

Despite huge exposure to bubbly 2005/2006 vintage real estate investments, DPFP assets "performed" remarkably well throughout the "great recession."  But as it turns out, Tettamant"s "performance" was only as good as the illiquidity of his investments.  We guess returns are easier to come by when you invest your whole book in illiquid, private assets and have "discretion" over how they"re valued.

In 2015, after Tettamant"s ouster, $600mm of DPFP real estate assets were transferred to new managers away from the fund"s prior real estate manager, CDK Realty Advisors.  Turns out the new managers were not "comfortable" with CDK"s asset valuations and the mark downs started.  According to the Dallas Morning News, one such questionable real estate investment involved a piece of undeveloped land in the Arizona desert near Tucson which was purchased for $27mm in 2006 and subsequently sold in 2014 for $7.5mm.

Then the plot thickened when, in April 2016, according the Dallas Morning News, FBI raided the offices of the pension"s former investment manager, CDK Realty Advisors.  There has been little disclosure on the reason for the FBI raid but one could speculate that it might have something to do with all the markdowns the pension was forced to take in 2015 on its real estate book.  At it"s peak, CDK managed $750mm if assets for the DPFP.

The sudden implosion of the fund left active-duty Dallas police and firemen wondering whether that pension check they had been counting on to fund their retirement was about disappear for good.  All of which sparked a mass exodus of Dallas police and firefighters eager to lock in their payout rates before they were slashed by the DPFP board (see:  Dallas Police Resignations Soar As "Insolvent" Pension System Implodes).

Now, despite the passage of a plan designed to "save" the pension by the Texas legislature back in May, a record 72 officers decided to quit the force in July.  Apparently they were not convinced that the legislature"s plan is going to work.

Meanwhile, the steady outflow of officers for over a year now is leading to what many in Dallas are calling a public safety crisis.  Per the local Dallas CBS affiliate:

Dallas Police Association President Mike Mata and others sounded the alarm months ago: Now, by the end of this month, Mata says 72 Dallas Police officers will leave: 70 percent of them are retiring and the other 30 percent are going to make more money at other departments. “We’re losing some of our most experienced detectives: The investigator you want to come out and solve that homicide, that you need to come out and solve that sexual assault.”

Adam McGough, chairman of the Dallas city council’s public safety committee, is also expressing concern. “That’s the first of this number I heard of it. Anytime we have large numbers of officers leaving, it’s concerning.”

Mata says, “We’re at a critical state and we’re not solving the problems that are going to help correct this. That’s why I’m a little disappointed in the city manager’s budget.”

Apparently these officers can"t wrap their heads around how an incremental $40 million contribution from the City of Dallas will solve their pension"s $3 billion funding shortfall...they aren"t the only ones.

Sudden Death For Greek Widows' Pensions: New Criteria, Cuts To Push 1000s More Into Poverty

The implementation of the Greek pension reform of 2016, will lead to the sudden death of incomes for widows, and as KeepTalkingGreece reports, will push a large portion of population further into poverty. Widows’ pensions will be cut down to 50% of the deceased’s pension and new more restrictive age-based criteria will go into effect this month.

According to so-called Katrougalos Law, a widow is entitled to receive a pension for the rest of her life, if she was at least 55 years old at the time of the spouse’s death.

• If the surviving spouse was below this age limit, the pension is given initially for three years. Then it is interrupted and is granted again after the surviving spouse reaches the age of 67.


• If the age of 55 in not completed within three years, the pension is cut and never granted again.

The state keeps in its pockets all the pension contribution paid by the deceased.

Exemptions are for widows with underage children until they reach 18th year of age and students until they reach the 14th year of age. Widows receive the pension independently of their age until the children/students reach the age limit.

Provision is for widows or unmarried children with disability over 67%. They receive the pension. However, if the disability occurred after the death of the spouse or father, this does not count as precondition to retirement.

Changes are also implemented to the age of the deceased.

The deceased insured person must have fulfilled completed at the time of death the requirements for pension due to age, invalidity, full or reduced pension.

“Old” insured – i.e. who started to pay social security contributions before 1993 – need to have 1,500 insurance days, 600 of them in the last five years.

A new criterion is the one linked to the length of marriage and the age difference between the deceased and the surviving spouse. Minimum length of marriage is now 5 years, from 3 previously. Exemptions are when the death was caused by an accident, if a child was born during the marriage or the widow was pregnant at the time of death. Unfortunately, I did not see details about the age difference between the spouses and how they can affect the pensions.

At the same time, widow pensions are lowered from 70% of the pension down to 50 percent.

What is interesting is that I read nothing about the old odd Greek regulation that daughters of civil servants, especially daughters of armed forces personnel, were granted the pension of their parents until the end of their life, if they were unmarried.

In times of recession and high unemployment, widows over 50 or 55 should seek a job or sink in poverty in a country without social safety net?

We have gone completely nuts here…

And it appears President Trump agrees.

Trump expressed his true sympathy for the plight in Greece and said that he will reveal his policy for the International Monetary Fund in the next days.

Speaking to a group of conservative US journalists in the West Wing of the White House, Donald Trump reportedly said “Greece!” They are in such a terrible situation there. It’s awful!”

Rich People Are Living Longer And It's Going To Cost Taxpayers 'Bigly'

Social Security, like America"s trillions of dollars of underfunded public and private pensions, is nothing more than a ponzi scheme that will eventually fail.  Any system that relies on capital drawdowns to fund benefit obligations while the number of beneficiaries continues to soar is, by definition, a rather obvious ponzi.  That said, it"s always easier to "kick the can down the road" and hope for the best than to preemptively address the real problems that face retirees...after all, old people love to vote and taking away their retirement money is not a good way to earn their support.

Ironically, it"s not just the lower tiers of the socio-economic spectrum that will bankrupt social security.  As a new study entitled "How the Growing Gap in Life Expectancy May Affect Retirement Benefits and Reforms" points out, rich people are living a lot longer than they used to and it"s going to take a massive toll on government entitlement programs over the next couple of decades.

Per the chart below from Bloomberg, a "rich" 50-year-old in 2010 can expect to live 12.7 years longer than someone in the lowest income bracket.

Converting those longer life expectancies into dollars implies that people in the highest income brackets will draw $66,000 more from Social Security than the previous generation of retirees.  Moreover, using current distribution rates and adjusted for longevity, a top-earner could expect to extract nearly $300,000 from Social Security over a lifetime compared to $122,000 for the bottom income bracket.

Combined with other entitlements like medicare, the longevity penalty on young taxpayers is even more pronounced. 

Of course, these entitlement programs should completely collapse at some point over the next couple of decades leaving young folks high and dry.  But, luckily the average millennial has stashed away like $1,000...which, when compounded at 7% for 40 years, should be enough to cover 2-3 months of rent, at least.

After 'Modest' 250% S&P Returns, Corporate Pension Funding Levels Roughly Same As 2008

We spend a lot of time writing about public pensions because the aggregate underfunding levels, $3 - $5 trillion on the low end, are simply staggering and at some point they will be realized for the ponzi schemes that they are and the systemic risk they represent to the global financial system.  Until then we"ll just keep shouting into the abyss.

And while we don"t spend as much time on corporate pensions, for some companies their underfunded defined benefit obligations will almost certainly result in their demise at some point in the future.  As a recent study from Pensions & Investments points out, the top 100 corporate pensions were underfunded by over $250 billion at the end of 2016.  Moreover, despite a 250% S&P rally from the 2009 lows, corporate pensions have only managed to improve their funded status from 79.1% in 2008 to 84.5% today. 

The aggregate funding deficit for P&I"s universe rose to $258 billion as of Dec. 31, up 5.3% from a deficit of $245 billion the previous year.

The average funding ratio of the 100 largest U.S. corporate defined benefit plans continued to slide in 2016, dropping to 84.5% from 85.1% at the end of 2015 and 85.7% at the end of 2014, Pensions & Investments" annual analysis of corporate SEC filings shows.

“The big story on DB plan funding is how little it"s recovered from the big downturn in the recession,” said Alan Glickstein, Dallas-based senior retirement consultant at Willis Towers Watson PLC.

The average funding ratio for P&I"s universe was 108.6% at the end of 2007, which plunged to 79.1% at the end of 2008 at the peak of the financial crisis.

Meanwhile, the bottom 10 corporate pension funds alone, as ranked by funded percentage, were underfunded by nearly $70 billion. 

And while a $250 billion funding shortfall is significant, at least investors can take some solace in the fact that corporate pensions, unlike their public counterparts, are using somewhat reasonable discount rates to calculate the present value of their future funding obligations.  According to P&I, the average corporate pension used a discount rate of 4.39% in 2016...

The average discount rate used to calculate plan liabilities began to decline in 2008, dropping to 4.05% in 2012 from 6.45% in 2008. The average discount rate used by the plans in P&I"s universe was 4.39% in both 2015 and 2016.

...compared to 7.5% for several public pensions like CalPERS in California.

But, it"s no big deal...if public pensions lower their discount rates to force them inline with private corporate assumptions it would only increase net underfundings by $3.5 trillion...no biggie....taxpayers can definitely absorb that.

Why The Equity Bull Market Must Continue (Or Else)

Via Global Macro Monitor blog,

We have been busy crunching some very interesting data on pension funds from the most recent Federal Reserve’s,  Flow of Funds Accounts.    Check out the charts below.

Interestingly,  the last time Private and State & Local Government Pensions were fully funded was at the end of the stock market bubble in 2000.  Pensions were 25 percent overfunded in 1999.

However,  even with stocks making new highs,  these pensions remain $2.33 trillion, or 27 percent of their assets,  underfunded at the end of 2016.   Surprising.

One would think the slope should be headed south as stocks rise, no?  Just as it was from 1995 to 2000.   On the contrary,   unfunded entitlements are heading parabolic north.

Could be a combination of an under-allocation to equities since the dot.com and financial crash (see charts) and rising pension entitlements,  mainly in state and local government retirement funds.   Probably more the result of the later.

The Upshot?   It seems the only way out of the pension mess — other than massive contributions, tax increases, or defaults — is a humungous equity bull market with pensions appropriately positioned.   In aggregate, they seem to be gun shy after the financial crisis with their average aggregate equity allocation only about 50 percent of what it was at the start and first few years of the new millennium.

One caveat is the allocation data can be distorted and deceiving as equities are measured at their market value where some of the other assets are not.

The question is:  Will Janet Yellen and President Trump do “whatever it takes to preserve” the pensions?   And will it be enough?

Are Corporate Pensions About To Start Dumping Their $1 Trillion In Equity Holdings

Several large public pensions around the country are in serious trouble and, after several years of paying out more in distributions than they take in (which is the textbook definition of a ponzi scheme, btw), many are just one more equity market crash away from completely running out of cash.  In fact, we recently wrote about how Chicago"s largest pension fund could run out of cash within 4 years if such a scenario played out (see "How Chicago"s Largest Pension May Run Out Of Cash In As Little As 4 Years").

And while we hate to be pessimistic, lets just take a look at what happens if, by some small chance, today"s market gets exposed as a massive bubble and we have another big correction in 2018.

Such a correction would force the fund to liquidate over $1.5 billion in assets in 2018 alone....

....and the system would run out of cash completely within 4 years.

And while public pensions may be forced to continue swinging for the fences by allocating more and more capital to equity markets, corporate pension funds, according to Bloomberg and Morgan Stanley, are growing a little weary of Yellen"s equity bubble and may be looking to rotate capital into corporate bonds instead.

Company pensions are nearing a tipping point that’s poised to send them on a buying spree in the U.S. corporate bond market.

The retirement plans, helped by gains in stocks, are edging closer to digging themselves out of a hole they’ve been in for more than a decade, a shift that is cutting their demand for risky assets like equities and stoking their interest in more stable investments like company debt.

Companies on average have about 82 percent of the funding they expect to require for retirees’ pensions, compared with around 75 percent in the middle of last year, according to strategists at Morgan Stanley. Once pensions are around 80 percent funded, they tend to increase their bond holdings and cut their stock investments to lock in gains, Morgan Stanley analysts led by Adam Richmond wrote in a report on Friday. They funnel much of that money toward high-grade corporate debt, especially longer-dated bonds, to help fund their decades-long obligations.

That trend is already happening and could now intensify, according to Morgan Stanley analysts. U.S. company pension funds own more than $1.8 trillion of assets, and even small changes to their allocations can lift already-high prices for bonds, and weigh on stocks.

In all, non-public pension funds held just over $1 trillion in equities at the end of 2016, or roughly 31% of their $3.3 trillion in assets.  Obviously, reducing that equity allocation target by just 10% would therefore put about $330 billion worth of selling pressure on equities...and that"s assuming public pensions don"t follow along.

Of course, by choosing to do the right thing and derisk their portfolios, these massive pension funds could very well become the catalyst that brings Yellen"s massive asset bubbles crashing down...so if you"re going to get out...probably best to be a first mover in what will become a race to the bottom.

California Taxpayers Expected To Nearly Double Public Pension Contributions Over Next 5 Years

The California Policy Center (CPC) has just updated it"s annual study on pension contributions required from local California municipalities and, to our complete "shock", the conclusions are brutal for Cali taxpayers.  Among other things, the study found that California taxpayers will be forced to double their contributions to CalPERS over just the next 5 years alone from $5.3 billion in 2017/2018 tax year to $9.8 billion in 2022/2023.

• In Fiscal Year 2017-2018, California local governments will make over $13 billion in pension contributions to CalPERS, county pension plans and single employer plans.


• Local government pension contributions to CalPERS will total $5.3 billion in Fiscal 2017-2018 and are projected to rise to $9.8 billion in Fiscal 2022-2023 – an increase of 84%.


• In Fiscal Year 2015-2016, at least 26 California cities and counties devoted over 10% of their total revenue to pension contributions. San Rafael, San Jose and Santa Barbara County shouldered the highest pension burdens – exceeding 13% of revenue.


• Major local governments that have recently surpassed the 10% pension contribution to total revenue threshold include Contra Costa County, Berkeley and Newport Beach.

Meanwhile, 20 California cities were found to already spend more than 10% of their annual revenue on pension contributions, with San Rafael at closer to 20%.  And, given that it"s highly unlikely these towns are willing to cut 10% of their budgets over the next 5 years, we can only assume that taxpayers are about to get slammed with massive tax hikes.

Unfortunately, as our readers are undoubtedly aware, the reality is even far more bleak than the numbers above would suggest because they use CalPERS" 7% discount rate to calculate underfunded levels.  But, as we pointed out back in December (see "CalPERS Board Votes To Maintain Ponzi Scheme With Only 50bps Reduction Of Discount Rate"), even CalPERS" finance committee chair admitted that 7% is too high and the decision to not move it lower was politically motivated to allow "municipalities and other government agencies some breathing room before they absorb the impact."

In its August 2016 actuarial reports, CalPERS included projections of future contribution rates through Fiscal Year 2022-2023. We used these documents to determine total contribution amounts and then recalculated the totals to reflect the impact of CalPERS’ recent decision to change the rate at which it discounts future liabilities from 7.5% to 7%. Although CalPERS did not update its projections, it provided employers with a circular containing guidance on how to adjust

the August 2016 amounts. We used this guidance in our own calculations.

So what"s to blame for these skyrocketing pension costs?  Well, as CPC points out, in Newport Beach at least part of the problem is attributed to a gaggle of lifegaurd "captains" raking in over $100,000 per year which serves as the basis for calculating their massive pensions.

The city of Newport Beach contributes to CalPERS. Its net pension liability in 2016 was $264 million, and its plans were only about 68% funded. Pension contributions grew from $20 million in 2014-2015 to $31 million in 2015-2016, and are projected to reach $52 million in 2022-2023. One reason for the increase is that the city is accelerating its repayment of the unfunded liability. The new funding schedule is expected to save the city $129 million over 30 years.

One unusual contributor to Newport Beach’s pension burden is its team of lifeguards. While many of the city’s beach lifeguards receive relatively modest compensation, the city employed 10 Lifeguard Captains and Battalion Chiefs in 2015, all of whom received more than $100,000 in wages. Lifeguards hired before 2011 were eligible for the 3%-at-50 pension formula. That year, the city council voted to lower the benefit for newly hired lifeguards to 2%-at-50, but due to the California Rule, already employed lifeguards were unaffected. Lifeguards hired after the implementation of PEPRA are on the 2.7% at 57 pension formula.

In February, the Daily Pilot reported that the city was shelving several projects due to increasing pension costs. The projects in jeopardy include a new library and fire station in Corona del Mar, a new restaurant for the Newport Pier and new junior lifeguard headquarters.

In conclusion, CPC offered this sobering reality check to California taxpayers:

Despite the strong economy and a buoyant stock market, pension cost burdens faced by California local governments have continued to grow – with many now devoting more than 10% of revenue to retirement contributions. With the Great Recession now eight years behind us, the risk of a new downturn is increasing. The result would be a further spike in pension burdens on local governments. Unless the state enables more aggressive pension reforms than those allowed under the 2013 PEPRA legislation, several California cities and counties will find themselves forced to slash other spending. The less fortunate will simply be unable to pay the bills they receive from CalPERS or their local retirement system.

S&P Confirms That NJ Plan To Pay 50% Of Required Pension Contributions Is Bad; Maintains Negative Outlook

Standard and Poor"s credit rating analysts for the state of New Jersey, David Hitchcock and John Sugden, apparently think that funding only half of your state"s annual actuarially determined contributions is a bad thing...who knew?  So, just to make sure we achieve crystal clarity here, S&P believes that adding to NJ"s $66 billion pension underfunded liability, which would be much higher but for a ridiculous assumption the state makes in setting its return on assets at an artificially high rate of 7.65%, each and every year by contributing less to the fund than what is paid out in benefits, is a bad thing?

Of course, as S&P notes, NJ"s pension problems won"t bankrupt the state until sometime "down the road" so an "A-" rating is still reasonable for now.

Short term, the proposed budget leaves the state in similar financial condition to where it started 2017, with slim, but adequate reserves, and some vulnerability to potential revenue shortfalls. However, down the road, because New Jersey plans to only partially fund its actuarially determined contributions (ADC), the picture looks much worse, as reflected in our current "A-" general obligation rating and a negative outlook on the state.

The governor"s budget proposal follows his multi-year plan to gradually ramp up to full funding of the state pension ADC over 10 years. New Jersey would fund only 50% of the ADC in fiscal 2018, after funding 40% in fiscal 2017. Underfunding in any year ratchets up future state liabilities, in effect pushing back the tide, as New Jersey comes closer to the day when it will be left with no choice but to confront its very significant retirement obligations. The term-limited governor"s successor will face tough funding decisions as early as fiscal 2019. The planned 50% ADC contribution in fiscal 2018 in itself represents a record payment of $2.5 billion, boosted in part by the state"s decision to lower the assumed rate of return to a somewhat less aggressive 7.65% from 7.90%. We calculate the budget proposal, if enacted, would leave New Jersey with a sizable structural budget gap of about 9% of proposed 2018 appropriations--2% attributable to various one-time budget items in fiscal 2018, and 7% representing pension funding below ADC--a similar structural budget gap to last year, despite the increased pension contribution in 2018.

That said, we"re happy to note that S&P was encouraged by Chris Christie"s recommendation, even though it wasn"t a part of his official budget and would likely face stiff opposition, to set aside revenues from his state"s lottery enterprise system to fund New Jersey"s pension ponzi for a period of 30 years. Per NJ.com:

Christie"s biggest surprise was his plan to use proceeds from state lottery ticket sales to pay for public worker pensions" ever-increasing tab.

The lottery, which is expected to bring in $965 million this year, helps fund education programs, psychiatric hospitals, centers for people with developmental disabilities and homes for disabled soldiers.

Under the state Constitution, lottery proceeds must be spent on state institutions and state aid for education. The state pays a number of costs on behalf of local school districts that can be categorized as aid, including the employer share of the Teachers" Pension and Annuity Fund.

The governor estimated this quick injection of cash would reduce the pension fund"s unfunded liability -- $66.2 billion -- immediately by $13 billion and each year reduce the amount actuaries recommend the state chip in.

"If implemented correctly this action would increase the value and stability of our pension funds immediately and would please bond investors and credit rating agencies, also giving greater confidence to New Jersey"s public employees," he said.

State Senate President Stephen Sweeney (D-Gloucester) said if Christie"s lottery plan "makes sense" to help fix the pension system, state lawmakers "will be happy to do it."

Of course, as we pointed out previously, Christie"s plan to send lottery dollars to his own pension just might have something to do with his state"s latest ponzi that envisions issuing debt, intended to cover state budget deficits, to it"s own insolvent pension fund.

After struggling to raise debt from third parties to repair crumbling
infrastructure, the state of New Jersey has come up with a "clever" approach to fundraising that entails selling debt to their own insolvent pension funds...something we"ve dubbed the "Pension Ponzi Squared."  Of course, because when everybody else shuns your debt for being too risky who better to sell it to than yourself?

With $3.4 billion in annual benefits payments versus only $1.9 billion in contributions, funds like the New Jersey Public Employees" Retirement System already qualified as a plain vanilla ponzi scheme.  But, using what little pension assets they have left (38% net funded) to buy debt in the entity that ultimately backstops their liabilities is a whole new level of madness.  As we recall, the mortgage CDO^2 didn"t work out so well back in 2008.

For those who haven"t followed the pension debacle in NJ, here is a decent recap of how decades of bad leadership in the governor"s office created the mess that will inevitably bankrupt the state.

NY Teamsters Pension Becomes First To Run Out Of Money As Expert Warns "Pension Tsunami" Is Coming

The New York Teamsters Road Carriers Local 707 Pension Fund has won the unfortunate award for "First Pension to Officially Run Out of Money."  According to the New York Daily News, and a host of angry former truck drivers who"ve had their pension benefits slashed, the Pension Benefit Guaranty Corp. (PBGC) has officially been forced to step in and take over payments to retirees of the Local 707, albeit at a much lower rate.

Teamsters Local 707’s pension fund is the first to officially bottom out financially — which happened this month.

“I had a union job for 30 years,” Chmil said. “We had collectively bargained contracts that promised us a pension. I paid into it with every paycheck. Everyone told us, ‘Don’t worry, you have a union job, your pension is guaranteed.’ Well, so much for that.”

“It’s a nightmare, it has just devastated all of our lives. I’ve gone from having $48,000 a year to less than half that,” said Chmil, one of five Local 707 retirees who agreed to share their stories with the Daily News last week.

“I don’t want other people to have to go through this. We need everyone to wake up and do something; that’s why we’re talking,” said Ray Narvaez.

Of course, the Teamsters 707 and other Teamster pension boards attempted to submit plans that would have cut benefits in order to prolong payments to retirees but those plans were universally rejected by the Obama administration...better that the pensions just run out of cash completely.  Per Pensions & Investments:

The Obama administration is in denial about the necessity of cutting pension benefits under the Multiemployer Pension Reform Act of 2014 to try to put distressed multiemployer plans on sounder financial footings and make them more sustainable. It must face reality and order the Treasury Department to stop blocking action.

So far the department, required under the act to approve proposed reductions, has rejected proposals by the Teamsters Central States, Southeast & Southwest Areas Pension Plan and the Road Carriers Local 707 Pension Fund.

Ten plans total have applied for cuts, including the New York State Teamsters Conference Pension and Retirement Fund, Syracuse, whose Aug. 31 application is too new to be listed on the Treasury"s website.

The Road Carriers 707 application stated that the plan projects it will become insolvent in February — only about five months away — absent suspension of benefits.

As desperate as the plan"s financial situation appears to be, the Treasury denied the application.

And while the Local 707 pension was the first to dry up, it certainly won"t be the last...

Also on the brink of drying up are the pensions for two Teamster locals — 641 and 560 — in New Jersey, union officials said. Plus 35,000 Teamster members upstate who are part of the money-hemorrhaging New York State Teamsters Pension Fund.

Bigger than all of New York’s Teamster locals combined is the Central States Pension Fund — another looming financial disaster that could leave 407,000 retirees without pensions across the Midwest and South.

Meanwhile, under the maximum benefits provided by the PBGC, many former Teamsters, like Ray Narvaez, said their monthly retirement checks have been slashed by two-thirds.

Then Narvaez, like 4,000 other retired Teamster truckers, got a letter from Local 707 in February of last year.

It said monthly pensions had to be slashed by more than a third. It was an emergency move to try to keep the dying fund solvent. That dropped Narvaez from nearly $3,500 to about $2,000.

“They said they were running out of money, that there could be no more in the pension fund, so we had to take the cut,” said Narvaez, whose wife was recently diagnosed with cancer.

The stopgap measure didn’t work — and after years of dangling over the precipice, Local 707’s pension fund fell off the financial cliff this month. With no money left, it turned to Pension Benefit Guaranty Corp., a government insurance company that covers pension.

Pension Benefit Guaranty Corp. picked up Local 707’s retiree payouts — but the maximum benefit it gives a year is roughly $12,000, for workers who racked up at least 30 years. For those with less time on the job, the payouts are smaller.

Narvaez now gets $1,170 a month — before taxes.

Of course, as the Central States Pension General Counsel notes, the real "pension tsunami" will come when the massive "municipal and state plans go down next."

The same crisis now hitting Local 707 has been stewing among numerous Teamster locals around the country for the past decade, he said, and that includes in upstate New York.

The trucking industry — almost uniformly organized by Teamsters — has suffered enormous financial losses in its pension and welfare funds due to a crippling combination of deregulation and stock market crashes, Nyhan said.

“This is a quiet crisis, but it’s very real. There are currently 200 other plans on track for insolvency — that’s going to affect anywhere from 1.5 to 2 million people,” said Nyhan. “The prognosis is bleak minus some new legislative help.”

And it’s not just private-sector industries that are suffering, he added.

“Municipal and state plans are the next to go down — that’s a pension tsunami that’s coming,” he said. “In many states, those defined benefit plans are seriously underfunded — and at the end of the day, math trumps the statutes.”

We"re looking at you Illinois...