Sunday, April 29, 2018

Public Pension Crisis Looming Across US

Across the country, state retirement systems are woefully underfunded. Yet, that’s just the tip of the iceberg — so are city retirement funds, county retirement funds and teacher retirement funds. Aside from being underfunded, one thing they all have in common is that they are all backed by taxpayers.

Already, taxes are being raised and services are being lowered, and you can expect this trend to continue in the years ahead.

Cumulatively, unfunded state and local pension liabilities now exceed $5 trillion. Take a moment to let that sink in.

Not a single US state had a fully funded pension plan as of last year. In fact, 11 states’ pension systems are funded at less than 60 percent and a whopping 43 sates saw their pension funding worsen in 2016.

Here’s how Bloomberg described the matter:

"The news continues to worsen for America’s public pensions and for the people who depend on them. The median funding ratio — the percentage of assets states have available for future payments to retirees — declined to 71.1 percent in 2016, from 74.5 percent in 2015 and 75.6 percent in 2014. Only six states and the District of Columbia have narrowed their funding gaps."
By the way, these shortfalls are occurring during the biggest and longest bull market for the Dow post-WWII, according to Leuthold Group. The Dow has quadrupled during this bull market, which turned 9 in March. The fiscal positions of all public pensions will be disastrous when this bull finally ends its run and the bear comes out of its long hibernation.

It will inevitably mean higher taxes, less services and the likelihood of defaults — even bankruptcies. Remember Detroit ($18 billion), Jefferson County, AL ($4 billion), Orange County, CA ($2 billion), Stockton, CA ($1 billion) and San Bernardino, CA ($500 million)?

When the stock market eventually tanks, which it always does, many states will face some awful choices, as well as costly legal battles. Pensioners expect to be paid, even if their pensions were unrealistic or outrageous from the outset. In most cases, public pensions are legal obligations. We’ll see how far tax payers can be pushed. After all, you can’t extract blood from a stone.

For example, Illinois — a state that is absolute financial mess -- has 63,000 public employees with salaries of at least $100,000. This includes truck drivers, tree trimmers, and streetlight-repair workers. These tens of thousands of workers are in line for some rather large pensions, based on their high salaries.

The California Public Employee Retirement System (CalPERS) is the USA’s largest pension fund, with $301 billion in assets. CalPERS has 21,862 public employee retirees who receive a pension of $100,000 or more. This costs California taxpayers $2.8 billion annually.

Steve Westly, a former voting member of the CalPers board and a former state Controller, recently tweeted the following:

"The pension crisis is inching closer by the day. CalPERS just voted to increase the amount cities must pay to the agency. Cities point to possible insolvency if payments keep rising but CalPERS is near insolvency itself. It may be reform or bailout soon.”

Here’s the biggest concern: Illinois and California are not alone and they are not unique. Similar funding crises are starting to bubble up in numerous states, counties and cities, and the taxpayers are all on the hook.

This affects nearly all of us, whether you receive a public pension or not.

Friday, April 20, 2018

Our Debt is Slowly Crushing Us

If you’re not highly concerned about our nation's debt problem, you should be.

The Great Recession and 2008 financial crisis were sparked by an excess of debt in an overly connected global financial system.

Today, the total amount of debt is even greater at the federal, corporate and consumer levels, while state and local debt is enough to be catastrophic in the next recession. In essence, the solution to the debt crisis was to create even more debt.

Next time will be different, because it will be worse.

This most obvious concern is the national debt, which has surpassed $21 trillion. This whopping debt is serviced by borrowing even more money, creating a sort of black hole of debt that can never be escaped.

According to a Congressional Budget Office report released this month, trillion dollar deficits are now the norm. Congress recently voted to both reduce revenues by cutting taxes and to increase spending. Those can only be described as acts of insanity.

As the debt has steadily grown, an annual deficit of 3 percent (which was long viewed as a stable) results in ever-expanding debt payments. For example, 3 percent of a $100 billion deficit is $3 billion. However, 3 percent of a $1 trillion deficit is $30 billion. As a result, the growth in federal debt has become exponential.

People often measure the national debt in relation to the size of the economy — the so-called debt-to-GDP ratio. However, the government doesn’t service its debt with the entire economy; it services it with tax collections, which are now smaller and actually adding to the debt.

Yet, our troubles aren’t confined to the federal government.

At the end of 2017, the 50 US states had a cumulative debt of $1.176 trillion. When local debt is added, the figure leaps to more than $3 trillion. Most states have constitutional requirements stipulating that they maintain balanced budgets, yet none of them manage to do that.

Even the most financiallly healthy states face substantial long-term challenges related to their pension and healthcare benefits systems.

Additionally, total corporate debt has reached an unprecedented level and is currently at three-and-a-half times GDP. Even a moderate drop in the value of corporate bonds would result in wealth losses equivalent to a large fraction of GDP. For example, a 10 percent decline in the value of corporate debt would wipe out an amount of wealth equal to 35 percent of GDP. That would mean absolutely massive losses for bond holders, such as pensions and 401ks. That should make you queasy.

The chart below shows the additional economic output (GDP) generated by each additional dollar of business debt in the US. As you can see, debt has become steadily less stimulative over the last several decades. Despite low interest rates and a massive debt binge, the stimulative affect of debt is back down where it was during the lows of the Great Recession. That’s troubling.

Furthermore, total household debt rose to an all-time high of $13.15 trillion at year-end 2017, according to the Federal Reserve Bank of New York. It was fifth consecutive year of annual household debt growth, with increases in the mortgage, student, auto and credit card categories.

Our economy is addicted to debt for growth; it can't function without it. But, like any addict, our addiction is slowly killing us. We need more and more of the drug (debt) to get a continually weakening effect. Without our government’s deficit spending, our economy would likely be in a depression.

This policy of debt-induced economic expansion is baked into the cake; it is the very essence of our economic system. However, spending a dollar to get anything less than a dollar of return is not productive.

As Chris Martenson at Peak Prosperity notes, debt has been growing twice as fast as GDP for nearly five decades. That’s not sustainable. Debt expansion only works if it is exceeded by GDP growth.

Eventually, this will end very badly and it will be terribly disruptive to our economy, our national security and our way of life. There is no cure or recourse, other than a massive deflation.

Yet, that’s exactly what our financial masters at the Fed and on Wall St. are desperately trying to avoid… until they no longer can.