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.