Pensioners Take Note, Municipal Bond Storm Coming

[B]ut California too is now starting to hand it to bondholders. Cities in California are now testing the limits of bankruptcy law, and not paying the debt nor the payments for retirees to the state system. Thus this article describes how the state retirement system (CALPERS) is suing to demand payment, and saying that retiree obligations come AHEAD of creditors (municipal bond holders) in the queue.

“The issue is, do Calpers obligations supersede unsecured bondholders?” Fabian said in a telephone interview. “There’s an awful lot of unsecured bondholders in California. If you put pension obligations to Calpers as secured and senior to unsecured debt, in effect those bonds have been downgraded.”

In the Stockton and San Bernardino cases, Calpers is arguing that pension contributions must be made ahead of payments to other creditors because they are so-called statutory liens, or debts that state law requires to be paid. Bondholders and other creditors that oppose Calpers argue that pension debt is a contractual obligation like any other.

You’d have to be nuts to buy California municipal debt if Calpers has precedence and employee retirement benefits can’t be cut, since this is the MAIN THING that is driving these cities into insolvency. In the future likely these municipalities would just contract out everything to third parties that wouldn’t pay their employees those giant benefits, but the cities have to jettison these liabilities to put their fiscal house in order today.

via Chicago Boyz.

In case this is a little tough to follow, in bankruptcy debts are paid according to a priority.  There’s a decent primer here.

The “Illinois” based pensions are probably ok. e.g. ITRS.  There is no statute permitting a state to file for bankruptcy protection.

However cities are corporations; they can (and do) file for bankruptcy protection.  CPS, CPD, CFD employees and retirees should watch these cases in California closely.  They may be getting a real haircut if they have to defer to the bond holders to get their money.

It’s all very very sad.

 

Quick Pension Analysis

Ok, so I was getting asked about this the other day both in person and in the comments about why the pensions are really in such bad shape and what the latest GASB positions mean to the funds.  GASB first.

GASB Changes
I did some poking around and the recent GASB changes really mean nothing.

After six years of research and about 400 pages of text, GASB’s statements 67 and 68 do little to provide enough meaningful information about the potential retirement costs faced by the taxpayers. The statements will force the worst of the worse, such as Illinois, to recognize a much larger liability.

That’s like throwing the zombified Walking Dead under the bus to give the appearance of taking a serious step in providing transparency. Zombies are already dead. You can throw them under a bulldozer; it doesn’t make them more dead.  …

The new standards still allow most pension funds to choose their discount rates when determining their pension liabilities. In other words, the sworn and civilian plans of the City of Los Angeles can wantonly throw caution to the wind and assume a 7.75% earnings assumption going forward, avoiding any consideration of risk.

via City Watch LA.

You can read the policy papers.  It’s pages and pages of nonsense summarized nicely with the zombie analogy above.

But what the lastest GASB changes point out to us is the danger regarding the assumed internal rate of return.

Interest Rate Issue
For giggles I found the 2011 annual report of the Chicago Teachers’ Pension Fund.  It’s 116 pages detailing a underfunded, mismanagement, no financial understanding pension time-bomb with some lipstick.

From page 13:

As of June 30, 2011, investments at fair value plus cash totaled $10,456,912,118. This reflects a 16.8% increase from the $8,949,590,783 value of June 30, 2010. The Fund’s investment performance rate of return for the year ended June 30, 2011, was 24.8%, exceeding the projected return of 8% and reflecting a 82.3% increase from the 13.6% performance rate of return as of June 30, 2010. The ten-year rate of return posted by the Fund for the period ended June 30, 2011, was 5.7%, and fell short of the actuarial assumption of 8%.

That’s a lot of information.  I draw your attention to the incredible swings in the rate of return of the fund over the years.  24.8% one year, 13.6% another, however the 10-year average is a mere 5.7%.   On page 25 we learn that the 5-year average is only 4.7%.  Yikes!!  But the fund assumes that over the long term it will average 8%.

But what does that mean? So what?

Well, the fund currently has net assets of $10.344 billion.  When invested at the given rate of returns at the end of 5 years we have:

Year Value @ 4.7% Value @ 5.7% Value @ 8%
0 $10,344,100,000.00 $10,344,100,000.00 $10,344,100,000.00
1 $10,830,272,700.00 $10,933,713,700.00 $11,171,628,000.00
2 $11,339,295,516.90 $11,556,935,380.90 $12,065,358,240.00
3 $11,872,242,406.19 $12,215,680,697.61 $13,030,586,899.20
4 $12,430,237,799.29 $12,911,974,497.38 $14,073,033,851.14
5 $13,014,458,975.85 $13,647,957,043.73 $15,198,876,559.23

If the next 5 years are like the past 5 years the fund will earn 4.7% on its assets.  So in 5 years it will have $13.014 billion.

In the next 5 years are like the past 10 years the fund will earn 5.7% on its assets.  So in 5 years it will have $13.646 billion.

However the plan assumes that over the next 5 years it will follow the 8% column and have $15.1 billion.  History is against them.

If the fund earns 5.7% over the next 5 years it will be $1.55 billion short of projections.  That’s 10% less money available.

If the fund earns 4.7% over the next 5 years it will be $2.18 billion short of projections.  That’s 14% less money available.

If all the assumptions go on for 10 years:

Year Value @ 4.7% Value @ 5.7% Value @ 8%
10 $16,374,178,752.54 $18,007,050,537.73 $22,332,136,064.29

Earning 5.7% the fund is $4.33 billion short or 19.3%.

Earning 4.7% the fund is $5.95 billion short or 26.6%.

So if the next 10 years are anything like the past 10 years from an investment standpoint we can expect the all the state pension funds to have about 20% less money than they’re projecting.  That could easily be another $40-50 billion that someone’s going to come looking for.

– – –

Now in all fairness, a historic average suggest that a return rate of 8% could be reasonable.  i.e. These funds may be able to earn an 8% return in the next 5 years.  Why?

Interest Rates & Inflation.  In the last 5 – 10 years there has been very little inflation and interest rates have been low.  That’s generally accepted to be a good thing.  However it messes with the long-term analysis as to what something will be worth in the future.

Given the amount of debt carried by the Feds, and the quantitative easing (a/k/a money printing) that been happening, it’s safe to say that very soon interest rates are going to start going up… fast and dramatically.

When interest rates go up, the rate of return on these pension funds should go up as well.  If they get close to the 8%, then we’ll only have to worry about the current short fall of billions and billions and billions.

Any questions?

More Bad News on the Pension Crisis

If I was Rahm I would so totally throw Daley under the bus on this issue.

The debt from 10 Chicago-area pension plans swelled more than 600 percent to $27.4 billion between 2001 and 2010, according to a study released Monday by the nonpartisan Civic Federation. That’s $8,993 for each man, woman and child in Chicago, according to the report.

The shortfall comes on top of more than $83 billion in unfunded pension liabilities at the state level, driving the cost up to nearly $15,000 per Chicagoan, the report shows.

via chicagotribune.com.

Shear insanity.

 

JP Morgan: Public Employee Pension’s Set to Explode

But they wanted to keep the story to themselves:

JPMorgan recently circulated a “strictly confidential” report among leaders at the bank and with trusted hedge fund allies outside of the bank which details an impending public pension crisis. And we mean big time nastiness.

Massive cuts in services will have to happen, or massive tax increases will have to happen, or both, to keep many pensions and municipalities from going over a cliff. The politicians know that disaster is coming. JPMorgan and their hedge fund buddies know that it’s coming. The public, though it has a sense of impending doom, still doesn’t grasp the avalanche that is headed toward states and cities in the very near future.

Charlie Gasparino details in the attached article that JPMorgan did not want the information in the report to become public because it feared angering the politicians in the municipalities and states where default due to public pensions is a very real possibility. Many local politicians are lying when they tell their fire fighters and teachers that pensions are in good shape. According to what the report supposedly says these workers should probably start making alternative plans for retirement. But to say that is very messy politically.

JPMorgan didn’t want to lose its very profitable muni bond underwriting business in these same localities, which is determined to a large degree by these same lying local politicians, so this information was kept quiet.

via AgainstCronyCapitalism.org.

To the actual article:

OK, it’s no secret that nation’s public pension funds are in big trouble, holding large “unfunded” liabilities owed to public workers once they retire. But most politicians (New Jersey Gov. Chris Christie is an exception) will tell you the problem is fairly containable, that there are simple fixes — such as raising taxes on the rich or pruning benefits. …

Not so, warns a “strictly confidential” report JP Morgan issued last year. It describes in straightforward, frightening detail how underfunded pensions are huge ticking timebombs for many of the nation’s big cities and states.  …

Nationwide, the actual size of unfunded public pension liabilities is four times larger than the $900-plus billion that officials are ’fessing up to. That’s right, the bank sees a $3.9 trillion hole; to plug that, states and cities will need large tax hikes, massive budget cuts or both. Plus, public-sector unions will have to accept smaller retirement packages, and later retirement ages, to keep the pension systems going.  …

In New York, for example, JP Morgan said state officials would have to immediately cut spending by 12.3 percent or raise taxes on everyone by 7.4 percent. And they’d need to make these tax hikes and budget cuts permanent for the next two decades to fully fund public-employee pensions.

New Jersey faces an even bigger hole. Even after Christie’s reforms, it would still have to cut spending 30.8 percent or raise taxes another 17.2 percent, keeping them in place for two decades, to solve the problem.
via NY Post.

No word on how Illinois fares.  But as we are the #1 unfunded pension state in the union it’s no doubt a bad, bad, bad situation.

How Retirement Benefits May Sink Illinois

We’re national news again.

…  Indiana’s debt for unfunded retiree health-care benefits, for example, amounts to just $81 per person. Neighboring Illinois’s accumulated obligations for the same benefit average $3,399 per person.

Illinois is an object lesson in why firms are starting to pay more attention to the long-term fiscal prospects of communities. Early last year, the state imposed $7 billion in new taxes on residents and business, pledging to use the money to eliminate its deficit and pay down a backlog of unpaid bills (to Medicaid providers, state vendors and delayed tax refunds to businesses). But more than a year later, the state is in worse fiscal shape, with its total deficit expected to increase to $5 billion from $4.6 billion, according to an estimate by the Civic Federation of Chicago.

Rising pension costs will eat up much of the tax increase. Illinois borrowed money in the last two years to make contributions to its public pension funds. This year, under pressure to stop adding to its debt, the legislature must make its pension contributions out of tax money. That will cost $4.1 billion plus an additional $1.6 billion in interest payments on previous pension borrowings.

Business leaders are now speaking openly about Illinois’ fiscal failures. Jim Farrell, the former CEO of Illinois Toolworks who is heading a budget reform effort called Illinois Is Broke, said last year that the state is squandering its inherent advantages as a business location because “all the other good stuff doesn’t make up for the [fiscal] calamity that’s on the way.” Caterpillar, the giant Peoria-based maker of heavy construction machinery, made the same point more vividly when it declined in February to locate a new factory in Illinois, specifically citing concern about the state’s “business climate and overall fiscal health.”

via WSJ.

How bad is it going to be?

Back in Illinois, Dana Levenson, Chicago’s former chief financial officer, has projected that the average city homeowner paying $3,000 in annual property taxes could see his tax bill rise within five years as much as $1,400. The reason: A 2010 Illinois law requires municipalities to raise the funding levels in their pension systems using property tax revenues but no additional contributions from government employees. The legislation prompted former Chicago Mayor Richard Daley in December to warn residents that the increases might be so high, “you won’t be able to sell your house.”

We’re in trouble.

Local media is still ignoring.  National media starting to ring the bell.

IL Legislators Should Give-up Pensions

Illinois lawmakers ought to give up their state pensions.

Legislators are part-time employees, but they make nearly $70,000 a year and in some cases can qualify for a pension after as little as four years in office at age 62. If they were elected before 2011, they can retire at 55 and collect a pension after eight years of service.

Those pensions (like all pensions in Illinois) are not subject to the state income tax, and lawmakers also get health insurance benefits after they retire.

With the state facing roughly $80 billion in unpaid pension liabilities and on the verge of financial collapse, the elected officials who created this crisis ought to be ashamed to accept such largesse from taxpayers.

via Southtown Star.

Agreed.

I can’t remember where exactly but I once wrote about this at length.  Elected folks should earn a salary based on their more recent private sector salary.  And when they’re done with their “service” they should not receive a nickel from the taxpayer.

This change alone would solve many many of our problems.

Clout Boosts Ex-Police Chief $30k per Year

The Machine taking care of its own:

At first blush, a pension bill adopted by the General Assembly in 2007 seemed to have a laudable goal: extending retirement benefits to local police force employees’ widows after they remarried.

But buried within the legislation was something considerably less altruistic: a provision that enabled a member of one of Chicago’s better-known political families to boost his pension by more than $30,000 a year — while saddling unsuspecting taxpayers in Oak Brook with nearly $750,000 in funding liabilities, the Chicago Sun-Times and Better Government Association have learned.

The recipient of that larger pension, Thomas Sheahan, is a former police chief in Oak Brook, the current village manager in Lyons and a member of a Democratic clan that has helped rule Chicago’s Southwest Side for decades.

Sharp-tongued and unapologetic about benefitting from the provision that no one else has used, the 59-year-old Sheahan said of his pension: “I worked for 24 f—— years [in the public sector], I deserve every penny of it and I deserve a lot f—— more.”

Retiring from Oak Brook last spring, Sheahan now is drawing an annual payout of nearly $77,000. Although pension records show that’s about $32,000 more than he would have received had he retired at the same point without the legislation, Sheahan said it’s still a relatively modest sum. “I get about what a sergeant gets,” he said.

Sheahan — brother of former Cook County Sheriff Michael Sheahan and James “Skinny” Sheahan, a long-time aide to ex-Mayor Richard M. Daley — wouldn’t say if or how he was involved in the origin of the pension sweetener.

via Chicago Sun-Times.

When will the people rise up and say “Enough!”  A foul-mouth connected punk thinks he deserves more.  Go get a real job in the private sector and find out what you’re really worth.

But that’s not even the end of the story:

The main sponsor of the bill, then-state Rep. Bob Molaro (D-Chicago), told members of the Illinois House that the tweak to the state’s pension code was intended to help one person, according to a transcript that didn’t identify the person.  …

Molaro declined to be interviewed, but released a statement to the Sun-Times indicating he did not know Thomas Sheahan at the time the legislation was crafted, something Sheahan echoes. They came to know each other, however, after Molaro left the Legislature in late 2008 and, with a partner, became a $5,000-a-month lobbyist for Oak Brook.

Molaro said in the statement: “Any attempt to connect the sponsorship of this bill and my being part of the lobbying team for the village of Oak Brook is completely unfounded and absurd.”  …

Sheahan now is village manager in Lyons, where he said he’s paid roughly $65,000 a year for fewer than 20 hours a week.

So this political hack is now drawing $140,000 per year from the taxpayers.  Unbelievable.

And Molaro… the tool that he is, doesn’t even know who he’s working for.  He’s just doing what he’s told; nothing more than a warm body filling a seat collecting $80,000/year from the taxpayers to be Michael Madigan’s bag man.

Speaking of Madigan… Where’s Lisa Madigan in all this?  Shouldn’t the state’s highest law enforcement officer look into the matter to see if a crime’s been committed?