Pension Funds Analysis

Even though the pension fund that Georgetown and its employees invest in is relatively solvent, the bigger pension picture is that the under-funding of state and local employees pensions is going to result in massive financial dislocations across the U.S. sometime after the next recession.

John Mauldin, a professional money manager and financial consultant from Dallas, expects the crisis to occur within the next 7-10 years and there is nothing can be done to avoid a "war" between those who have been promised pensions and those who work, own property and pay taxes. John Mauldin

He points out that in Houston and other coastal cities their expenses are going to substantially increase due to rebuilding after Harvey, while at the same time their income will decrease. Property tax revenue will be greatly reduced due to the massive property damage and even sales tax revenue is likely to be reduced until businesses are able to rebuild.

This will put massive financial stress on the cities and county's ability to fund their pension systems. Politicians will not be able to raise taxes enough to compensate for the lost tax revenue.

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.

This has happened in a period of positive economic growth and significant growth in stocks, in which pension funds invest. 

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

This shows explicitly the issue this blog has been pointing out and that is the unfunded liability of a pension fund depends on the assumed discount rate. The Texas Municipal Retirement System assumes a discount rate of 6.75%. Looking at the chart, the unfunded liability increases dramatically as assumed discount rates are reduced to a more realistic level, such as the 30 year treasury rate of 2.72%. The unfunded liability almost triples!

Although TMRS may be in better shape than the county or state pension funds, what happens when those neighboring jurisdictions begin to suffer from higher taxes, reduced services and financial angst?

But wait, it gets still worse. (Do you see a trend here?) Many state and local governments have actually 100% funded their pension plans. Some states and local governments have even over funded them – assuming they get their projected returns. 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.

And there is nothing more local than police and firefighters 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.

This is the core problem. Our political system gives some people incentives to make unrealistic promises while also absolving them of liability for doing so. It also places the costs of those must-break promises on innocent parties, i.e. the retirees who did their jobs and rightly expect the compensation they were told they would receive.

So at its heart the pension crisis is really not a financial problem. It’s a moral and ethical problem of making and breaking promises that profoundly impact people’s lives. Our culture puts a high value on integrity: doing what you said you would do.

Read the entire article. It is a wake up call to all of us!