Wednesday, July 18, 2012

Irresistible Pool of Money Running Dry?

Mary Williams Walsh and Michael Cooper of the NYT report, Gloomy Forecast for States, Even if Economy Rebounds:
The fiscal crisis for states will persist long after the economy rebounds as they confront rising health care costs, underfunded pensions, ignored infrastructure needs, eroding revenues and expected federal budget cuts, according to a report issued here Tuesday by a task force of respected budget experts.

The problems facing states are often masked by lax budget laws and opaque accounting practices, according to the report, an independent analysis of six large states released by the State Budget Crisis Task Force.

It said that the financial collapse of 2008, which caused the most serious fiscal crisis for states since the Great Depression, exposed deep-set financial challenges that will worsen if no action is taken.

“The ability of the states to meet their obligations to public employees, to creditors and most critically to the education and well-being of their citizens is threatened,” warned the chairmen of the task force, Richard Ravitch, a former lieutenant governor of New York, and Paul A. Volcker, a former chairman of the Federal Reserve.

The report added a strong dose of fiscal pessimism just as many states have seen their immediate budget pressures begin to ease. And it called into question how states will restore the services they have cut during the downturn, saying that the loss of jobs in prisons, hospitals, courts and agencies have been more severe than in any of the past nine recessions.

“This is a fundamental shift in the way governments have responded to recessions and appears to signal a willingness to ‘unbuild’ state government in a way that has not been done before,” it said, noting that court systems had cut their hours in many states, delaying actions including divorce settlements and criminal trials.

The report arrived at a delicate political moment. States are deciding whether to expand their Medicaid programs to cover the uninsured poor as part of the new health care law, with the federal government pledging to pay the full cost at first. Public-sector unions feel besieged, as states and cities from Wisconsin to San Jose, Calif., have moved to save money on pensions. And Washington’s focus on deficit reduction — with big budget cuts scheduled for after the fall election — has made cuts to state aid inevitable, many governors believe.

If federal grants to the states were cut by just 10 percent, the report said, the loss to state and local government budgets would be more than $60 billion a year — nearly twice the size of the combined tax increases that states enacted during the fiscal crisis from 2008 to 2011.

Things are worse than they appear, the report contends.

Even before the recession, Medicaid spending was growing faster than state revenues, and the downturn led to higher caseloads — making the program the biggest share of state spending, as states have cut aid to schools and universities. States have not set aside enough money to cover the health and retirement benefits they owe their workers. Important revenue sources are being eroded: states are losing billions of sales tax dollars to Internet sales and to an economy in which much consumer spending has shifted from buying goods to buying lightly taxed services. Gas tax revenues have not kept up with urgent infrastructure needs. And distressed cities and counties pose challenges to states.

While almost all states are required by law to balance their budgets each year, the report said that many have relied on gimmicks and nonrecurring revenues in recent years to mask the continuing imbalance between the revenues they take in and the expenses they face — and that lax accounting systems allow them to do so.

The report focused on California, Illinois, New Jersey, New York, Texas and Virginia, and found that all have relied on some gimmicks in recent years.

California borrowed money several times over the past decade to generate budget cash. New York delayed paying income tax refunds one year to push the costs into the next year and raided several state funds that were supposed to be dedicated to other uses. New Jersey borrowed against the money it received from its share of the tobacco settlement and, along with Virginia, failed to make all of the required payments to its pension funds.

Texas delayed $2 billion worth of payments by a month — pushing the expenses into the next year. Illinois has billions of dollars of unpaid bills and borrowed money to put in its pension funds.

Desperate budget officials often see public pension funds as an almost irresistible pool of money. One common way of “borrowing” pension money is not to make each year’s “annual required contribution,” the amount actuaries calculate must be set aside to cover future payments. Despite its name, there is usually no enforceable law requiring that it be paid.

As a result, the report found that from 2007 to 2011, state and local governments shortchanged their pension plans by more than $50 billion — an amount that has nothing to do with the market losses of 2008, which caused even more harm.

When money is withheld from a pension fund, the arrears can snowball, because most states count on the money compounding at a rate of about 8 percent a year.

Eventually the unfunded liability grows unmanageable. And states and municipalities have promised an estimated $1 trillion in health benefits — that most have not started saving for — to their retirees.

While the report called New York’s practice of delaying payments to its pension fund a “gimmick,” Morris Peters, a spokesman for the state’s budget division, said that the state was not relying on any new gimmicks. But the state comptroller, Thomas P. DiNapoli, praised the task force for “bringing the severity of this crisis to the fore.”

Others welcomed parts of the report. Matt Fabian, the managing director of Municipal Market Advisors, a research and consulting firm, said that while it might alarm some investors in the short term, “in the long term it’s a good thing for creditors to get a handle on these costs.”

And Kerry Korpi, the director of research at the American Federation of State, County and Municipal Employees, agreed with its findings that the federal government should consider how its actions impact state and local governments, and that states should modernize their tax systems to pay for needed services.

The task force chairmen said they wanted to call attention to the severity of the problem without making it worse by spooking the investors who buy municipal bonds. State and local governments cannot function if they lose their access to credit, as New York City did in 1975.

Mr. Ravitch, a primary player in resolving New York City’s near breakdown, said he did not see the states’ problems today as analogous. The states, he said, are not juggling the giant load of short-term debt that New York City had back then.

Mr. Volcker disagreed.

“New York City went and spent a lot of money they didn’t have,” Mr. Volcker said. “We’re doing exactly the same thing today on a grander scale.” He said that it was characteristic of financial markets to fail to respond to problems until they became a crisis.

“They’ll lend right up to the brink,” he said. “That’s the lesson of this. You don’t want to act too late.”

God bless Paul Volcker. If President Obama truly wanted to make a difference, he would have made him Treasury Secretary. Instead, he opted for bank-pandering Tim Geithner, the preferred choice of banksters (Volcker didn't stand a chance).

The report highlights a big part of the reason behind the pathetic state of state pension funds. Desperate public officials often see public pension funds as an almost irresistible pool of money, borrow from these pensions and neglect topping them up. The compounded effect of such actions has led to massive pension shortfalls.

By the way, before you condemn this as yet another example of public profligacy, let me remind you that things aren't better in the private sector. The WSJ reports that S&P 500 companies posted a record level of underfunding for pensions and other post-employment benefits in 2011. Defined pensions were underfunded by $354.7 billion in 2011, an increase of over $100 billion from the end of 2010.

During the good years, companies used investment gains from their pension plans to pad their earnings and outright steal from pensions, but now that option has vanished. With interest rates hitting record lows, pensions have become a liability, prompting companies to cut them or offload the risk to insurance companies.

In fact as

Corporate and public pension funds across the country are seriously underfunded, threatening the retirement security of workers and straining the financial health of state and local governments, according to a pair of independent studies.

In 2011, company pensions and related benefits were underfunded by an estimated $578 billion, meaning they only had 70.5% of the money needed to meet retirement obligations, according to a report by S&P Dow Jones Indices.

Funds generally don't need to have all the money needed pay future pensions because returns on investments vary over the years and people retire at different ages and with different levels of benefits, experts said. But a funding level in the 70% zone is considered dangerously low.

The looming shortfall, and the move by corporations to 401(k)-type plans in which the level of investment is controlled by employees, could keep many aging baby boomers from retiring, said Howard Silverblatt, a senior S&P Dow Jones Indices analyst and the report's author.

"The American dream of a golden retirement for baby boomers is quickly dissipating," Silverblatt said. "Plans have been reduced and the burden shifted with future retirees needing to save more for their retirement.

"For many baby boomers it may already be too late to safely build up assets, outside of working longer or living more frugally in retirement."

While the cost of retirement is out of reach for many older workers and growing more expensive for younger ones, it's becoming less of a burden for employers, according to the report issued Tuesday.

Employers are paying less into pension funds despite the fact that company cash levels remain near record highs and cash flows are at an all-time high," Silverblatt said.

Meanwhile in the public sector, a separate pension-related report by the national State Budget Crisis Task Force warned that public pension funds in the U.S. are underfunded by $1 trillion to $3 trillion, depending on who's making the estimate.

California pensions, collectively, currently face a $136-billion unfunded liability, the report said, citing data from the National Assn. of State Retirement Administrators. The group, chaired by former Federal Reserve Bank Chairman Paul Volcker and former New York Lt. Gov. Richard Ravitch, looked at a variety of pressures, including pensions, on the governments of six large states — California, Illinois, New Jersey, New York, Texas and Virginia.

"The ability of the states to meet their obligations to public employees, to creditors and most critically to the education and well-being of their citizens is threatened," the report said.

Soaring pension costs have contributed to the decisions by Stockton and San Bernardino to seek bankruptcy protection. Last month, voters in San Jose and San Diego approved local ballot measures that reduce pension benefits for some government employees.

The state Legislature in August is expected to consider a comprehensive pension overhaul proposed at the start of the year by Gov. Jerry Brown.
After reading the above, you shouldn't be surprised that pensions are under attack in America. Once again, it is the common worker in the private and public sector that gets royally screwed as companies and states look to trim "soaring" pension costs.

And if you ask Robert Benmosche, AIG's CEO, there is no retirement crisis. All you have to do is raise the retirement age to 80 and we can fix the problem. Luckily, much wiser and more informed academics are sounding the alarm, pleading for new thinking on the retirement crisis.

My own views are that we have to bolster pensions for public and private sector workers by making the case for defined-benefit plans. Pensions have to be treated as a public good. Companies shouldn't be in the business of managing pension plans. Only well governed, large public pension funds that operate at arms-length from government interference.

Unfortunately, in the US, there is little political appetite for public health or public pensions. Even if the evidence is overwhelmingly clear that pooling resources lower costs, right-wing fanatics will scream that it will impose an 'unmanageable tax burden' on future generations.

But the truth is that the current trajectory of the US economy, with inequality rising at dangerous levels, poses huge risks for future taxpayers. The social welfare costs of rising inequality will swamp all other costs and break the system. And if you want a glimpse of the future if the status quo is maintained, all you have to do is look at these 12 hellholes as examples of what America might soon look like.

Below, listen to this Bloomberg interview with former Federal Reserve Chairman Paul Volcker and former New York Lieutenant Governor Richard Ravitch talk about the potential for Federal Reserve monetary policy to spur growth in the U.S. economy. Volcker and Ravitch also discuss fiscal challenges facing states and municipalities.

Also, Daniel Gross, economics editor at Yahoo! Finance, interviews Donald Boyd, executive director of the State Budget Crisis Task Force. Mr. Boyd discusses how pensions constitute one of the long-term challenges as states have long made a practice of promising pensions to public employees without setting aside adequate funds.

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