Public Pensions Risks Vary Widely?
Fitch Ratings said on Monday that local government pension liabilities vary largely for the more than 1,000 local governments it rates, and in some cases it expects the underfunded retirement systems will become a "source of budgetary pressure."As more and more cities struggle with their pension shortfalls and dire finances, they will have to make ever tougher decisions on pensions. The Stockton ruling didn't exactly save pensions, it just deferred a more complicated legal ruling, pitting bondholders against pensioners in the future (see video clips at the end of the secret pension money grab).
"The situations that pose the greatest concern remain those in which the plan's funded ratio is exceptionally low and contribution levels are already high relative to the budget and rising," the agency said in a special report.
A pension's funded ratio measures the amount of money a retirement system has on hand against its liabilities. A pension with a ratio of around 80 percent is considered well-funded.
The Pew Center on the States recently estimated that U.S. cities have a combined pension shortfall at least $99 billion.
The underfunding and high costs of late have pushed a few cities toward bankruptcy and into protracted political fights with unions. And as cities such as Stockton, California, file for bankruptcy, many in the $3.7 trillion municipal bond market are wondering if the creditors or the pensioners will be paid first.
Fitch said that local governments' pension burdens figure into its credit ratings because unfunded pension liabilities "represent a future claim on government resources."
Earnings provide 60 percent of pension funds' revenues. When investments tumbled during the financial crisis, local and state governments were pressed to make up for the shortfalls. Many struggled to pitch in the extra money as their own revenues buckled under the strain of the 2007-09 recession.
More than half of local governments send money to state-administered retirement systems, but Fitch said "pension contributions remain a source of budgetary pressure for local governments" regardless of whether they participate in a statewide plan.
Since the downturn, almost all states and most local governments have changed the benefits and financial structures of their pension plans. But "in most cases," Fitch said, "pension reforms have only affected new hires, in which case the budget benefits accrue only gradually."
"Where reforms have included current employees or retirees...more substantial and immediate reductions in current funding requirements and unfunded liabilities have resulted," it added. "However, in some situations these changes are being litigated."
The new Governmental Accounting Standard Board's rules set to take effect over the next two years are a "step in the right direction toward better transparency and comparability of government pension liabilities," the rating agency said, adding it does not expect any major rating changes due to these new pension accounting standards.
Under new GASB standards approved in June, state and local governments will post their net pension liability -- the difference between projected benefit payments and the assets set aside to cover them -- on their financial statements.
Also under the new rules, pensions with insufficient assets to cover their obligations will have to project lower rates of return on their investments, closer in line to the yield on a municipal bond.
"The lack of consistently available data across plans to which local governments belong ...poses an analytical challenge for evaluating local governments," the agency said. "Fitch expects that GASB's enhanced pension reporting standards will result in considerably more data to evaluate local governments."
One mayor who is struggling with such decisions is Rahm Emanuel. Mark Peters of the WSJ reports, Chicago Mayor's Pension Conundrum:
Mayor Rahm Emanuel, who built a reputation in Washington as a blunt problem solver, is grappling with one of the nation's biggest municipal-pension shortfalls, setting up a showdown with labor unions as he stakes his first term on reshaping city government.Illinois is a particular pension basket case. The SEC recently slammed it over pensions and lawmakers are frantically trying to fix the situation but many political and legal hurdles remain.
The former chief of staff to President Barack Obama inherited a retirement system for teachers, firefighters and other city workers that is underfunded by almost $24 billion—and the bills are starting to come due.
Under Illinois law, the city schools in coming months must resume regular payments to the teachers retirement system at a cost of $404 million a year, or nearly 8% of current Chicago education spending. Mr. Emanuel also faces a state mandate to more than double payments to the pension funds for police, firefighters and other unions.
If these payments were funded by property taxes, his administration estimates residents would face a 150% increase—an option Mr. Emanuel says he won't consider.
His other options also are tough. Mr. Emanuel could try to reach agreements on benefits cuts with individual unions, though such efforts so far have fallen flat. Or he could bypass unions by persuading the Illinois legislature to trim pension benefits for city employees and current retirees or give the city the power to do it.
Much of this could come to a head in the next two months as the legislature grapples with its own huge state-worker pension problems and Mr. Emanuel is pushing for Chicago to be part of any resulting legislation.
Mr. Emanuel's assessment: Workers are paying into a retirement system that makes unrealistic promises, and the city is offering benefits it can't pay. "The system today as constructed is not honest to the employees and is not honest to the taxpayers," he said in a recent interview.
Chicago is one of the most dramatic examples of a fiscal crunch that many states and cities face as underfunding, market losses on pension investments and stagnant tax revenue push some pension funds toward insolvency. Mr. Emanuel's national reputation and the city's long history as a cradle of organized labor could make Chicago a key battleground as public-sector unions fight to fend off attempts to claw back benefits.
Mr. Emanuel won his office in 2011 with little union support as he pledged to shake up the old order. Since then, he has brokered a labor deal at the city's convention center, extended the school day and balanced the city's $8.3 billion budget.
His relationship with several unions has been rocky. Last month, police sergeants overwhelmingly rejected a pension deal the Emanuel administration saw as a model. The mayor faced off with the teachers union last September in a seven-day strike that didn't address the ballooning pension costs but instead concerned teacher evaluations and layoffs tied to school closings. More recently, the teachers led a pushback against the mayor's plan to shutter more than 50 schools.
One recent bright spot for Mr. Emanuel has been a decrease in violent crime. While high-profile crimes such as the murder of 15-year-old honors student Hadiya Pendleton grabbed headlines, the murder rate overall dropped 40% in the year's first three months.
Mr. Emanuel says that pension costs loom over any progress the city makes. Within three years, his administration estimates, annual pension costs for city workers other than teachers will reach $1.1 billion, compared with less than $500 million this year, squeezing services from tree trimming to police patrols.
"There's a set of choices. Reform pensions and continue to be able do other things that are essential for a great city—or make pension payments and do certain things to the rest of the budget that are not part of a great city," Mr. Emanuel said.
A recent study by the Center for Retirement Research at Boston College of 128 county and municipal pension funds found Chicago with three of the 12 most underfunded systems. Chicago is in "a shockingly bad situation," said Alicia Munnell, the center's director.
Chicago has chronically underfunded its retirement systems, setting its annual contribution to the pension funds through a state formula rather than amounts set by actuaries. For the teachers fund, the schools were allowed to pay less than actuaries required. Data from the Boston College study show Chicago on average contributed less than half of what actuaries required between 2007 and 2010, while the vast majority of the cities and counties it looked at paid 100% or more.
Earlier this year, Mr. Emanuel's administration and leaders of the police sergeant's union reached a preliminary four-year contract with a 9% raise in total. In exchange, union leaders pledged to support efforts at the state level to solve the pension issue by reducing cost-of-living increases for current retirees, raising the retirement age and increasing worker contributions.
Union members rejected the deal by a 6-to-1 margin last month, with rank-and-file officers pushing the sergeants to shoot it down. For some officers, the deal belied the mayor's statements that he wanted to work with unions to resolve the pension shortfall. "To me, being a partner shouldn't mean my way or the highway," said Mike Shields, president of Chicago's largest police union.
Mayor Emanuel and other mayors with similar disputes over pensions have an extremely tough battle ahead. But just like in Greece, when you reach a critical point, you have to negotiate and make sure you're implementing policies that are right for all key stakeholders: unions, local governments and taxpayers. There's simply no other choice.
Below, CNBC's Steve Liesman talks with James Bullard, St. Louis Federal Reserve Bank president, about the outlook on the U.S. economy; the lagging labor market; expectations for Europe, and tapering quantitative easing. Good interview with excellent comments on the U.S. labor market and possible future course of monetary policy.