New rules are likely about to precipitate another financial crisis. The point of origin is pensions. Part of the problem is that these pensions were far too luxurious. According to Fox Business News, for example,
“…cushy pension stories continue to pour out of California. One retiree in the County of Solano pulls in nearly $371,000 a year in retiree pay. Nearly 12,200 government retirees get $100,000 a year, including 94 city retirees in Stockton. A retired librarian in San Diego somehow gets a $234,000 annual pension. A Newport Beach lifeguard got to retire at age 51 with a $108,000 annual pension plus health-care benefits.”
But in most (all?) states, those pensions benefits, having been promised with the job, are legally unalterable. Perhaps states will start taxing pension benefits at one hundred percent above a certain level.
While the Fed keeps interest rates at zero or below, claiming this will help the economy, its policy is about to start a landslide of city bankruptcies and local austerity. It has finally become undeniable that the way pensions are calculated is unrealistic to the point of being virtually fraudulent. Whether or not a pension has the funds necessary to cover obligations is calculated on the basis of growth projections. As economic blogger Mish, explains:
“Pension plans typically assume 7.5% returns. That’s not going to happen on a sustained basis with 10-year treasuries yielding close to 2%. Yet, any significant rise in bond yields will crush existing bondholders as well as wreak havoc in equities. Moody’s wants states to assume 5.5% returns, but even that is far too high. The stock and bond markets are now so bloated thanks to Feb bubble-blowing policies that 0-2% returns for a full decade is a distinct possibility. And not a single pension plan in the US is remotely prepared for such an event.”
While Mish is probably right about all pension plans, the first to fall may be those of California cities. Elizabeth McDonald wrote for Fox News,
“The pension changes from Moody’s, and separately the Governmental Accounting Standards Board, scheduled for this month, could result in Los Angeles, San Francisco, San Jose, Azusa and Inglewood joining fiscally troubled Stockton and San Bernardino, among others, as severe credit risks. It’s all largely due to soaring employee retirement costs, according to new analysis based on the methodology by Bob Williams and his team at State Budget Solution (SBS), a non-partisan organization that studies state budget crises. The new rules could nearly double California’s unfunded liabilities to $328.6 billion. Moreover, California cities that have already filed for bankruptcy protection, like Stockton and Vallejo, will fall deeper into the red.”
Of course, the requirement doesn’t really “double” unfunded liabilities. If merely stops hiding them. By pretending they can grow their assets at an impossibly high rate, the pensions make themselves appear solvent. Sooner or later reality has to be recognized.
But when that reality is recognized, we can expect people to react. And the economic crisis will only be worse for having been delayed this long.