Drastic Pension Cuts Will Hit California, Kentucky, Other States

Mish

The CA Supreme Court will rule on pension cuts. Curiously, the court's ruling will be irrelevant in case of bankruptcy.

Please consider California's Brown Raises Prospect Of Pension Cuts In Downturn.

California Governor Jerry Brown said legal rulings may clear the way for making cuts to public pension benefits, which would go against long-standing assumptions and potentially provide financial relief to the state and its local governments.

Brown said he has a "hunch" the courts would "modify" the so-called California rule, which holds that benefits promised to public employees can’t be rolled back. The state’s Supreme Court is set to hear a case in which lower courts ruled that reductions to pensions are permissible if the payments remain “reasonable” for workers.

"There is more flexibility than there is currently assumed by those who discuss the California rule,” Brown said during a briefing on the budget in Sacramento. He said that in the next recession, the governor “will have the option of considering pension cutbacks for the first time.”

That would be a major shift in California, where municipal officials have long believed they couldn’t adjust the benefits even as they struggle to cover the cost. They have raised taxes and dipped into reserves to meet rising contributions. The California Public Employees’ Retirement System, the nation’s largest public pension, has about 68 percent of assets needed to cover its liabilities. For the fiscal year beginning in July, the state’s contribution to Calpers is double what it was in fiscal 2009.

"In the next downturn, when things look pretty dire, that would be one of the items on the chopping block," Brown said.

Pension Cuts Are Coming

It's refreshing to hear a politician admit the obvious: Pension cuts are coming.

However, whether or not the cuts are "reasonable" is irrelevant in cases of bankruptcy. Bankruptcy is under federal, not state law.

Municipal Bankruptcy State Laws

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The above map is from Governing.Com.

Municipalities located in states that are green, generally have a right to declare bankruptcy. Those in purple don't. There could be bankruptcy legislation at the national level that would supersede state constitutions and I am in favor of that.

Meanwhile, despite the enormous gains in the stock market in the past decade, CALPers is still only 68% funded, and that even assumes 7-8% returns into the future.

Illinois and Kentucky are much worse off.

Even 3% gains would devastate most pension plans. Steep actual losses are likely.

Translation: Things are dire and pension cuts are coming.

Municipalities will resort to bankruptcy if necessary, in states that allow it. Those states that do not allow municipal bankruptcy will be forced one way or another to do so.

Mike "Mish" Shedlock

Comments (29)
No. 1-29
klausmkl
klausmkl

Cal pers went into its pocket like 300 million for it's pay out last year. California has plenty of money don't let anyone fool you. They only want more for their socialist state system. Tax payers are fleeing in droves. More keep moving in though someone is buying those homes. I spent 30 years there and watched the state go from good to shit hole.

Sechel
Sechel

this is what true conservatives should be talking about. out of control transfer payments , specifically pensions which are a direct result of how public sector unions bargain with state and local officials who trade pensions for votes.

Carl_R
Carl_R

defined benefit programs should all be replaced with defined contribution plans.

Bam_Man
Bam_Man

Duh....Maybe that's why the stock market is being shot to the moon (by your friendly Central Banks). It will keep the pension Ponzi alive for another few years....

Bam_Man
Bam_Man

These guys are SO predictable.

Tony_CA
Tony_CA

see how it works out if we drastic cut pensions. I promise it wont be pretty.

jivefive99
jivefive99

As a Federal employee a few years away from happiness, and who so far is separate from this state stuff, I need to remind everyone gloating over crap state and local pensions that they are just like the Federal pensions of old, where you could get up to 80% of pay BUT you didnt get social security. While the new Federal system Im under is a more reasonable 30-40% of pay (we do qualify for social security and a 401k-ish plan), these horrible teachers, fireguys and cops (and public works truck drivers and housing inspectors etc etc) were given no choice but to accept this 80% max pension system. And before you piss off hundreds of thousands of these employees/voters with your "you aint gonna get a pension! you aint gonna get a pension! nyah! nyah! nyah!), take a good look at what happened to the American econony when the PRIVATE sector lost its pensions. A country with a few trillionaires and everyone else making minimum wage aint much of a goal.

Trader_O
Trader_O

68% funded even under the assumptiom of 7%-8% returns. So crazy. Pension cuts are coming no matter what.

Tony_CA
Tony_CA

Our whole system is collapsing. The neo-liberal agenda has drastically failed everyone except the billionaire class.

2banana
2banana

jivefive99 - here is thing. To PAY for insane PUBLIC union pension, a democrat controlled city/county or state will tax the average citizens to INFINITY. Fail to pay your taxes? Another PUBLIC union goon with a gun will come and take your house. Or car. Or bank account.

Not ONE cut is acceptable to the union goons. It is "a contract is a contract" and just raise taxes.

Bill Gates - If I don't like the product he is selling. I don't buy it. End of story.

JonSellers
JonSellers

Could you explain exactly what that 68% of assets necessary to cover California's liabilities means Mish? Those liabilities are spread out over decades and the asset expenditures will be also. Does it include future contributions and market gains? How long would it take to draw down that 68% to 0% assuming future revenues?

KidHorn
KidHorn

Whenever a politician faces a problem that can be kicked down to the next guy, it gets kicked down to the next guy. Everything will be great and then suddenly there won't be any money and everyone will be shocked.

Ron S
Ron S

“Defined retirement benefits” are creeping into budgets, especially when those benefits are underfunded. The unintended consequences are that it’s unfortunate that future generations, unable to vote today, will bear the costs of many enacted pension programs, entitlements and boondoggle projects, requiring them to pay higher taxes and work later into their lives to pay for these promises.

The international business world is intelligent enough to know that DEFINED BENEFITS, neither capped nor precisely quantifiable in advance, financial disasters to any business, thus all businesses focus on the known, i.e., defined CONTRIBUTIONS alone.

Since the public pension system is severely underfunded, city governments need to fund the retirements of former employees by taking money from government services as the increasing pension costs will likely continue to crowd out resources that otherwise would go to public assistance, recreation, libraries, health, public works, and in some cases public safety. Benefit costs are slowly crowding out the discretionary money available for states, districts, and schools to spend on other priorities.

Stealing from the young who have no votes, but silently shoulder the costs and bear the burden of unfunded promises of these programs to enrich the old seems to describe the Governments expansion of entitlement benefits and other government services, along with the taxes young people will have to pay to support them, mostly to subsidize older Americans.

Even before those young folks can vote, our Golden State schools are on track to force substantial budgetary cutbacks on core education spending, as public schools around California are bracing for a crisis driven by skyrocketing worker pension costs that are expected to force districts to divert billions of dollars.

RonJ
RonJ

"That would be a major shift in California, where municipal officials have long believed they couldn’t adjust the benefits even as they struggle to cover the cost." It's called the laws of math. 1+1 ALWAYS =2, regardless what anyone wants to believe.

RonJ
RonJ

"Municipalities located in states that are green, generally have a right to declare bankruptcy. Those in purple don't." Math won't care whether or not a municipality has a "right" to declare bankruptcy. They will be bankrupt, regardless.

RonJ
RonJ

"Even 3% gains would devastate most pension plans. Steep actual losses are likely. " The DOW jumped 1,000 points in 12 days, fastest on record. Parabolic moves work the same in reverse.

JonSellers
JonSellers

@RonJ , "They will be bankrupt, regardless." Bankruptcy is a good or bad thing depending on who you are. Do pension payments come before bond payments? Do both of those come before fixing deteriorating roads and bridges? In Detroit, the taxpayer and bondholder generally lost more than the pensioner.

Ambrose_Bierce
Ambrose_Bierce

In a test case a district which opted out of Calpers was stuck with a redemption penalty (seems they only guarantee a return on the bond or fixed income portion of the contributions for some set period of time, eight years?). Should that test hold up Calpers could be broken up on a district by district basis. There would be a vote and depending (probably) on the ratio of young workers to retirees that district could leave the system. The system would then remain in tact, otherwise you are discussing bankruptcy and everyone suffers. Certainly as more districts leave the system payments could be curtailed (in a reasonable fashion of course). Assuming the rate of returns slows down anyway, opting to stay in is only a delaying action. After losing some deadwood, the system will be on a more solid footing, and hopefully when returns resume a normal pace will once again be viable. The system will endure this, it's just a matter of spreading the cost out evenly. Bankruptcy is the wrong solution.

Stuki
Stuki

@JonSellers

Any proper bankruptcy clears the past. Divvies up CURRENT assets amongst claimants, then closes the case. The whole purpose of the process, is to bury the past once and for all, so that it no longer keeps holding the future back.

Any supposed “bankruptcy” that doesn’t leave future tax payments alone, is just yet another financialization sham. And will do no more than further zombiefy the country, in a never ending downward ladder of new “final solutions” to the “pension problem.” With the only ones benefiting, being the usual suspects of ambulance chasers, banksters, direct tax feeders and other members of the produce-nothing-consume-everything leeching classes.

Realist
Realist

A couple of points. First, there is nothing inherently wrong with defined benefit pension plans. There are many well run DB plans throughout the world. The fact that so many DB plans in the US are so poorly run, does not mean DB plans themselves are bad. As I have mentioned before, you northern neighbour has many good examples of well run DB plans. I suggest you check out some of their websites (OTPP and HOOPP for example). I also recommend reading The Third Rail by Jim Leech, who at one point, managed OTPP. Second, I am always surprised at the number of commenters who seem to take pleasure in seeing their fellow Americans suffer from losing their job, their pension, their health care, etc. Third, JonSellers asked about what 68%funding means. If you check out one of the websites mentioned (OTPP), they explain how their funding level (over 100%) is based on projections 75 years into the future (which includes inflows, outflows, and future returns of between 3 and 4%).

JonSellers
JonSellers

@Realist, " I am always surprised at the number of commenters who seem to take pleasure in seeing their fellow Americans suffer from losing their job, their pension, their health care, etc." I agree completely. An employer could take the employer and employee pension contributions and just add them to the employee's pay. Then the employee could just take the money and put it in a managed annuity. It's the same thing. For some reason when some politicians decide to promise Americans something and then lie and don't put the money in the pension fund, everybody jumps on the American who is being stolen from. When they should be expressing their outrage at the criminals, both private and public sector, who are defrauding their fellow Americans.

JonSellers
JonSellers

But that's why the Norwegians call us a "$h_thole country".

Realist
Realist

Lol.

Stuki
Stuki

The supposed existence of a distinction between “well ran” vs “poorly ran” defined benefit plans, are no different than ditto between a “well ran” and a “poorly ran” Ponzi scheme: The former just hasn’t blown up yet.

Promising people to pay them something you don’t have, cannot be “well ran” to anything resembling any reasonably stringent standard. Keep at it long enough and eventually you’ll be caught out dry. With 100% certainty.

While simply not making any promises is, OTOH, 100% certain to never blow up. No matter if you keep doing it ‘til the end of infinity.

IOW, you have one scheme that is certain to fail. Another that is certain not to. Yet people are somehow supposed to willingly bend and fork over, in order to keep pretending the former is somehow sound? Or even can be sound, if only they fork over just a little more? Over and over…. And over and over…..

Realist
Realist

Sorry Stuki. I completely disagree. Many well run DB plans routinely have such large surpluses that they are often used to improve benefits and lower contributions. It’s no different than any other well run organization. Perhaps your experience with poorly run US pensions prevents you from seeing it any other way.

Realist
Realist

Again, look it up for yourself on the two sample websites I previously mentioned.

Realist
Realist

Promising to pay people with something you don’t have? These well run DB plans have more than enough invested all over the world. Look it up.

Blacklisted
Blacklisted

There are two kinds of socialist - those who refuse to believe what is true, and those who believe what isn't true.

Pensions are a Ponzi scheme, as govt can't pay for the retiree and their replacement. Govt pensions around the world are simply running out of other people's money. While we are only seeing it in a handful of muni's so far, European countries, like Germany, will be going belly up in the next couple of years. It will spread to the US, and when the economy turns down and they can't sell their bonds, private pensions, 401K's, and IRA's will be raided, and you may be given the option of taking some treasury IOU's for your forced contribution to the American way - govt first!

In the mean time, you will see states like IL, that "can't" declare bankruptcy, continuously raise taxes until the last productive person and business leaves. All of this will feed the ongoing civil unrest and anti-establishment trend, which will break-up the EU within three years, and could lead to the break-up of the US and UK in 15-20 years.

Since govt's will never look in the mirror and proactively reform, an economic reset is inevitable, which is why people should pray that crypto's are ready for primetime in four years. What's the alternative?

Realist
Realist

Hey Blacklisted. Managing a well run pension plan is no different than managing a mutual fund, etf, large company etc. I fail to see how it equates to government or socialism? Where is that coming from?


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