There’s A Battle Brewing On The Horizon

The WSJ reported yesterday that US state pension funds collectively lost approx. $865bn  in the last year according to the Center For Retirement Research at Boston College.  Assets plunged 37% in the 14 months that ended December 16th.  Prior to the recent losses,  the plans were approximately 86% funded  (I would question the 86% number; I’m sure that it includes rosy projections on health care costs and investment returns).  The funds, which have 20.4mm members dropped from  $2.3 trillion in 2006 to $1.46 trillion. There’s a lot of hardship on the horizon for people looking to retire from city, state and local municipalities. I think that there will be confrontation between those that are retired and receiving benefits and those that are still working.  It is still undetermined how it will be resolved.

The only way that the system gets back to any sort of fiscal balance is for the retired to take cuts in benefits or for the working to make larger contributions.  The other alternative is to try to borrow more to fund the gaps.  The amount of borrowing would be mammoth.  Consider also that market returns may be muted at best, so the projected growth, which assumed 8-10% per annum may need to be revised down to 3-5%, when you take into consideration last years returns.  This only serves to increase the amount of the underfunding.

The stimulus package from the Fed to all states looks like $160bn.

It looks like the Federal Government is readying the stimulus package to the states.  The amount being thrown around today is $160bn.  It would appear that this would be woefully short.  This would only begin to start to plug some of the holes in the pension funds; this will create a secondary battle.

The secondary battle will be between workers on the job fighting to keep their jobs or gain pay increases and the retirees.  The retirees will try to defend the fact that they are “entitled” to retirement pay and compensation as promised.  Workers will feel entitled to keep their salaries and pay increases intact.  All I can say is that it’s going to be a nasty, knock-down drag out political horror show.  The losers in the battle will be the taxpayers.  Any solution that’s worked out between the workers and the retirees will have to face the scrutiny of the taxpayers.  In case you haven’t noticed, taxpayers are feeling sort of tapped out, financially - lately.

It’s not going to be easy to get anything passed, like property tax increases etc.  MA is talking about increasing the gasoline tax by .20/.30 per gallon.  They’re suggesting that this might be a way to begin to close the gap.  There was talk of “toll increases” in state roads.  This was politically unpopular as the state is still trying to work through the expense of the BIG DIG.  Which was billions of dollars over budget.

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