From John Rubino on a guest post at theburningplatform.com:
It’s the same story pretty much everywhere: Cities and states promised ridiculously generous (by today’s standards) pensions to teachers, cops and firefighters, failed to sufficiently fund the plans and invested the money they did have very badly. And now the weight of the resulting unfunded obligations are crushing not just plan recipients but entire communities. Here’s a representative case:
Oregon PERS unfunded liability swells to $21 billion
(KTVZ) – This week, Oregon’s Public Employee Retirement System Board received an earnings report on the status of the PERS fund investment. The report said Oregon’s PERS fund fell by 4 percent in 2015, a loss of nearly $3 billion — and a Central Oregon lawmaker said that means major reforms are more urgent than ever.“The blow to PERS from the Moro court case left Oregon with an additional $5 billion in unfunded liability,” Sen. Tim Knopp, R-Bend, said Tuesday. “Now PERS is an additional $8 billion short of its target.”In that ruling nearly a year ago, the state Supreme Court overturned the vast majority of the PERS reform cost-saving provisions enacted by the 2013 Legislature.
The current unfunded PERS liability now exceeds $21 billion, up from $18 billion last year, he noted.
PERS Communications Director David Crossley said while the PERS fund earned just over 2 percent last year, it did not achieve the “assumed savings rate” of 7.75 percent, so the liability increased by about $3 billion.
He noted that PERS had positive earnings, but lost value because it pays out about $3.5 billion in benefits a year.
PERS rates for school districts and local governments will rise in July 2017, Knopp said, forcing school districts to lay off teachers, reduce school days, increase class sizes, and cut programs like art and PE. Local governments will also have to make cuts to public safety and other critical services.
This combination of worse-than-expected investment returns and legal barriers to cost savings is playing out across the country. See Fitch downgrades Chicago after “worst possible outcome” in state supreme court pension reform bid.
To continue reading: Imploding Pensions Take The Rest Of US Down With Them
The $64 question remains: What will taxing districts try to do when trapped between yesterday’s legal regime and today’s/tomorrow’s mathematical reality?
I’ve never seen the calculation, but my guess is that in Illinois, if municipal, fire, police and teacher pensions were to be honored dollar-for-dollar, property taxes might have to double. Or MORE!
IL already has among the highest tax burden of any state. Only NJ has higher average property taxes, and where I live I’m paying (not exaggerating) 3.67% year in and year out on a modest property.
Raising taxes damages property values. This is axiomatic. So what happens if my property tax number goes up by half, and as a consequence my home value falls 20%? Can anyone honestly suggest people will pay over 6% each and every year of the market value of their home, just so pension promises that never made mathematical sense can be honored?
Imagine that retiring public employees move to low tax sunshine belt states while expecting those they leave behind to watch their property values crater, taxes skyrocket and services go to hell?
States like Illinois court full-scale Detroit-style collapse.
I might add that in some communities in IL, where taxes are already astonishingly high, raising the tax burden as much as seems likely could absolutely outstrip homeowners’ very ability to remit that much after-(income)-tax money. I know of plenty of people paying $7,000, $10,000 or even more each year for the privilege of owning a relatively typical (nowadays) home. How many of those owners are pulling in $250k/yr where coming up with an extra $5k for higher taxes is even doable?
Not many. States like IL will in all likelihood finish what the 2007-2009 housing bust began. By the end, vast tracts of homes will be vacant or filled with squatters because their ostensible owners were driven out by the tax man acting on behalf of a public employee pension nightmare.
Your comments today demonstrate, not surprisingly in light of past comments, your understanding of the unavoidable political, economic, and financial consequences of current trends. My belief, or perhaps hope, is that the coming collapse will be an opportunity to restore rationality, because the resources will no longer be available for fund irrationality. We’ll see. Please feel free to contribute your thoughts on that question in future comments.