Public pensions will play a big part in the next financial crisis. From Patrick Watson at mauldineconomics.com:
Here’s a loaded question for you: “What could go wrong?”
In some contexts, it can express mistaken confidence, as in, “Sure I’ll put my hand between that crocodile’s jaws. What could go wrong?”
Investors should ask the same question before entering a position. “What risks am I taking with this trade? What could go wrong if it doesn’t go as planned?”
But here’s the problem: What if you never think to ask the question because you have no idea you’re in that trade?
And guess what—this is your problem if you are a taxpayer anywhere in the US.
Photo: DWS via Flickr
Part of my job is helping John Mauldin with the research for his Thoughts from the Frontline letters. Regular readers know John isn’t a doom-and-gloom guru. He’s optimistic on most of our big challenges.
Except for a few things—like the brewing state and local pension crisis.
The more John and I dig into it, the worse it looks. We have both spent many hours trying to find any good news or a silver lining, without success.
All over the US, states, cities, school districts, and other governmental entities have promised their workers generous retirement benefits, but haven’t set aside enough cash to pay what they will owe. At some point, perhaps soon, either they will have to cut benefits to retirees or stick taxpayers with a huge bill, or both.
What else could go wrong? Plenty.
Photo via Flickr
Healthcare Goes on the Books
Local governments often give retired police officers, firefighters, teachers, and other workers a pension plus healthcare benefits.
Healthcare is expensive even in the best circumstances. Imagine your health insurer had promised to cover your medical expenses but hadn’t set aside any cash to pay for it.
Remarkably, that’s exactly what has happened. Governments currently disclose their retiree healthcare liabilities only in footnotes to their financial statements. Many have saved little to no money to cover those future expenses.
That’s about to change.
Starting in 2018, the Governmental Accounting Standards Board—the source of generally accepted accounting principles (GAAP) for state and local governments—will force officials to record healthcare liabilities on their balance sheets. Pew Charitable Trusts estimates the national shortfall will add up to $645 billion.
To continue reading: What Could Go Wrong? (For Public Pensions, More Than You Know)