Politicians have been buying votes with pension promises to government employees for decades. Now, in Illinois and other states, the bill is coming due. From John Rubino at dollarcollapse.com:
Somewhere back in the depths of the 20th century, a bunch of governors, mayors, and public sector union leaders got together and cooked up one of history’s greatest financial scams. They would offer teachers, cops, and firefighters extremely generous pensions but would avoid raising taxes to fund the resulting future obligations. Grateful workers would vote to re-elect their benefactors, while taxpayers would appreciate the combination of excellent public services and low taxes.
The beauty of the scheme flowed from its demographics: Most of the original public sector workers were young and therefore decades away from retirement, so the crime wouldn’t be discovered until long after the architects retired rich and revered.
Now, however, those baby boomer workers are retiring and the scam is revealed for all to see. Even in the absence of a pandemic lockdown, mass defaults on state and city obligations would be inevitable in the coming decade. But with the lockdown, they’re coming next year.
So what do the worst offenders do? What they’ve always done, of course, which is to look for ways to paper over the mess for one more election cycle. Illinois is the poster child for state financial mismanagement, with unfunded liabilities that have grown from virtually nothing to $137 billion in just the past two decades.
California’s public pension are burning forest fire-size holes in California’s budgets. From MN Gordon at economicprism.com:
Hot dry winds have returned to the land of fruits and nuts. After baking away all summer long in the blistering sun, the dense sage and chaparral covering the coastal hillsides and canyons and the inland mountain forests are dry and toasty. Vegetated areas are a giant tinderbox.
What happens next is as predictable as night follows day. Just one spark – from a downed powerline or a backfiring semi-truck – and the whole thing conflagrates into a blistering windblown wildfire. The Golden State goes up in smoke. The sky turns to an orange haze; the sunsets are magnificent. And ash sprinkles down and coats the pavement with residue.
Of course, this happens every year. And every year is the worst year ever. The fires rage until the mild winter weather arrives. Then everyone seemingly forgets the fires ever happened…until the mudslides.
Indeed, California is a whacky and wild place. The Governor’s an absolute loon who fancies himself a leading presidential candidate for the 2024 election. State and local governments are largely socialist. The general populace generally wants first rate infrastructure, at a second rate price. And nearly half of all U.S.’s homeless people live here.
Yet the real story with California. The story only geeks and dweebs will tell. Is a story of its state and local governments. It’s a story that’s also being written in a state or city near you. The story has nothing to do with wildfires, per se. But it does have to do with conflagration.
This is the story of an army of public servants. And the promise of retirements that are unaffordable. More so than the wildfires ravaging the state are the wildfires ravaging the big pension fund. This is the story of grand promises that must be broken. And the painful level setting that comes with it.
New Jersey politicians keep raising taxes as New Jersey residents keeping leaving the state and the politicians profess to see no connection between the two. From Tyler Durden at zerohedge.com:
A new tax on millionaires, a 22.5% gas tax hike (bringing the total increase to 250% in 4 years), and now a tax on high frequency trades: it is becoming obvious to most – except perhaps the state’s democratic leadership – that New Jersey is now actively trying to drive out its tax-paying population and top businesses with a series of draconian measures to balance its deeply underwater budget, instead of slashing spending. The state-imposed limitations on commerce, mobility and socialization due to the covid pandemic have also not helped. And in case it is still unclear, the trend of New Jersey’s ultra wealthy residents fleeing for more hospitable tax domiciles which started with David Tepper years ago, is now spreading to members of the middle class.
According to the latest data from United Van Lines and compiled by Bloomberg, people have been flooding into Vermont, Idaho, Oregon and South Carolina, eager to flee such financially-challenged, high-tax, protest-swept, Democrat-controlled states as Connecticut, Illinois and New York. But no other state has seen a greater exodus than New Jersey, where out of every 10 moves, 7 have been households leaving the state, or nearly three times as many moved out than moved in.
On the opposite end were bucolic, pastoral states such as Vermont and Idaho, which have seen between 70% and 75% of all inbound moves.
The last thing that the world’s many underfunded pensions need is bear markets in either stocks or bonds. Can central banks save their bacon? From Tyler Durden at zerohedge.com:
The Organization for Economic Co-operation and Development (OECD) recently published a report showing how pension funds in OECD countries recorded a massive loss of approximately $2.5 trillion during the stock market meltdown in February through late March. Shortly, after that, central banks intervened with monetary cannons to rescue stock markets and other financial assets to avoid pension returns from going negative.
The spread of COVID-19 worldwide and its knock-on effects on financial markets during the first quarter of 2020 are likely to have reversed some of these gains. Early estimates suggest that pension fund assets at the end of Q1 2020 could have dropped to USD 29.8 trillion, down 8% compared to end-2019 [or about a $2.5 trillion loss].
The drop in pension fund assets is forecast to stem from the decline in equity markets in the first quarter of 2020. Returns, inclusive of dividends and price appreciation, were negative on the MSCI World Index in the first quarter of 2020 (-20%), and between -11% and -24% on the MSCI Index for Australia, Canada, Japan, the Netherlands, Switzerland, the United Kingdom, the United States.
An increase in the price of government bonds that pension funds own could partly offset some of the losses that pension funds experienced on equity markets in Q1 2020. Some Central Banks, such as the Federal Reserve in the United States, cut interest rates in 2020 to support the economy. The fall in interest rates may lead to an increase in the price of government bonds in the portfolios of pension funds as the yields of newly issued bonds decline. – OECD
Bloomberg’s Lisa Abramowicz pointed out in a tweet, “this report [referring to the OECD report] shows the massiveness of pension assets & points to why central banks are tethered to bailing out markets: social infrastructures depend on their not going down too much.”
Public sector unions have a lot of municipal governments by the balls. That may change as their pensions go bust. From Paul Rosenberg at theburningplatform.com:
I try to avoid all things political, but the recent mayhem required me to give it some attention. And I couldn’t help noticing that almost no one is addressing a fundamental factor in most of it: The unions.
Whether we like or dislike unions (I have mixed experiences, as I suppose most people do), they are a major factor in our recent events, and bear some attention. And so I’ll get the ball rolling.
The Police Unions
A few people have mentioned police unions following the sadistic murder of George Floyd, but let’s be clear on this: All the cops who kill people then get their jobs back are so privileged because of their unions. (And this, by the way, is actual privilege.)
California lawmakers are trying to make it look like they’re cutting expenses so they can run to Washington for a bailout. However, they’re not touching the biggest expense—state pensions—which tells you all you need to know about the sincerity of their effort. From John Rubino at dollarcollapse.com:
Just a few months ago, California was running surpluses and spreading the wealth around — at least to its affluent voters and public sector employees — as if the good times were here to stay.
Fast forward to the present and it’s all over. Tech stock IPOs – a huge source of capital gains tax revenue for the home of Silicon Valley – have evaporated. Those “unicorn” companies – not yet public but worth over a billion dollars each – are doing “down rounds” that value them as the risky start-ups most of them are. The formerly booming housing market has ground to a halt. And thousands of service industry businesses like restaurants and nightclubs have closed permanently.
But the state government still has to pretend to balance its books, so now comes the tragicomedy of negotiations between the governor and state legislators over where to find the needed $50+ billion. Here’s how the Associated Press covers it in an article bafflingly titled California lawmakers agree to close $54.3 billion budget gap:
Taxes cannot be raised high enough to pay the total state and local government debt and promised pension and medical benefits in Illinois—the tax donkeys will flee. From Ted Dabrowski and John Klingner at wirepoints.org:
Illinois’ combined state and local pensioner debts have reached absurd levels. When divvied up between Illinois’ households, the “shadow mortgage” each one is on the hook for now totals hundreds of thousands of dollars per household, if not more, depending on who politicians target to repay those debts.
As Gov. J.B. Pritzker and other lawmakers try to extract that kind of money from Illinoisans, they’ll fail, for the simple reason that the amounts have become overwhelming. Too many households don’t have the means, while others won’t stick around to pay for it. They’ll just leave.
And as Illinoisans leave, the shadow mortgage on those who remain will jump. The crisis will only deepen.
Slashing health-care benefits is going to be a powerful trend. From Tyler Durden at zerohedge.com:
Pension-fund managers from across the US stopped to take note of an unsettling development in their industry, and perhaps thought to themselves: ‘There but for the grace of God go I’.
For the first time in years, a major public pension system has slashed benefits for retirees: The Ohio Public Employees’ Retirement System voted last week to cut health care benefits provided to the pension’s current and future retirees beginning in 2022 to try and prevent the fund from plunging into insolvency in the not-too-distant future.
It’s just the latest reminder that America’s ‘pension timebomb’ isn’t as far off into the future as many retirees, investors and public officials would like to believe.
“There is no available funding for health care,” a report from the board said. “All of the employer contribution[s] must be allocated to pension funding until that funding improves. Based on current projections, no funding will be available for health care for 15 or more years.”
Is the repo crisis prelude to market rejection of US government debt at anything close to current interest rate levels such that the Federal Reserve will have to monetize an ever-increasing portion of that debt? Dmitry Orlov thinks so, and he could well be right. From Orlov at cluborlov.blogspot.com:
In processing the flow of information about the goings on in the US, it is impossible to get rid of a most unsettling sense of unreality—of a population trapped in a dark cave filled with little glowing screens, all displaying different images yet all broadcasting essentially the same message. That message is that everything is fine, same as ever, and can go on and on. But whatever it is that’s going on can’t go on forever, and therefore it won’t. More specifically, a certain coal mine canary has recently died, and I want to tell you about it.
It’s easy to see why that particular message is stuck on replay even as the situation changes irrevocably. As of 2019, 90% of the media in the United States is controlled by four media conglomerates: Comcast (via NBCUniversal), Disney, ViacomCBS (controlled by National Amusements), and AT&T (via WarnerMedia). Together they have formed a corporate media monoculture designed to most effectively maximize shareholder value.
As I wrote in Reinventing Collapse in 2008, “…In a consumer society, anything that puts people off their shopping is dangerously disruptive, and all consumers sense this. Any expression of the truth about our lack of prospects for continued existence as a highly developed, prosperous industrial society is disruptive to the consumerist collective unconscious. There is a herd instinct to reject it, and therefore it fails, not through any overt action, but by failing to turn a profit because it is unpopular.”
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