Reform Party?

Is the world going sane?

The Federal judge in Detroit’s bankruptcy case ruled that pension rights are contract rights. The legislature in Illinois just passed a mega pension reform. What’s next? Congress reforming Social Security?

It’s no secret that the US has a pension problem. Under current law, States and cities have underfunded their retirement benefits by about $700 billion, by some estimates. New Hampshire’s gap alone is $3.2 billion, bigger than Minnesota’s. And pension obligations are at the heart of Detroit’s bankruptcy filing. The City is$18 billion in debt—most of which are pensions. While the average pension is modest, there’s $25,000 in debt per resident—too much!

But the bulk of the problem isn’t current payments, it’s future liabilities. Since pensions can now be negotiated, the judge ruled that the Michigan constitution—which protects pensions, as does Illinois’—is not a financial suicide pact. There’s no reasonable way for the city to dig its way out of the hole it is in. Bankruptcy is the only option.

And Illinois seems to have seen the light on pensions, too—or at least, a glimmer. If it survives its own court challenge, the reform will go a long way towards reducing the State’s $83 billion unfunded liability—the worst in the nation.

With all this good news breaking out, I’m feeling lucky. Maybe I should go buy a lottery ticket. Or some Detroit bonds—which could be considered the same thing.

Douglas R. Tengdin, CFA

Chief Investment Officer

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