Fair Use. Art: Alex Ross. Source: Wikipedia
A lot of politicians and State financial managers would probably pick invisibility. That’s what they’ll need, or want to use, on their State financial problems, especially their pension problems.
For years we’ve heard of “looming pension problem.” Ever since the 1950s, analysts have warned of the moral hazard associated with public pensions. Public officials can garner current electoral support by promising expanded future benefits. The votes come today, the bill doesn’t come due for another 25-30 years. And the promised day of reckoning never seems to get here. Either the stock market rallies or economic growth is higher than expected or something else intervenes to stave off disaster. Eight years ago Meredith Whitney predicted “Hundreds of billions” of imminent losses in Muni bonds. But that didn’t happen, either.
People are inured to the boy-who-cried-wolf scolds who keep calling out a disaster that never seems to get here. We need to distinguish between actuarial problems and cash problems. Actuarial issues are real, but they aren’t here yet. Calvin Coolidge said that if you see ten problems coming at you on the road, chances are that nine of them will run into the ditch before they get to you. That’s an actuarial problem: a potential issue that is headed your way.
But cash problems are real and here. Puerto Rico has a cash problem. That’s why it’s under a special, non-elected manager. Detroit had a cash problem. That’s why it went through Chapter 9 Bankruptcy proceedings. New Jersey has an actuarial problem that’s on its way to being a cash problem: a $78 billion state pension fund, with pension liabilities of $280 billion, 27% funded. It’s important to note that State pension issues are local and specific. Connecticut’s problems aren’t South Dakota’s problems. South Dakota is 97% funded, and has no responsibility for New Jersey’s promises. New Hampshire, by the way, is 57% funded. Closer to New Jersey than to South Dakota. But at least we’re funding our pensions – our problem isn’t getting worse. We’ve been 50-something percent funded for a while.
Source: Pew Charitable Trusts
You can whistle past the graveyard and kick the can down the road, but eventually, these promises come due. The only question is, how soon. For some states, a cash problem isn’t very far away.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”