Already Gone II: Minnesota’s Public Pensions Drop To 7th-worst Funded From 30th (Heartache Tonight?)

The Eagles said it best in their song: (Minnesota’s public pensions are) already gone.  They left out the part where Minnesota tax payers are on the hook for $33.4 billion in debt ($6,000 for every resident).

(Bloomberg) — Minnesota’s debt to its workers’ retirement system has soared by $33.4 billion, or $6,000 for every resident, courtesy of accounting rules.

The jump caused the finances of Minnesota’s pensions to erode more than any other state’s last year as accounting standards seek to prevent governments from using overly optimistic assumptions to minimize what they owe public employees decades from now. Because of changes in actuarial math, Minnesota in 2016 reported having just 53 percent of what it needed to cover promised benefits, down from 80 percent a year earlier, transforming it from one of the best funded state systems to the seventh worst, according to data compiled by Bloomberg.

“It’s a crisis,” said Susan Lenczewski, executive director of the state’s Legislative Commission on Pensions and Retirement.

The latest reckoning won’t force Minnesota to pump more taxpayer money into its pensions, nor does it put retirees’ pension checks in any jeopardy. But it underscores the long-term financial pressure facing governments such as Minnesota, New Jersey and Illinois that have been left with massive shortfalls after years of failing to make adequate contributions to their retirement systems.

The Governmental Accounting Standards Board’s rules, ushered in after the last recession, were intended to address concern that state and city pensions were understating the scale of their obligations by counting on steady investment gains even after they run out of cash — and no longer have money to invest. Pensions use the expected rate of return on their investments to calculate in today’s dollars, or discount, the value of pension checks that won’t be paid out for decades.

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The guidelines require governments to calculate when their pensions will be depleted and use the yield on a 20-year municipal bond index to determine costs after they run out of money.

The Minnesota’s teachers’ pension fund, which had $19.4 billion in assets as of June 30, 2016, is expected to go broke in 2052. As a result of the latest rules the pension has started using a rate of 4.7 percent to discount its liabilities, down from the 8 percent used previously. Its liabilities increased by $16.7 billion.

The worsening outlook for Minnesota is in line with what happened nationally. Pension-funding ratios declined in 43 states in the 2016 fiscal year, according to data compiled by Bloomberg. New Jersey had the worst-funded system, with about 31 percent of the assets it needs, followed by Kentucky with 31.4 percent. The median state pension had a 71 percent funding ratio, down from 74.5 percent in 2015.

While record-setting stock prices boosted the median public pension return to 12.4 percent in 2017, the most in three years, that won’t be enough to dig them out of the hole.

Only eight state pension plans, in Minnesota, New Jersey, Kentucky and Texas, used a discount rate “significantly lower” than their traditional discount rate to value liabilities, according to a July report by the Center for Retirement Research at Boston College.

“Because of that huge drop in the discount rate under GASB reporting, their liabilities skyrocket,” said Todd Tauzer, an S&P Global Ratings analyst. “That’s why you see that huge change compared to other states.”

In Minnesota lackluster returns and years of shortchanging have taken a toll. The state’s pensions lost 0.1 percent in fiscal 2016.

But other factors also helped boost Minnesota’s liabilities: Eight of Minnesota’s nine pensions reduced their assumed rate of return on their investments to 7.5 percent from 7.9 percent, while three began factoring in longer life expectancy.

Minnesota funds its pensions based on a statutory rate that’s lower than what’s need to improve their funding status. School districts and teachers contribute about 85 percent of what’s required to the teacher’s pension, according to S&P Global Ratings.

“It’s woefully insufficient for the liabilities,” said Lenczewski, the director of Minnesota’s legislative commission on pensions. “You just watch this giant thing decline in funding status.”

Minnesota has officially joined other states in promising more benefits than can be delivered.

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While the public pension crisis isn’t a heartache tonight, it will in the near future. Add the growing debt issued to keep public pension funds going, and the amount of the tab for other government spending like The Federal debt (currently $165,819 per taxpayer) and unfunded liaibilities such as Medicare and Social Security ($899,500 per taxpayer) and we have a party.

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Already Gone! US Public Pension Funds As Low As 31% Funding Ratio (New Jersey, Kentucky and Illinois The Worst)

Three states in the US are below 40% in terms of funding ratio: New Jersey, Kentucky and Illinois. And the funding ratio has deteriorated in 43 states. And the funding ratio deteriorated in each of the worst 15 states.

(Bloomberg) –The news continues to worsen for America’s public pensions and for the people who depend on them. The median funding ratio—the percentage of assets states have available for future payments to retirees—declined to 71.1 percent in 2016, from 74.5 percent in 2015 and 75.6 percent in 2014. Only six states and the District of Columbia have narrowed their funding gaps; New York did best, going from 90.6 percent to 94.5 percent. D.C. is now overfunded.

By contrast, New Jersey, Kentucky and Illinois continue to lose ground and now have only about one third of the money they need to pay retirement benefits. And three states had double-digit declines in their pension funding ratios in the past year: Colorado, Oregon and Minnesota—though some of this can be attributed to actuarial changes in the way pension liabilities are calculated.

We’ve ranked the states by the size of their funding gap. The lower the funding ratio, the more money the state has to come up with to meet its pension obligations.

Public employee pension funding ratio by state, 2016 figures

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The Eagles sang it best: these pensions are “Already Gone!”

Taxpayers will ultimately be called upon to honor the retirement benefits promised by Federal and State governments unless the retirement benefits can somehow be dialed-back.

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Feeding The Beast: Why Trump and Congress Should Leave The Mortgage Interest Deduction Alone

President Trump and Congress are once again tinkering with the US tax code (rather than just trashing the entire thing and creating something simple like a flat-tax system). There will always be winners and losers when the tax code is altered. This time the target is middle-class homeowners.

Begin the simple premise that the Federal government wants more of your tax dollars to spend. The Federal government is already spending at almost a rate of 2x over current tax receipts.

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And with “mandatory” expenditures expected to keep rising (and discretionary spending expected to decline), the will be increased pressure to find tax revenue from somewhere (or someone) to feed the Federal goverment’s ravenous spending.

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What is in their sights? The mortgage interest deduction (MID) for qualified secured debt. There have been calls by a number of people to get rid of the MID, such as Vice President Pence’s Chief Economist Mark Calabria (formerly of the Cato Institute).

Possilities include Calabria’s call for scrapping the MID, lowering the eligibility from $1 million to $500,000 (allegedly impacting fewer than 6 percent of mortgage holders nationally—and converting the deduction into a credit, allowing an additional 15 million low and moderate income homeowners to get a “much-needed tax break”).

Low and moderate income households are often better-off renting given the standard deduction. And low and moderate income households may not fully benefit from the MID if their joint income is less than $77,714. Households earning less than $77,714 but more that $38,173 pay only 10.47% of total personal taxes paid (in 2014, according to the National Taxpayers Union Foundation). And less than $38,173 pay only 2.75% of total personal taxes paid.

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It’s the most productive members of the middle class that are forced to pay for subsidies in Obamacare and Social Security already. Removing or limiting the MID amounts to a new middle class tax on those who can’t afford to pay off their mortgage, unlike the political elite in both parties who can continue to get the full tax benefit of home ownership by eliminating mortgage debt.

And what about households that purchased a home that are part of the 6% of the population that have a mortgage balance in excess of $500,000? It will produce a major hit of their after-tax income and likely lead to reduction in home prices, particularly in the suburbs of major US cities. Congress could always grandfather in current homeowners, but the number of households trying to purchase those homes would decline.

Homeownership rates are already at early 1960s levels, back to the days of President Lyndon B. Johnson’s “Great Society” social programs. Now the Trump Administration wants to redistribute the advantages of homeownership AGAIN.

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And remember that Canada does not allow MID for homeowners, yet has had explosive home price growth, so thinking that removing the MID will slow the growth of home prices across the board is wishful thinking.

As Kevin Villani wrote in American Banker, “But the “tax loophole” is not the mortgage interest deduction, it’s the failure to tax “imputed rent” from homeownership, i.e., the value of rental services the homeowner receives — done only in Belgium, the Netherlands and Switzerland. This has never been seriously considered in the U.S. because the political, conceptual and methodological problems of taxing farmers for consuming their home grown food — as the U.S. has done — are much greater for homeowner imputed rent.”

And since owners of rental properties get to deduct mortgage interest (as well as depreciation for tax purposes), taking away the MID for households is flat out unfair.

But as I mentioned earlier, Washington DC has to feed “the beast” and its ever-growing expenditures. The simple solution would be to cut Federal spending.

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State and Local Pensions Average 0.6% Return In 2016 (Despite 7.6% Return Assumption and Chronic Underfunding)

The US Federal government is spending at a fast and furious rate. US Federal Spending is rising at a staggering $428,253,120 per day while US Federal TAX Revenue is only rising at $129,857,760 per day. That is almost a ratio of 2x tax revenue.

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Meanwhile, US public debt is skyrocketing.

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While the Federal government further indebts citizens, the US personal savings rate in declining at a rate of 24% YoY.

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Then we have the underfunded pension funds of American, both private and public.  Public pension funds earned a dismal 0.6% in 2016

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According to the Center for Retirement Research at Boston College. public pension funds are also underfunded at 67.9% as of 2016.

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Rotten returns coupled with chronic underfunding. Who are those guys?

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Intel and Delta Airlines Lead US In Underfunded Pensions (The Illlinois of Corporate Pensions)

Its not only State pension funds that are woefully underfunded (like Illinois at 43.4%), many corporate pension funds are worefully underfunded as well. 

The biggest offenders? Tech giant Intel and Delta Airlines (that includes the former Northwest Airlines, Western Airlines and parts of Pan American airlines) are the two most underfuded penions at 46.6% and 49.4% underfunded, respectively. So, Intel and Delta Airlines are the Illinois of the corporate pension world.

People who rely on their company pension plans to fund their retirement may be in for a shock: Of the 200 biggest defined-benefit plans in the S&P 500 based on assets, 186 aren’t fully funded. Simply put, they don’t have enough money to fund current and future retirees. The situation worsened for more than half of these funds from fiscal 2015 to 2016. A big part of the reason is the poor returns they got from their assets in the superlow interest-rate environment that followed the financial crisis. It’s left a hole of $382 billion for the top 200 plans.

Of course, the percentage of workers covered by traditional defined benefit plans—those that pay a lifetime annuity, often based on years of service and salary—has been declining for decades as companies shift to defined contribution plans such as 401(k)s. But each time a pension plan is terminated, canceled or altered, thousands of workers are affected.

Last month, the 70,000 participants in the United Parcel Service Inc. pension plan learned they won’t earn increased benefits if they work after 2022. Late last year DuPont Co. announced it would stop making payments into its pension plan for 13,000 active employees, and Yum! Brands Inc. offered some former employees a lump-sum buyout to offload some of its pension liabilities. General Electric Co. has a major problem. The company ended its defined benefit plan for new hires in 2012, but its primary plan, covering about 467,000 people, is one of the largest in the U.S. And at $31 billion, GE’s pension shortfall is the biggest in the S&P 500.

So, it isn’t just State and Local government pension plans that are woefully underfunded. Corporate America.

What happens when the global central banks stop their monetary nonsense?

Just like the dinosaurs, pension fund recipients face a bleak future.

Debt Star! Trump May Need Obama’s Secret Debt Plan, Worrying Markets

So, President Obama had a secret plan to default on the US public debt all along. And President Trump may have to use it.

(Bloomberg) Deep within the Treasury Department sits a once-secret plan written by the Obama administration that could lead to the first-ever default on U.S. debt. Bond traders are worried that Donald Trump’s Treasury secretary may have to use it.

The U.S. government will reach its statutory limit on borrowing some time in October, the Congressional Budget Office estimates. The Trump administration has asked Congress to raise the ceiling before then, but it is running into the same complications the Obama White House encountered: lawmakers, mostly Republicans, who want to use the debt limit as leverage for controversial policy changes.

Treasury Secretary Steven Mnuchin has said there are “plans and backup plans” to keep the government solvent through September. Bond traders suspect he is referring to preparations made in 2011 in case the Obama administration had to prioritize payments on government securities over other obligations. The Treasury chief got fresh hope that Congress may raise the debt limit before leaving for its August recess after Senate Majority Leader Mitch McConnell delayed the break by two weeks.

Yes, Congress and the US Treasury has a debt problem. Explosive debt, thanks to chronic spending by Congress, will really be facing a problem if Treasury rates rise.

Healthcare spending (such as Medicare) is growing exponentially.

Leading to a CBO forecast of over $30 trillion in the near future.

And then we have the massive underfunding of government pension plans which will require bailouts by taxpayers. Look at Illinois, for example at 40% funded.

The good news is that markets aren’t pricing in excessive debt … yet.

With Senators like Maria Cantwell running things in Congress, how bad can it be?

Moody’s Down Grades Hartford CT As Wage-to-Cost Of Living Gap Drives Household Debt Growth

Despite what is touted by the Federal Reserve (debt is good!), states and municipalities are drowning in debt. As are US households.

Moody’s Investors Service has downgraded the City of Hartford, CT’s general obligation debt rating to B2 from Ba2. The outlook is negative.

The Hartford General Obligation bond is at 6.971% based on $82.768.

The rating was placed under review for possible downgrade on May 30, 2017. The par amount of debt affected totals approximately $550 million.

The downgrade reflects the increased likelihood that the city will pursue debt restructurings to address its fiscal challenges. Last week, the city hired a law firm to advise it on debt restructurings. City management has made public statements indicating they will need to have discussions with bondholders about restructuring its debt regardless of the outcome of the state’s biennial budget as debt service costs escalate sharply leading to budget deficits over the next five years.

The rating also reflects the city’s challenging liquidity outlook in the current fiscal year and weak prospects for achievement of sustainably balanced financial operations. The city currently projects a fiscal 2018 deficit of $50 million and is seeking incremental funding from the state to close that gap. The state has not yet adopted a budget specifying aid for the city for the fiscal year beginning July 1. Even if the state’s biennial budget allocates sufficient funds to address the current and following years deficits and create a fiscal oversight structure, the budget is still unlikely to provide a pathway to structural balance over the longer term. City deficits, partially attributable to escalating debt service costs, are projected to grow to $83 million by 2023, making the city’s weak financial position vulnerable to further deterioration.

Rating Outlook

The negative outlook reflects the possibility that the city will restructure its debt in a way that will impair bondholders. The outlook also incorporates uncertainty over state funding in the current fiscal year and beyond and the associated impact on reserves, liquidity and the ability to achieve sustainably balanced operations.

That is the City of Hartford that is in trouble due to excessive debt relative to tax receipts. But what about US households?

The rising cost of living relative to wage growth is leading to excessive debt use to maintain a standard of living.