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Friday, October 31, 2008 10:28 AM

Pension Time Bomb Explodes In US and Canada

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The ticking time bomb of overpromised, underfunded public pension plans has finally exploded. Here are a few headlines to consider. My comments appear at the end starting with the bold heading “Future Expectations Too High”

Pension Fund of San Diego

Pension's loss may add to San Diego's money woes

SAN DIEGO, Oct 29 (Reuters) - The pension fund of San Diego, California, may have lost as much as $1 billion of its $5 billion in assets recently, potentially adding to the financial challenges weighing on the state's second-largest city.

According to San Diego City Attorney Michael Aguirre, San Diego's city pension fund for nearly 20,000 active and retired employees has lost at least $700 million between Dec. 30, 2007, and Sept. 30 -- before the worst of the stock market's recent crash.
Colorado PERA Fund

PERA shares stocks' pain

The largest pension fund for state and local public employees lost $10 billion in market value through mid-October, raising the specter of higher contribution rates or lower benefits in coming years if markets don't improve rapidly.

Colorado PERA, which covers 413,000 employees and retirees, saw its assets plummet from $41 billion at the beginning of the year to $31 billion on Oct. 15.
Illinois Municipal Retirement Fund

Economic crisis hits IMRF, tax increases might be needed
Illinois taxpayers may soon be called on to bail out what is arguably the best-funded public pension plan in the state thanks to $3.6 billion in fund losses caused by the spiraling economy.

IMRF began 2008 with one dollar in the fund for every dollar promised to present and future retirees in the system. By the end of September, it only had 79 cents for every dollar promised. IMRF has no rainy day fund to recoup losses. Thus, more tax dollars are needed. The questions are how much and when.
Pension Crisis Looming In Canada

Pension Crisis Looming In Canada

The end of December represents a massive, looming crisis for some Canadian companies this year. Companies due to have new valuations at the end of this year are at risk of having to fund their pension plans based on severely deflated stock prices, triggering large cash contributions at a time of tight credit, even if markets recover in 2009, industry analysts say.

In the current economic climate, there is a need for governments to look at pension funding rules – a move Finance Minister Jim Flaherty said yesterday Ottawa is considering.

One option would be to give companies more time to fund pension shortfalls. Under current rules, they generally have five years. Some companies want that to be increased to 10 or 15 years. This solution assumes stock markets will recover over that longer time frame. [My comment: This is the LTBH and pray approach. Ask Japan how well that option worked.]
Los Angeles County public-employee pensions

Double whammy: Bill for public pensions seems unfair
At a time when most workers are watching their retirement savings get swallowed up by falling stock prices, it feels like a cruel trick to learn that taxpayers may have to spend $1 billion in 2010 to prop up Los Angeles County public-employee pensions.

Government watchdogs have been warning for years that generous public-employee pension packages would consume more and more taxpayer dollars. Now, with the nation's stock market in the tank and investments worth significantly less than a few months ago, taxpayers are going to have to foot the bill to keep public-employee pensions fully funded in the coming years. And it could be a very big bill.
Fresno County California

Fresno County calls pensions secure
Wall Street's volatility has cost Fresno County's retirement system nearly a third of its value over the past year. In the past year, the county's $3 billion pension system has lost $865 million in market value. The plan has declined in value 29% over the past year and now has about $2.13 billion in assets, Retirement Administrator Roberto Pena said.

On Tuesday, Pena told county supervisors that while the county's retirement plan has lost money as a result of stock market declines, it should recover. "We are obviously concerned about it, but we are here for the long term, and we fully expect the market to come back," he said.
New York State Pension Fund

NY state pension fund down 20 pct since April
NEW YORK, Oct 28 (Reuters) - New York state's pension fund has tumbled 20 percent in value since April, a steep fall though not as big as the 30 percent decline suffered at the end of the dot-com era.

Like many other states, New York and lots of municipalities are suffering from lower tax revenues due to the economic slowdown, meaning higher contribution rates could hit them hard.
California CalPERS may need bailout

CalPERS may need bailout

With stock market losses topping $50 billion since July 1st, CalPERS is on track to needing help in just two years if the nose dive continues on Wall Street. Taxpayer groups are upset that Californians have to foot the bill when many employers have moved away from pension plans.

"This is adding insult to injury. At the same time we're seeing our own 401k's get hit, we're on the hook to make up the shortfalls for public employees who are guaranteed their full pensions without any risk," said Jon Coupal, from the Howard Jarvis Taxpayers Association.

Cities and counties also use CalPERS. Many can barely afford to keep services going, let alone contribute more to retiree benefits. Pension costs can hurt a public agency's budget. They led to a big scandal in San Diego and helped push the city of Vallejo into bankruptcy.
US pension funds face big losses

US public pension funds face big losses
In the nine months to the end of September, the average state pension fund lost 14.8 per cent, according to Northern Trust, a fund company. The loss has grown since, as financial markets slumped further in October. The previous highest loss for state funds was 7.9 per cent for the full year in 2002.

State and local pension funds comprise a patchwork of 2,700 funds that manage $1,400bn on behalf of 21m employees, including teachers, firefighters and other municipal workers. About 40 per cent are underfunded, meaning that they would not be able to pay the future pensions that employees have been promised.

Critics say the underfunding is worse than official data show. The calculation is based on an assumption of annual returns of 8 per cent, but few funds will reach that in the next few years.
Future Expectations Too High

My Comments:

The above is just a random sampling of hundreds of articles about pension plan woes. 40% of pension plans are underfunded and that assumes future returns of 8% annually. Good luck with that.

Now think how bad things will be if the S&P drops to 600. Go one step further and think about what might happen if the US heads into an economic slump similar to Japan. For a quick review please see S&P 500 Crash Count Compared To Nikkei Index.
Nikkei Monthly Chart

click on chart for sharper image
If that chart seems far fetched for US equities, I assure you it's not. Click on the above link for a fundamental and technical explanation of why something like that might happen.

Taxpayer Backlash Brewing

A huge taxpayer backlash against overly generous public pension plans is brewing. Boomers with destroyed stock funds and IRAs are not going to want to have taxes increased so that public workers can get 90% of their salaries for the rest of their lives during retirement.

Vallejo California went bankrupt over benefits earlier this year. Expect to see more cities and counties take that action if the stock market continues to decline from these levels.

Mike "Mish" Shedlock
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