Even with booming stock market, public pensions in big trouble

Moody’s Investors Service is warning states and cities that the unfunded liabilities of their public pension plans are reaching critical levels, and they will no longer accept accounting gimmicks being used to cover up the true nature of the shortfalls.
The shift in accounting rules will expose how bad the problem truly is, which Moody's believes approaches $5 trillion in unfunded liabilities, compared to the $1.7-trillion shortfall that the Federal Reserve claims.
Bloomberg:

Moody’s, which in 2013 began using a lower rate than governments do to calculate future liabilities, has estimated that the 25 largest U.S. public pensions alone have $2 trillion less than they need. Cincinnati and Minneapolis are among cities Moody’s has since downgraded.
The credit-rating company said in a report Friday that the shortfall in Dallas’s police and firefighters’ pension system will more than triple to $4.7 billion because of the accounting-rule shift.
“You’ll probably start to see a lot more negative outlooks,” said David Ashley, who helps oversee $10 billion of munis at Thornburg Investment Management in Santa Fe, New Mexico. “That’s on the horizon.”
The new reporting requirements are taking full effect just as stock and bond markets sputter as the Federal Reserve prepares to raise interest rates for the first time in nine years.
The California Public Employees’ Retirement System, the largest U.S. pension, this week said it earned just 2.4 percent last fiscal year, one-third of the annual return it projects. The California State Teachers’ Retirement System, the second-biggest fund,gained 4.5 percent, compared with its 7.5 percent goal.
The Standard & Poor’s 500 Index has climbed 3.2 percent this year, following double-digit gains for each of the last three years.
Pension systems have been a particular strain for local governments, which have less ability than states to raise taxes.
Like other cities, Houston’s revenue is limited by property-tax caps. Its three pension plans have combined unfunded liability of about $3.4 billion, according documents for a debt sale last month.
On July 2, Moody’s lowered Houston’s outlook to negative, citing the “challenges the city faces from growing pension costs and liabilities.” The Aa2 rating is the third-highest investment grade.

There may be a silver lining to this mess.  The downgrade in rating might spur state and local officials to seriously address the problem.

“Any time you have clarity around pension funding versus the provision of essential services versus tax levels, it helps generate good policy,” said Shawn O’Leary, senior research analyst at Nuveen Asset Management, which oversees about $100 billion in munis. “The market is really paying attention to these issues. The rating agencies are just catching up.”

The Illinois government is at war with public unions over their overly generous pension plans, and the two are currently in court fighting for the right to change the plans.  Even with Illinois bond rating at junk status, the unions refuse to give in, thus doubling the cost of funding the pensions.  This sucks money away from law enforcement, education, roads, and other vital spending priorities.

If Illinois is having this much trouble reforming pensions despite them being in the worst shape in the country, you can imagine how difficult it will be to turn this situation around and get public pensions under control.

Read more: http://www.americanthinker.com/blog/2015/07/even_with_booming_stock_market_public_pensions_in_big_trouble.html#ixzz3gIMgFCpW
Follow us: @AmericanThinker on Twitter | AmericanThinker on Facebook