U.S. munis face $2 trillion in unfunded pension costs

[screwball]

U.S. munis face $2 trillion in unfunded pension costs

(Reuters) - U.S. states and localities have run up more than $2 trillion of unfunded pension liabilities, Moody's Investors Service said on Monday, citing data on plans offered by 8,500 local governments and over 14,000 individual entities.

The Wall Street credit agency said that according to its estimate, the total liabilities for fiscal 2010 were more than three times the amount reported by local governments.

"Pension liabilities are widely acknowledged to be understated," Moody's Managing Director Timothy Blake said in a statement. Most states end their fiscal years on June 30.

Investors in the $3.7 trillion municipal bond market are focused on whether states, counties, cities and towns can afford the pension benefits granted public workers.

The rising cost of public pensions has strained finances for cities around the country. Stockton, California, which last week became the biggest U.S. city to file for Chapter 9 protection, plans to cut employee compensation and retiree benefits by $11.2 million to help close its deficit.

Public pension benefits have become a flashpoint in elections around the country.

Since 2009, at least 43 states have tried to rein in costs. But many states spread the savings out over long periods.

Moody's is seeking public comment through the end of August on four major changes it plans to make in how it treats pension liabilities. The negative impact of the modifications - which will start taking effect in the fall - will hit local governments such as counties, cities and towns, as well as school districts, most heavily - unless Moody's significantly alters them after reviewing the public comments.

"Moody's expects the proposed pension adjustments to result in rating actions for local governments where the effect is outsized relative to their rating category, but no state rating changes are expected solely as a result of pursuing the adjustments now under consideration," it said.

Cities and counties are likely to see downgrades, Blake said.

That is partly because some liabilities in state pension plans that also cover localities will be allocated to the specific local governments. Currently, some of those liabilities might not be broken out by the individual city, town or school that is part of a state plan.

The liabilities of all public pension funds, for both states and localities, could leap, as Moody's will also consider a revision of the rate used to calculate them.

Currently, many public pension plans use the same rate - often 7.5 percent to 8.25 percent - for the assumed investment rate of return and the discount rate used to calculate liabilities.

Moody's would cut the discount rate to that of a high-grade long-term corporate bond index - which was 5.5 percent in 2010 and 2011.

The actuarial accrued liability would climb about 13 percent for each percentage point difference between 5.5 percent and whatever discount rate was used.

For example, a plan with a $10 billion liability based on an 8 percent discount rate would see that amount leap to $13.56 billion if a 5.5 percent rate were used.

Asset-smoothing, which enables pension plans to spread losses or gains over a number of years, will be abolished. Instead, pension fund assets will be valued based on the market value or the fair value on the actuarial reporting date, Moody's said.

Finally, yearly pension contributions will be adjusted on a common amortization period and in line with the three other modifications, Moody's said.

Some of the changes implemented by Moody's are in line with the new accounting rules for pension funds approved at the end of June by the Governmental Accounting Standards Board. (Reporting by Joan Gralla; Editing by James Dalgleish, Leslie Gevirtz and Dan Grebler)

[Deleterious]

They can just print...Oh wait, these people are actually screwed.

[ballmich]

Currently, many public pension plans use the same rate - often 7.5 percent to 8.25 percent - for the assumed investment rate of return and the discount rate used to calculate liabilities.

CalPers, one of the largest public pensions in the US, uses 7.75%. These rate of return assumptions are ridiculously too high, which just futher masks the insolvency of the muni pensions.

The 10-year treasury pays about 1.5%. To somehow come up with 6.25% of additional return, they have to take substantial risk. That will work out some years. But over the long haul, these pensions are facing severe unfunded liabilities, massive asset erosion, and just plain and simple insolvency.

[screwball]

CalPers, one of the largest public pensions in the US, uses 7.75%. These rate of return assumptions are ridiculously too high, which just futher masks the insolvency of the muni pensions.

The 10-year treasury pays about 1.5%. To somehow come up with 6.25% of additional return, they have to take substantial risk. That will work out some years. But over the long haul, these pensions are facing severe unfunded liabilities, massive asset erosion, and just plain and simple insolvency.

Yes, that is way too high, unrealistically too high.

And their funds are probably chocked full of the GM, FB, Zinga (or whatever it's called), and every other bow wow security known to mankind - probably even AAA rated mortgage backed securities or CDO's that they couldn't peddle to some other sucker on the planet.

[screwball]

They can just print...Oh wait, these people are actually screwed.

+1000

Good one D. They need to be a TBTF banks and do all kinds of nefarious things.

Let'em eat cake.

[ballmich]

CalPers just reported their FYE 6/30 investment results:

CalPERS 1 percent return is below the fund’s discount rate of 7.5 percent, a long-term hurdle lowered recently in response to a steady decline in inflation and as part of CalPERS routine evaluation of economic assumptions. CalPERS 20-year investment return is 7.7 percent.

1% vs the implied 7.5% benchmark. Oooopsy Daisey. But don't you worry one little bit, this is just the long-term hurdle. Besides, don't you worry, CalPers has a secret card to play:

Employer contribution rates that use CalPERS 2011-12 fiscal year investment performance will be calculated based on audited figures and will be reflected in contribution levels for the State of California in FY 2013-14 and for contracting cities, counties and special districts in FY 2014-15.

That's right, they are raising the contribution rate on current employees so that they can pay for current retireee obligations. Ponzi, ponzi. It works until it doesn't.

[Mr. DNA]

How about for every pensioner we save from starvation, we kill someone in Asia or Africa with a drone? With a plan like that, we'll have the trillions of dollars to pay off the municipal pensions in no time.

[ballmich]

I didn't know where to put this, whether this thread or the one about the municipalities filing BK was the right place, but I had to put it somewhere for it's shear awesomeness.

[San Bernadino Bankruptcy] The reason it's a big deal - unfortunately the state's retirement fund - CalPERS - is the city's largest creditor by far with a wonderful $143.3 million exposure.

Defined Benefit Pension Plans are the original ponzi. And if you don't fund them with current contributions, they fail a lot quicker.

[screwball]

Isn't that something. Shocked! Not.

It's only the beginning. But not to worry, the S&P is over 1400, party like it's 1999 (whatever that means).