Yesterday, Ben Bernanke gave a speech to the Southern Legislative Conference (SLC) of the Council of State Governments. While the speech was not considered very significant for FED policy, we at Notes found it interesting that the FED Chairman raised an issue that we at Notes have been discussing on and off for several months: The dire situation that the underfunded public pensions are causing the individual states.
Previously, we cited the wonderful article that our editor–also my daughter–wrote about the major underfunding of the Teachers’ Retirement System of Illinois and the havoc it could reap on the taxpayers of Illinois. Mr. Bernanke warned the Conference:
“States’ unfunded liabilities are significantly higher than before the recession and financial crisis because many pension fund investmentshave declined in value, and because many states have found it difficult to maintain pension contributions while its budgets are under stress. INDEED, SOME ESTIMATES SUGGEST THAT, ON AVERAGE, STATES WOULD NEED TO MORE THAN DOUBLE THEIR TYPICAL ANNUAL PENSION CONTRIBUTIONS OVER THE NEXT DECADE TO AVOID COLLECTIVELY EXHAUSTING THEIR PENSIONFUNDS DURING THE NEXT COUPLE OF DECADES. THIS DAUNTING PROBLEM HAS NO EASY SOLUTION; IN PARTICULAR, PROPOSALS THAT INCLUDE MODIFICATIONS OF BENEFITS SCHEDULES MUST TAKE INTO ACCOUNT THAT ACCRUED PENSION BENEFITS OF STATE AND LOCAL WORKERS … ARE ACCORDED STRONG LEGAL PROTECTION, INCLUDING, IN SOME STATES, CONSTITUTIONAL PROTECTION.“
This is important and the fact that Bernanke is stating it makes it even more so. The poor stock market performance, plus questionable investments on the part of some funds during the last decade has left public and private pensions way underfunded and this creates a negative feedback loop for state governments as defined benefit plans that were agreed upond have to be made good. If state governments have to raise taxes or cut services to meet itspension promises, then more stimulus is withdrawn and growth is harder to attain.
We believe that Bernanke understates the problem as our editor’s well researched article showed for the pension funds have had to reach for high-risk OTC derivatives in order to meet near-term obligations. Every public pension fund is HOPING that the economy comes ROARING BACK so as to relieve the short-term stress and drag on public pensions.
If we were to go the route of Japan and muddle on for another decade, the pension liability is going to be a major economic drag and the question will of course arise as to who will bail out the individual states. Bernanke said pension benefits are “accorded strong legal protection, including, in some states Constitutional protection.” While private pension funds are supposed to be guaranteed by the Pension Benefit Guaranty Corporation, there is no precedent for the public pensions. As my daughter wrote in the article, because public pensions have yet to endure bankruptcy, the decision would ultimately reside with the courts–make the state pay or let the pension fund run out of money. Bernanke’s presumptive posturing is creating a guarantee that the government will step in if this happens … a government bailout, if you will.
Bernanke goes on to state that the pensions are just one part of the problem because state governments also have an estimated $600 billion liability for retiree health benefits. With the boomers starting to retire, this problem will probably increase the states financial burden. Is there any wonder why the discusion moves to the fear of deflation? It is very difficult to DEFALTE YOUR WAY OUT OF DEBT … and so it goes. Do we really need the equity market to rally for the next decade or will the pensions be refunded with 2 percent 10-year U.S. Treasuries?
Our readers can do the math but you better well figure that 2+2=5 will be the mainstay of that math course.
Tags: Bernanke, Fed, Illinois, pension funds
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