Saturday, December 22, 2012

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis


Boogeymen and Fake Reforms

Posted: 22 Dec 2012 03:45 PM PST

Earlier today I received an email from Jonathan Ingram at the Illinois Policy Institute that I wish to share. The email is regarding the sorry state of Illinois Pensions.
Dear Mish

Illinois has a long history of fake reforms – legislative proposals that promise to solve the great policy challenges of the day when passed, but never actually accomplish these goals and often make problems worse.

In the mid-1990s, Illinois lawmakers were facing a serious problem: the unfunded liability of the state's five public pension systems had reached $20 billion.

As a way to combat this growing problem, the state created a repayment schedule, often called the "pension ramp."

The pension ramp, which was passed by the Republican-controlled General Assembly and signed into law by former Republican Gov. Jim Edgar, promised to reach 90% funding levels by 2045.

According to the repayment schedule, the five systems should be nearly 57% funded today. Instead, the systems are just 39% funded and the state's pension debt has grown to $95 billion.



What happened?

You'll often hear that the pension debt was caused by the state "skipping pension payments." What you won't hear is that taxpayers have actually paid $8 billion more than the original ramp projected.

How can the five pension systems be just 39% funded?

The systems simply weren't able to get the kinds of returns they promised and the underlying actuarial assumptions didn't reflect reality.

These are problems with the underlying structure of Illinois' pension plans. The defined-benefit structure guarantees that a large share of the actual costs will be hidden and largely unknown until the systems come back to taxpayers asking for more money to make up for poor returns and mistaken assumptions.

This creates massive uncertainty for future budgets. For example, the state's fiscal year 2014 pension contribution was originally projected to be $3.7 billion. The actual contribution for fiscal year 2014 will be $6.8 billion. That's nearly twice what was predicted.

That's why we need a government retirement system that is reliable for workers, but still affordable for taxpayers.

We must freeze all of the defined benefits workers have already earned and move to a defined-contribution plan for all future work, similar to the 401(k) plans available in the private sector and the 401(a) plans already offered to many state university workers.

Illinois has the worst-funded pension system in the nation. The only way to move toward those solutions is to get politicians out of the retirement business altogether and give employees real control over their retirement savings.

Jonathan Ingram
Director of Health Policy and Pension Reform
While Illinois burns, Moody's threatens next downgrade

Ingram is of course preaching to the choir, but I don't object one bit. It's important for Illinois citizens to be informed about the pathetic state of Illinois finances.

Please consider another look at the sorry state of affairs in Illinois, by Ted Dabrowski at the Illinois Policy Institute: While Illinois burns, Moody's threatens next downgrade.
It's no secret that Illinois has the worst-funded state pension systems in the nation. That's an accepted fact by those on both sides of the aisle. Unfortunately, that fact hasn't motivated any action from the state's politicians.

Now recent news point to even deeper troubles for the state. Moody's Investor Services has threatened to punish Illinois again with another credit downgrade by revising the state's outlook to "negative" from "stable". The agency already gave Illinois the nation's worst credit rating, an A2, in January 2012 – and things look to get worse.



What's ironic is that as the situation worsened during the past year, Springfield's lack of action became increasingly more obvious. Moody's called out this fact, saying: "The state repeatedly failed to act on pension reform – during the regular session that ended May 31, during a one-day special session convened by the governor on Aug. 17, and again during the state's 'veto sessions' in November and December."

A growing problem

A recent release by the Illinois Policy Institute shows the true extent of the crisis in Illinois. Politicians often talk about Illinois' official funding shortfall, now equal to $96 billion. But when the state's liabilities are measured under new accounting and transparency rules proposed by Moody's, Illinois' pension shortfall exceeds $209 billion.

The state also has $54 billion in unfunded liabilities for retiree health insurance and $15 billion in pension bonds that Gov. Pat Quinn and his immediate predecessor, former Gov. Rod Blagojevich, issued to avoid pension reform.

That debt now totals more than $275 billion — or $58,000 in debt for each and every household in Illinois.

Only 24% Funded

It's becoming clear that the state's pension systems are running out of time. Under new rules proposed by both Moody's and the Governmental Accounting Standards Board, the five state pension systems have reached dangerously low levels of funding. Under Moody's rules, the state's overall funding levels are now just 24 percent. The Teachers' Retirement System, or TRS, for downstate and suburban teachers is only 24-percent funded and among the worst-funded systems in the nation. One major stock market correction and that fund will be effectively insolvent.

Those findings only confirm what Dick Ingram, head of the TRS, said in February: Without reforms, TRS may be insolvent by 2029.
TRS Insolvency on the Way

Dick Ingram, head of the TRS (not to be confused with Jonathan Ingram at the Illinois Policy Institute) is an optimist.

Without reforms, TRS is highly likely to be insolvent far soon than 2029. In fact, I think it is insolvent now.

Pension plan assumptions regarding expected rates-of-return are preposterous, most likely because they have to be. All it will take to wipe the the entire plan out is another big decline in asset prices, and that is something I am confident is coming (time unknown).

If you wish to be better informed about the sorry state of affairs in Illinois and nationally, please sign up for Jonathan Ingram's Health Policy and Pension Newsletter email list

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Fiscal Cliff Jackasses Complain Shoppers Are Spooked

Posted: 22 Dec 2012 09:57 AM PST

It was bound to happen. Analysts are bitching the fiscal cliff is holding back retail spending.

Please consider "Fiscal cliff" spooks shoppers in last lap of holiday race.
Fears about imminent tax hikes and cuts in government spending are taking a toll on U.S. shoppers and could deprive retailers of a strong finish to the 2012 holiday shopping season.

The acrimonious debate in Washington over how to avoid the so-called "fiscal cliff" has cast a pall over shopper sentiment as consumers head to malls on the last Saturday before Christmas - typically one of the busiest shopping days of the year.

About 17 percent of the 1,514 Americans who participated in a Reuters/Ipsos poll conducted December 17-20 said the impending "fiscal cliff" was making them spend less this season.

"We just try to stay on a budget. We're not going crazy," said Tom Chowinski, a market researcher at Nielsen, who was shopping with his wife for their four adult children on Saturday morning at a Wal-Mart store in Westbury, New York.

HO-HUM CHRISTMAS

"What could have been a merry Christmas is going to turn to a ho-hum Christmas, and we can thank our, you know, politicians for getting in the middle of it all," NPD analyst Marshal Cohen said. "This great unknown puts a big damper on the consumer feeling confident to go out and spend more."

More than 60 percent of U.S. consumers have already finished more than three-quarters of their holiday shopping, according to a Reuters/Ipsos poll released on Thursday. This means retailers will have to offer deeper discounts to force Americans to open their wallets in the last lap of the holiday race.
Ho-Hum This

As far as I am concerned, people spending less for Christmas is a side "benefit" of the fiscal cliff. The Government needs to tighten it's budget and consumers do as well.

For those who do go on a last minute spending spree, who doesn't want lower prices (other than retailers and NPD analyst Marshal Cohen)?

Tough times will return (not that they ever left in the first place for millions of Americans), and the  last thing people need to do is overspend on junk that will be thrown out in a month or items dear Aunt Suzie will donate to the Salvation Army.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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