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Drastic Pension Cuts Will Hit California, Kentucky, Other States

The CA Supreme Court will rule on pension cuts. Curiously, the court’s ruling will be irrelevant in case of bankruptcy.

California Governor Jerry Brown said legal rulings may clear the way for making cuts to public pension benefits, which would go against long-standing assumptions and potentially provide financial relief to the state and its local governments.

Brown said he has a “hunch” the courts would “modify” the so-called California rule, which holds that benefits promised to public employees can’t be rolled back. The state’s Supreme Court is set to hear a case in which lower courts ruled that reductions to pensions are permissible if the payments remain “reasonable” for workers.

“There is more flexibility than there is currently assumed by those who discuss the California rule,” Brown said during a briefing on the budget in Sacramento. He said that in the next recession, the governor “will have the option of considering pension cutbacks for the first time.”

That would be a major shift in California, where municipal officials have long believed they couldn’t adjust the benefits even as they struggle to cover the cost. They have raised taxes and dipped into reserves to meet rising contributions. The California Public Employees’ Retirement System, the nation’s largest public pension, has about 68 percent of assets needed to cover its liabilities. For the fiscal year beginning in July, the state’s contribution to Calpers is double what it was in fiscal 2009.

“In the next downturn, when things look pretty dire, that would be one of the items on the chopping block,” Brown said.

Pension Cuts Are Coming

It’s refreshing to hear a politician admit the obvious: Pension cuts are coming.

However, whether or not the cuts are “reasonable” is irrelevant in cases of bankruptcy. Bankruptcy is under federal, not state law.

…click on the above link to read the rest of the article…

Puerto Rico Is Greece, & These 5 States Are Next To Go

Puerto Rico Is Greece, & These 5 States Are Next To Go

As Wilbur Ross so eloquently noted, for Puerto Rico “it’s the end of the beginning… and the beginning of the end,” as he explained “Puerto Rico is the US version of Greece.” However, as JPMorgan explains, for some states the pain is really just beginning as Municipal bond risk will only become more important over time, as assets of some severely underfunded plans are gradually depleted.

Wilbur Ross discusses Puerto Rico’s debt struggles and where it goes from here…

But, as JPMorgan details, Muni risk is on the rise for US states, but broad generalizations do not apply (in other words, these five states are ‘screwed’)…

The direct indebtedness of US states (excluding revenue bonds) is $500 billion.  However, bonds are just one part of the picture: states have another trillion in future obligations related to pension and retiree healthcare.  In the summer of 2014, we conducted a deep-dive analysis of US states, incorporating bonds, pension obligations and retiree healthcare obligations.  After reviewing over 300 Comprehensive Annual Financial Reports from different states, we pulled together an assessment of each state’s total debt service relative to its tax collections, incorporating the need to pay down underfunded pension and retiree healthcare obligations.  

While there are five states with significant challenges (Illinois, Connecticut, Hawaii, New Jersey, and Kentucky) , the majority of states have debt service-to-revenue ratios that are more manageable. 

As a brief summary, we computed the ratio of debt, pension and retiree healthcare payments to state revenues.  The blue bars show what states are currently paying.  The orange bars show this ratio assuming that states pay what they owe on a full-accrual basis, assuming a 30-year term for amortizing unfunded pension and retiree healthcare obligations, and assuming a 6% return on pension plan assets.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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