magicianA Magic Pencil for Unfunded Pensions is Actuary a Bad Idea

The United States may be facing a day of reckoning (alt) as the unfunded state and municipal pensions crisis gets worse.  Illinois currently has the worst unfunded pension liability for any state ($100bn unfunded), and Chicago is driving the crisis: the combined unfunded pension liabilities for Chicago are currently about $27bn.  To be considered “healthy,” pension funds should be about 80% funded: the teacher’s pension is about 54% funded and the city’s municipal workers, police, labor and firefighters’ pensions are about 33% funded.  Mayor Rahm Emanuel has been closing inner city schools and says that more layoffs of public employees could be necessary, or perhaps a 150% rise in property taxes.  Now jump to Desert Hot Springs, California, where years of spending and unrealistic revenue estimates are pushing the city towards bankruptcy along with its unfunded police pension.  “Police officers [in Desert Hot Springs], as in many California cities, can retire as young as 50 with 30 years of service and receive 90 percent of their final salary every year…The average pay and benefits package for a police officer here had been worth $177,203 per year, in a city where the median household income was $31,356 in 2011.”  City manager Robert Adams: “I would not venture to say that they are overpaid.  What I would say is that we can’t pay for them.”  While cities like Chicago, Detroit and Desert Hot Springs are exposing America’s unfunded pensions problem, the real problem may be sleight of hand accounting designed to understate the actual cost of pension promises politicians have made.  “Current rules allow them to make assumptions each year based not on what their portfolios actually earn – or lose – but on what they expect to earn.  These expectations are often too rosy; many state and municipal schemes assume investment returns will be much higher in future than those earned in the past decade.”  The states use an actuary (basically a fortune teller) to determine their expectation for earnings and voilá!  The municipal pension of Detroit is 87% funded!  Or, maybe just 50% funded.  Using this scheme, the Pew Center estimated the total state pension gap for the nation at $757bn.  A finance professor at Stanford, however, argues that using more realistic rates would put unfunded state pension liabilities closer to $4.5tn.  Accounting based on “expectations” has “long been abandoned by private sector employers in the US and the UK, and rejected by pensions regulators and accounting standards setters.”  Awesome quotes: “Actuaries have a “magic pencil” that can turn a shortfall into a surplus just by changing a key assumption.”  “The actuaries invented [this system] and the accountants fell in love with it and married it.”  Funny side note: the Chicago Daily Herald is either in denial or would just rather have you focus on the problems in China or somewhere else.

Japanese Workers May Get Paid More; Abe is Getting Kinda Cocky

“Japan’s most influential business lobby has agreed to raise workers’ base pay for the first time in six years as the economy gains momentum and corporate earnings improve…Many economists say an increase in base pay is essential to Prime Minister Shinzo Abe’s pledge to end 15 years of mild deflation and to help the Bank of Japan meet its 2 percent inflation target.”  Meanwhile, Abe is no longer welcome in China after he visited a controversial shrine in Tokyo.  Why is it so controversial you ask?  Well, the Yasukuni Shrine is believed to be a quasi-safe house for Japanese warriors’ souls, including those (1,068) who were convicted of war crimes against the Chinese, Koreans, Taiwanese etc. in WW2.    But Abe doesn’t want you to learn that in school so he’s going to go ahead and ban that piece of history too.

EU: US Distressed Debt Investors Target Europe (No Alt)

“Europe is ripe for a surge of leveraged buyout restructurings as banks sell their worst-performing loans to “distress-investors” eager to take over the borrowers.  In so-called “loan-to-own” deals, private equity or hedge fund investors buy existing bank loans at big discounts to their face value and work to take over the companies by swapping their debt for equity.”

China: Chinese Local Government Debt Up 13% in 6 Months

China’s National Audit Office is reporting that local government debt increased more in the second half of 2013 (13%) than the first half (12.7%).  This comes on the heels of the Chinese Academy of Social Sciences report last week which estimates local debt at even higher levels.  One Chinese economist at Merrill Lynch is estimating the Chinese total debt ratio (public, corporate and household) at 190% GDP, which he believes is “neither exceptionally high nor low.”  So it’s not that low, ok?  Calm down.

USA: Home Prices Back at Peaks in Some Areas

“Prices are back to all-time highs in 10 of the nation’s 50 largest metropolitan areas.”  While some metropolitan areas like Denver and Oklahoma City are enjoying a bump above 2007 levels, they are more likely exceptions to the rule: “Nationally, values fell 23.8% between 2007 and 2011 before rebounding 9.9% after hitting bottom in late 2011; they are now 16.3% below the high of the last decade.”


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