When Meridith Whitney, the Chief Investment Officer for Kenbelle Capital CP published “Fate of the States: The New Geography of American Prosperity”, most folks never really questioned the contractual obligations states have; the mantra out of union leadership was that such obligations were safe from bankruptcy.
Well, it turns out, that the vast majority of states throughout our Union haven’t funded pension obligations. That’s called bankruptcy. And the same union officals continue to shield this nasty reality behined rhetoric that really is propaganda. Because states have the Constitutional and legal authority to tax, they cannot file bankruptcy. So as union officials continue to mask paper thin obligations behined a mask of opaque rhetoric, let’s keep in mind that bankruptcy proceedings are about restructuring the very obligations unions erroneously think are safe.
Thanks to Q.E., public penion benefits are really well capitalized. Asset classes remain well capitalized. However, public pension costs have soared. Let’s look at two landmines.
California, Detroit, Chicago. Chicago must make one billion dollar pension contribution this year alone, a third of the cities operating budget! Just this year. There pension debt is $19.4 billion. Chicago just released a massive amount of unsecured debt. It issued $500 million in commercial paper and $900 million in general obligations. Can you believe that!!
Detroit is worse. The city is expecting to go broke by 2020. As a city, Detroit is expecting to repay its general obligation bondholders 20 CENTS on the dollar while suing to invalidate $1.4 billion in certificates of participation which were used to backfill 2005 pension costs. Try not to laugh. The banks that fostered this merely asked Detroit to perform an interest rate swap. These banks will now only be paid 30% of their investments. Oh yeah, unions refuse to support a readjustment plan to repay the banks in total.
Througout the city, Detroit is cutting pension benefits 34%, although these retiree’s can recoup their losses if the market performs well.
California: The city of Stockton filed for bankruptcy in 2012. The Franklin Templeton Investments is only recovering $94,000 from its initial $35 million investment. Its investors will receive about 50 cents on the dollar. See where this is going; bankruptcies remain the venue of choice for debt obligations BUT pensions remain untouched. Why is this a problem? Cities throughout California contiue to muddle through each year with most having to restructure again. Refusal to face the political third rail of pensions isn’t a sound fiscal strategy going forward anymore.
Unions throughout this nation continue to placate everyone/anyone to the mantra that pension obligations are protected by State & Federal Constitutions protecting them from impairment.