JPMorgan Expert: Illinois Bankruptcy Option Needed - True Debt, Pension, Health Costs Would Consume Half Of Revenue

His report released yesterday, The ARC and the Covenants, updates his earlier research comparing the percentage of state revenues needed to pay interest on general obligation debt, and meet all future pension and retiree healthcare obligations.[The link to the report appears to be working sporadically: https://www.jpmorgan.com/directdoc/ARC4_ES.pdf ]

Most states, he concludes, have manageable burdens (which he defines as 15% or less).

Not Illinois, which is far worst among the states. By his calculations, 51% of state revenue would have to go towards debt, pensions and retiree healthcare to reach full funding, and that would take 30 years. He assumes all pensions will earn 6% per year on invested assets. His comparison chart is below.

For the worst off states, particularly Illinois and New Jersey, Cembalest says a solution based on tax increases or higher employee contributions is probably neither economically or politically viable.

Hence, the bankruptcy option:

I participated in a seminar at Harvard’s Kennedy School last year, and there was a sense that the US should use the Promesa legislation for Puerto Rico as a dry run for creating  state-level bankruptcy rules, just in case. I think the expansion of Chapter 9 legislation for states makes sense, and I’m not the only one.

He cites former FDIC Chairman William M. Isaac, who earlier wrote:

The city of Chicago and the state of Illinois should act now to restructure their liabilities and put the fiscal mess behind them. This can be accomplished by utilizing Chapter 9 and other tools Congress just gave Puerto Rico. The process would entail about two years of unpleasant headlines, but the city and the state will rebound far sooner and less painfully than if t hey stay on their current paths. (Our article on those comments by Isaac is linked here.)

The analysis states that it represents the views and estimates of the author, Michael Cembalest, only, and should not be treated as J.P. Morgan Research. Note, however, that the chart above showing the 51% and comparison to other states is from J.P. Morgan Asset Management.

Cembalest concludes with this:

Public sector workers form a critical part of our civil society. They risk their lives to protect us when we’re in danger; they make our lives safer, cleaner and more efficient; they educate our children; they enforce the rule of law and provide remedies when laws are broken; they ensure access to clean air, water and food; and they heal us when we’re sick. The legal, medical, environmental and educational problems sometimes found in other countries are a reminder of what life might be like without them. They have earned the benefits they accrued and which were granted by state legislatures, and have the right to expect them to be paid.

Authored by Mark Glennon via WirePoints.com

Michael Cembalest is Chairman of Market and Investment Strategy at J.P. Morgan Asset Management.

Two Giant Pension Funds Just Admitted To Have BIG PROBLEMS

These two huge pensions funds just admitted big problems, and we’re not even in recession or a stock market downturn yet. Here’s the details…

I’ve been talking a lot about the looming pension crisis…

My short thesis is, if you’re depending on a pension for your retirement, it’s time to start looking elsewhere.

Pensions are simply giant funds responsible for paying out retirement benefits to workers.

And today, the nation’s 1,400 corporate pension plans are facing a $553 billion shortfall. And, according to Boston College, about 25% will likely go broke in the next decade.

Think about that… A full one-quarter of US, non-government employees expecting a pension to fund their retirement will likely get zilch.

And it’s even worse for the government…

According to credit-rating agency Moody’s, state, federal and local government pension plans are $7 trillion short in funding.

The reason for this crisis is simple – investment returns are too low.

Pension funds invest in stocks, bonds, real estate, private equity and a host of other assets, hoping to generate a safe return.

But with interest rates near their lowest levels in human history, it’s been difficult for these pensions to generate a suitable return without taking on more and more risk.

And that’s another big problem with pensions – their investment returns are totally unrealistic.

Most pension funds require a minimum annual return of about 8% a year to cover their future liabilities.

But that 8% is really difficult to generate today, especially if you’re buying bonds (which is the largest asset for most pensions). So pensions are allocating more capital to riskier assets like stocks and private equity.

And so far it’s working.

The California State Teachers’ Retirement System (CalSTRS) and California Public Employees’ Retirement System (CalPERS) both earned more than 8% for the second fiscal year in a row. CalPERS is the largest public pension in the US. And, together, the two funds manage $575 billion for 2.8 million public workers and retirees.

Two 8%+ years isn’t the norm. Over the past 10 years ending June 30, CalSTRS returned an annualized 6.3% a year – well below its target. And CalPERS has returned a dismal 5.1% over the same period.

And that’s been with the tailwind of one of the longest equity and fixed-income bull markets in history.

It’s clear these inflated gains can’t last.

And the two California pension giants are even admitting the game is up.

No, no more 8% target return, as we teeter on the edge of what could be the largest market correction of our lifetime.

CalSTRS is making the bold move to drop its future goal to… 7%.

And CalPERS is ratcheting down its return goals in steps to… wait for it, 7% by 2021.

Listen, it’s a nice gesture for these big funds to lower their expected returns and admit things are tough out there.

But 7% is still totally unrealistic. And that’s not even taking into account the tough times I see ahead for markets. Pensions haven’t been able to hit a 7% return in the best of times.

As of June 2017, the 10-year annualized median return for all public pensions tracked by the Wilshire Trust Universal Comparison Service was 5.57%.

That’s nearly 250 basis points below the 8% target.

But there’s another way pensions make money… they collect funds from active workers and taxpayers.

When these funds drop their return expectations, it has real life implications. With a lower, projected return, a pension fund needs more cash to pay out its future liabilities.

For example, CalPERS, which is dropping its expected return to 7% by 2021, said the state and school districts paying into the pension will have to pay at least $15 billion more over the next 20 years once the 7% target kicks in.

So, people depending on a pension not only likely won’t get the money owed to them in the future… but they’ll also get stuck paying more into the system today. It’s a true lose/lose.

Our goal at Sovereign Man is to put our readers in a position of strength.

And if you’re expecting a pension to pay for your retirement, you need a contingency plan today.

Last month, I outlined a series of steps you can take, right now, to improve your financial situation – like improving investment returns and alternative retirement account structures.

Personally, I’ve been selling assets to raise cash. In fact, I’m sitting on more cash than at any other point in my life.

I’m sitting on cash because I’m worried we could see another recession very soon.

And being liquid at a market bottom is one of the best ways to get really rich – you can buy the world’s best assets for pennies on the dollar.

But here’s the best part… I’ve structured my cash holdings so I’m still earning a solid return – better than a lot of these pension funds. But I’m remaining liquid and taking on very little risk.

If you want to know more about what I’m doing with my own money, and why I’m sitting on so much cash, just click here…

by Simon Black of Sovereign Man

"These Problems Aren't Going Away" - States Are Woefully Unprepared For The Next Recession

It's no secret that the finances of most US states are in shambles. For many, overly generous pension benefits have led to severe underfunding that threatens to drain state coffers, like in Illinois, where pension liabilities ballooned by a cumulative 1,067% between 1987 and 2016 while revenues for the state's general fund rose just 236% during that time.

While regular readers are no doubt acquainted with our musings on the looming pension crisis (a problem that is increasingly global in scope), the Wall Street Journal has apparently only just stumbled on to the story, writing in a story entitled "Many States Are Likely Unprepared for Next Downturn" that "many US states have been slow to improve their finances nine years into the economic expansion. That raises a risk they won't be prepared when another downturn hits, making them susceptible to big spending cuts that make the next recession worse."

The problem for most states is that aging populations mean that more money is being spent on medicaid and pensions while revenues have largely been stagnant. And while a booming economy might temporarily boost revenues, "some of these longer-term pressures are definitely not going away," said Gabriel Petek, managing director at S&P Global Ratings.

An aging population is also putting pressure on state Medicaid budgets and pension funds. State pension contributions were 78% higher in 2017 than in 2010, according to census data. And state Medicaid payments were 59% higher in 2016 than in 2010, according to the Centers for Medicare and Medicaid Services.

Many US states have depleted or nearly depleted emergency funds. With some states like Oklahoma having only 1.6% of expenditures in their rainy day funds.

Measured as a share of spending, 21 states had smaller rainy day funds in 2017 than they did in 2008, according to data from the National Association of State Budget Officers compiled by the Tax Policy Center.

[...]

North Dakota had only 1.5% of its expenditures in a rainy-day fund in the 2017 fiscal year, down from 16.6% in 2008. Oklahoma’s rainy day fund had 1.6%, down from 9.3%. New Jersey emptied its rainy day fund in 2009 and has yet to begin refilling it.

Many states also have lower credit ratings now than they did during the crisis, which will raise the cost of borrowing during a recession.

Many states governments have seen their bond ratings downgraded during this expansion for not taking the appropriate measures to get their fiscal houses in order. Eleven states have lower bond ratings than they did in 2010 while only five have higher ratings, according to Moody’s Investors Service. Fitch Ratings lists seven states with worse ratings and six with better ones since the recession. And analysts at S&P Global rate 12 states lower than in 2010 and 10 states higher.

"It’s very important in our view that during the good times the states should be building up their fiscal resilience and that really stands out as an area that’s been lacking throughout this recovery," said Gabriel Petek, managing director at S&P Global Ratings.

At stake are widely used public services like roads, police and schools. A recent Supreme Court ruling requiring online retailers to pay state sales tax could help boost revenues while a Trump's tax plan will help raise taxable income in some states. But with President Trump's trade war threatening to hammer agricultural states (which could seriously impact nationwide GDP figures), states are finding themselves in a tough spot. Boston Fed President Eric Rosengren explains, US states are simply referring to do what needs to be done to prepare for the next recession. "There are levers that all the states could think about in terms of preparing for the next economic downturn," Rosengren said. "It doesn’t seem like there is that much movement in that direction right now in many states."

Fonte: qui

America’s Silent $6,000,000,000,000 Crisis With No Solution In Sight

“From Portland to Portland, Lake Superior to the Mexican gulf…American pensions are wrecked upon the rocks of actuarial fact.” 

by Brian Maher via Daily Reckoning

America’s silent crisis is no longer… silent.

MarketWatch columnist Jeff Reeves has warned that “collapsing pensions will fuel America’s next financial crisis.”

“This is not a distant concern,” he adds, “but a system already in crisis.”

By some estimates, America’s public pensions alone are sunk in a $6 trillion abyss.

According to the Federal Reserve, pensions — public and private combined — were roughly 27% underfunded as of last year.

Meantime, vast hordes of pensioners are entering or approaching retirement.

Come at the dilemma from any angle… and you come upon a labyrinth.

How has the American pension come to such a sad pass?

As far as public pensions run, the answer is close by.

Daily Reckoning contributor Charles Hugh Smith:

Corrupt politicos promised the moon to public employees, and now the fiscal chickens of insolvency are coming home to roost.

“But I don’t have a pension,” comes your response. “This doesn’t concern me.”

Ah, but have another guess — at least if you swear off your taxes in these United States.

As the late Canadian Prime Minister Mackenzie King styled it:

“The politician’s promises of yesterday are the taxes of today.”

Zero Hedge’s pseudonymous Tyler Durden:

Funds collected from taxpaying Americans will be spent to satisfy the ridiculous retirement promises and obligations made over the past few decades, and while the immediate recipients of the funds, i.e., those looking at near-term retirement, will be made whole, everyone else, i.e., taxpayers, will lose.

Just so.

It is an iron law of nature, second only perhaps to gravity:

Politicians promise… taxpayers pay.

And let us add our own corollary:

The better the politician… the bigger the promises… and the larger the bill.

Most public pension systems were built upon this rosy-dawn assumption:

Their investments would yield a handsome 7.5% annual return.

Once upon a time, that may have been realistic.

But that was before the 2008 financial crisis… before the Federal Reserve opened its war on savers… and bonds still paid a handsome yield.

Consider…

The average public pension plan worked an average gain of 2–4% by 2015.

It returned just 0.6% in 2016, according to Bloomberg.

2017 saw an upswing.

But according to the Center for Retirement Research…

Even if these plans attain their Pollyannaish 7.5% returns over the next few years… they’ll still be only 73% funded by 2021.

Howard Marks, co-founder and co-chairman of Oaktree Capital Group:

If you walked into a pension fund today which had no investments, and you were given a pile of cash and you invested today intelligently, prudently, but not shrinking from risk, I think you could expect to make something in the vicinity of 5% in the coming years from today.

A highly technical term describes the business… and we apologize if it sends you scurrying for the dictionary:

Insolvency.

Briefly turn your attention to the Golden State, for example…

California pins its hopes on that pie-in-sky 7.5% annual return.

But the state’s pension planners put returns over the next decade at barely 6% a year.

6%, 7% — what’s the difference?

From one year to the next, possibly little.

But repeat it every year… and the meaning of compounding negative returns eventually becomes clear enough.

And these calculations — as far as we understand — do not account for a market downturn.

California’s pension fund lost some $100 billion in the Great Recession.

It never fully recovered.

What if it happens again?

Smith:

The 2008–09 global financial meltdown was a taste of the reality facing public pension programs: Once annual returns slip from 7% annually to minus 7% annually, the pension plans are soon insolvent.

California is by no means alone.

The great state of Illinois, for example, risks sinking into a $130 billion “death spiral,” as Ted Dabrowski of the Illinois Policy Institute describes it.

Meantime, jilted pensioners can generate a good deal of hullabaloo.

And jilted pensioners vote.

Do you think Uncle Samuel will let the politically strategic states of California and Illinois — with their combined 75 electoral votes — go scratching?

And who will he hand the bill?

Consult the nearest mirror… and there you will find your sorrowful answer.

The problems are not limited to California or Illinois, of course.

From Portland to Portland, Lake Superior to the Mexican gulf…

American pensions are wrecked upon the rocks of actuarial fact.

Illinois Gov. Bruce Rauner has warned that the state’s pension crisis is driving his beloved Land of Lincoln into “banana republic” territory.

Of course, the good governor’s mouth ran away with him here.

After all…

Who would compare the venerable, eminently worthy banana republic… to Illinois?

Visualizing The Pension Time Bomb: $400 Trillion By 2050

Are governments making promises about pensions that they might not be able to keep?

According to an analysis by the World Economic Forum (WEF), there was a combined retirement savings gap in excess of $70 trillion in 2015, spread between eight major economies..

As Visual Capitalist's Jeff Desjardins notes, The WEF says the deficit is growing by $28 billion every 24 hours – and if nothing is done to slow the growth rate, the deficit will reach $400 trillion by 2050, or about five times the size of the global economy today.

The group of economies studied: Canada, Australia, Netherlands, Japan, India, China, the United Kingdom, and the United States.

MIND THE GAP

Today’s infographic comes to us from Raconteur, and it illuminates a growing problem attached to an aging population (and those that will be supporting it).

Since social security programs were initially developed, the circumstances around work and retirement have shifted considerably. Life expectancy has risen by three years per decade since the 1940s, and older people are having increasingly long life spans. With the retirement age hardly changing in most economies, this longevity means that people are spending longer not working without the savings to justify it.

This problem is amplified by the size of generations and fertility rates. The population of retirees globally is expected to grow from 1.5 billion to 2.1 billion between 2017-2050, while the number of workers for each retiree is expected to halve from eight to four over the same timeframe.

The WEF has made clear that the situation is not trivial, likening the scenario to “financial climate change”:

The anticipated increase in longevity and resulting ageing populations is the financial equivalent of climate change

-Michael Drexler, Head of Financial and Infrastructure Systems, WEF

Like climate change, some of the early signs of this retirement savings gap can be “sandbagged” for the time being – but if not handled properly in the medium and long term, the adverse effects could be overwhelming.

FUTURE PROOFING

While implementing various system reforms like raising the retirement age will help, ultimately the money in the system has to come from somewhere. Social security programs will need to cut benefits, increase taxes, or borrow from somewhere else in the government’s budget to make up for the coming shortfalls.

In the United States specifically, it is expected that the Social Security trust fund will run out by 2034. At that point, there will only be enough revenue coming in to pay out approximately 77% of benefits.

Fonte: Z.H.

Meanwhile: Congress Has Quietly Formed A Committee To Bail Out 200 Pension Funds

“The US pension system is beyond repair. And if you’re depending on pension income to carry you through retirement, it’s…”

by Simon Black via Sovereign Man

The US pension system has gotten so bad, Congress is actually planning for its failure.

As the government was working on the recent, new budget deal and subsequent boost in government spending, Congress quietly snuck in a provision that forms a committee which would use federal funds to bail out as many as 200 “multiemployer” pension plans – where employers and labor unions jointly provide retirement benefits to employees.

As is often the case, this rescue “plan” is too little too late. The US pension system is beyond repair. And if you’re depending on pension income to carry you through retirement, it’s time to consider a Plan B.

Before explaining how dire the situation actually is, let’s take a step back…

Pensions are simply giant pools of capital used to pay out retirement benefits to workers.

Typically, employers and employees contribute a percentage of the employees’ salary to a pension throughout his or her career. Then, upon retirement, the pension is supposed to pay a fixed, monthly amount to the retiree.

There are both government and corporate pension plans.

Boston College estimates the nation’s 1,400 multiemployer plans (corporate) are facing a $553 billion shortfall. And around one-quarter of those are in the “red zone,” meaning they’ll likely go broke in the next decade or so.

But Congress’ committee, assuming it works, wouldn’t even rescue the red zone plans, much less the remaining 1,200.

And it doesn’t even begin to address the real problem – the $7 trillion funding gap faced by the government’s own pensions.

Congress is stepping in because the Pension Benefit Guaranty Corporation (PBGC) – the pension equivalent to the Federal Deposit Insurance Corporation (FDIC) – is completely insolvent.

Like the FDIC, the PBGC is an insurance program funded by premiums paid by its participating members (pensions). Its entire income is made up of premiums collected and the investment income it earns on those premiums.

So, as the markets crash, not only will the PBGC’s portfolio get slaughtered… so will those of the pensions it guarantees (which will then require more funds). And as these pensions fail, the PBGC will collect less in premiums. It’s a vicious circle.

But things are plenty bad already.

The PBGC, which only covers corporate pensions, had a $76 billion deficit in 2017. It has total assets of $108 billion on its books compared to potential loss exposure of more than $250 billion.

By its own estimation, its fund to cover multiemployer pensions (which makes up $65 billion of the deficit) will be insolvent by 2025.

Pensions are in such bad shape today for the simple reason that investment returns are too low. And pensions can’t cover their future obligations.

Pension fund managers invest in assets like stocks, bonds and real estate in hopes of generating a safe return.

Most funds require a 7%-8% return in order to meet their future liabilities.

But with interest rates near record lows, these funds are having to take on more risk in order to meet their minimum return requirements. They’ve reduced their bond allocations and started buying more stocks, private equity and other riskier assets.

Some funds, like Hawaii’s pension fund, went even further and dabbled in the incredibly risky strategy of selling put options. By selling a put, you collect a small premium if markets stay calm or rise. But you’re exposed to unlimited losses if markets crash – like they did when the Dow fell 2,400 points in a week last month.

At the end of last year, equities made up nearly 54% of public pension fund portfolios. The $209 billion New York State Common Retirement Fund has over 58% of its assets in stocks. Kentucky’s $20 billion pension for teachers is 62% in stocks.

These giant funds, which are supposed to pay for public and private employees in retirement, are piling into stocks at record high valuations. And when the volatility hits, it will be devastating.

Consider that America’s largest pension fund, The California Public Employees’ Retirement System (CalPERS), lost 5% of its assets ($18.5 billion) in just 10 trading days leading up to February 9.

Pension funds should never experience that kind of volatility. But the current macro environment is forcing them to make dumb decisions in hopes of generating a minimum return.

Luckily, if you’re a smaller investor, you still have plenty of solid investment options available – even if you’re investing with tens of millions of dollars.

I’ve told our Sovereign Man: Confidential readers about an asset-backed loan earning 13% a year. And they’ve already safely earned millions of dollars in interest.

You can also invest in super-safe stocks trading below their net cash, like Sovereign Man’s Chief Investment Strategist, Tim Staermose, does in his service, The 4th Pillar.

But these strategies get more difficult if you have hundreds of billions of dollars.

So these pension funds are forced to buy stocks and real estate at all-time highs. It stretches valuations and creates huge risk.

Still, pension fund allocations to equities are near all-time highs.

So, ask yourself, what will happen to your retirement if the stock market falls just 20%? What about 50%?

There’s zero chance these funds will be able to pay out retirement benefits. They’re taking huge risks at all-time highs and they have zero downside protection (the PGBC is broke).

Fonte: qui