Wednesday, August 24, 2016

That Public-Employee Pension? It's a Nuclear Bomb.

The State of Illinois taxpayers will be the first--but not only--to get hit by fallout.

Illinois’s largest public pension agrees with Bill Gross’s admonishment that it’s time to face up to the reality of lower returns and reduce assumptions about what funds can make off stocks and bonds.
Fund managers that have been counting on returns of 7 percent to 8 percent may need to adjust that to around 4 percent, Gross, ... said during an Aug. 5 interview on Bloomberg TV....

What does that mean to the taxpayer-type?

...We conservatively assume that public pensions are currently $2.0 trillion underfunded ($4.5 trillion of assets for $6.5 trillion of liabilities) even though we've seen estimates that suggest $3.5 trillion or more might be more appropriate.  We then adjusted the return on asset assumption down from the 7.5% used by most pensions to the 4.0% suggested by Mr. Gross and found that true public pension underfunding could be closer to $5.5 trillion, or over 2.5x more than current estimates. ...


....According to a Monday memo from a top [Illinois Governor] Rauner aide, the Teachers' Retirement System (TRS) board could (or rather, should) decide at its meeting this week to lower the assumed investment return rate, warning that this move "would automatically boost Illinois' annual pension payment."

"If the (TRS) board were to approve a lower assumed rate of return taxpayers will be automatically and immediately on the hook for potentially hundreds of millions of dollars in higher taxes or reduced services," Michael Mahoney, Rauner's senior advisor for revenue and pensions, wrote to the governor’s chief of staff, Richard Goldberg....

Yes.  Taxpayers will make up the difference with payable-right-now CASH.

Get your Vaseline ready; there are lots of Wisconsin pension plans with the same little problem.

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