Tag Archives: underfunded pensions

Pension Apocalypse Is Coming

“It’s unequivocal now: We are taking money from the new employees and using it to pay off this liability for the old employees,” said Turner, a Gov. John Hickenlooper appointee. “And some might call that a Ponzi scheme.”Denver Post, 6/27/17

The people in Denver who bother to read the news, especially the ones who are or will be dependent on the Colorado public employees pension fund (PERA), were greeted with a shock Tuesday. PERA is now admitting to be 42% underfunded, down from an alleged 38% underfunding last year. How on earth is it possible for the underfunding of a pension to increase during a period of time when the Dow, S&P 500, Nasdaq and fixed income markets are hitting or are near all-time highs?

And what about the valuations of these funds using realistic mark to market prices for the illiquid assets, like private equity, commercial real estate and OTC derivatives?  Harvard University is about to sell its private equity assets.  My bet is that the value received will be covered up as much as possible.  And we’ll never know where the fund was marked on its books.  But judging of the failure vs. expectations of the SNAP and Blue Apron IPOs, private equity investments are likely over-marked on the books by at least 15-20%. A market to market here would devastate the stated funding levels of every pension fund.

It’s not just Illinois, which is de facto bankrupt, and the Connecticut State pension fund, which is also de facto insolvent.  Nearly every State’s pension fund is severely underfunded, as well as most private funds.

That 42% underfunding for PERA, by the way, makes very generous actuarial assumptions about the assumed rate of return on assets vs. the assumed payouts. Those assumptions have been wrong for at least 20 years and will continue to be wrong. That’s why PERA’s – as well as most every other pension fund – has become more underfunded over the last year.

The quote at the top is from Lynn Turner, who was one of the few competent, if not respected, SEC commissioners in my lifetime. In my view, when politicians and public officials are willing to state the truth about a dire situation in public,  it implies that the situation is on the precipice and they want to be disassociated with it – i.e the rats are jumping ship.  Yesterday the Illinois State Senate minority leader resigned…

I would argue that the one of the primary reasons the Fed is working hard to keep the stock market propped up is because, if the Dow/SPX/Nasdaq were to fall 5-10% for an extended period of time – as in more than a month – the entire U.S. pension Ponzi scheme would blow up and decimate the financial system. It’s a literal black swan in full view.

This is explains the “V” rallies in the stock market when the market abruptly drops 1% on a given day – like Tuesday and Thursday this past week. The fact that the market reversed Wednesday’s overt Fed intervention on Thursday signals the possibility that the Fed is losing control.

Meanwhile, the paper price of gold has once again withstood a vicious overnight attack that began in London and continued when the Comex opened by holding up at the $1240 level and bouncing. This is the fourth time since the so-called Fed attack last week disguised by the fake news as the “fat finger” trade.

A Flock Of Black Swans Hovers Over This Bear Market Bounce

The Dow has spiked up nearly 1,000 points in six trading sessions.  Similarly, the S&P 500 has shot up 6.4% in the last six trading sessions. Nothwithstanding the continued flow of increasingly bearish economic data, stock market moves like this do not occur in a bull market.  The economic indicators continue to get worse – much worse.  Maybe the markets are giddy because they are anticipating more money printing – I don’t know.

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.  – Ludwig Von Mises,  “Human Action”

I don’t care what so-called Wall Street scam artists, financial media imbeciles and the  charts are saying.  The basic underlying economic, financial and geopolitical fundamentals continue to show two developments brewing:   the onset of a Greater Depression and war.

The black swans are right in front of our eyes in the form of debt at every level of our system:  Energy industry, student loans, auto debt, personal and credit card debt, corporate debt and real estate/commercial property/housing debt.

The energy debt crack-up boom is here and now. The Government can somewhat hide the SLMA debt problem but I’ve seen estimates that as much as 40% of the $1.3 trillion is in technical default. The Government lets people go into deferment or enables as little as no monthly payments with a new income based test that Obama initiated. But the Government still has to make payments on the debt as a the pass-thru guarantor to entities that hold the student debt.

The auto debt will become a problem this year:  More Subprime Borrowers Are Falling Behind On Their Auto Loans.   Repo rates are already at historically high levels.  The enormous glut of new cars will begin to push down the resale value of repo’d vehicles, forcing big losses on banks and auto loan-backed asset-trust investors.

The rate of delinquency on all of the new 3/3.5% down payment  mortgages issued over the last 5 years will begin to move up quickly this year as well.  In fact, the banks are still sitting on defaulted mortgages from the last housing market collapse.  But the liquidity pushed on to the banks by the Fed has enabled them to endure non-performing loans on their balance sheet.

And then there’s the tragically underfunded pensions…the State of Illinois has openly admitted to a $111 billion underfunding problem.  Several other States have disclosed 40-50% underfunding of their State-employee pension plans.  The problem with these estimates is that they rely on projected future rates of return that are too high.  Most funds assume a 7.5-8.5% ROR in perpetuity.   Last year most funds were flat to negative. YTD pension funds are quite negative.

How is it even remotely possible that any pension fund is underfunded given that, since the 2009 low, the stock market has tripled in value and the bond yields have fallen to record lows, which means bond portfolios should have soared in value?   Pension funds should be, if anything, over-funded right now.

Furthermore, those underfunding estimates assume bona fide, realistic mark to market marks on illiquid investments such as CLO’s, CDO’s, Bespoke Tranche Opportunites (think “The Big Short”), private equity fund investments, real estate, etc. – you get the idea.  I would bet most pension funds, public and private, are fraudulently over-marked on at least 20% of their holdings.   I know many pensions have allocated  in the neighborhood of 20% of their investments to private equity funds.  Most of these funds are in the early stages of becoming little more than toxic waste.

Pension underfunding is no different from a brokerage account that is using margin.   “Underfunded” is a politically acceptable term for “we are using debt to make current payments.”   The “debt” incurred will be owed to future beneficiaries.   But here’s the rub: with assumed rates of return too high and investments already overvalued for political purposes, it is highly likely that future pension fund beneficiaries – private and public – will be left holding little more than an “IOU.”

In other words, the pension underfunding problem is, in reality, another massive chunk of debt has been cleverly disguised and layered into our system.  It has been yet another mechanism by which the Wall Street racketeers have sucked wealth from the middle class.

By all appearances, this recent dead-cat bounce in the stock market is quickly losing steam.  Macy’s stock is up 1% because it “beat” estimates using “adjusted” EPS. “Adjusted” is a euphemism for “recurring non-recurring expenses that we strip out of our reported net income calculation to make the headline earnings report look better.”  Of course, hidden in between the lines is the fact that Macy’s revenues and net income (any way you want to calculate it) has dropped precipitously year over year.

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It’s impossible to know for sure how much longer this parabolic spike up can last. It might even run up to the 200 dma (red line). But inevitably the market take another parachute-less base jump off a tall building and remove another chunk of money from daytraders, retail investors and their moronic advisors and, of course, pension funds.

If you want ideas on how to take advantage of a market that is inevitably headed much lower, please visit the  Short Seller’s Journal.

The State Of Illinois Is Bankrupt

There seems to be no limit to the amount of relevant news about the U.S. economic and financial system that the mainstream media keeps off the radar screen.  I truly believe the technically insolvent status of the country’s fifth largest State is a lot more relevant to our collective lives than is the latest episode of The Jerry Springer Show Trump vs. Rubio vs. Cruz vs. Clinton “reality” TV show.

Illinois sports a $111 billion unfunded State pension, it has $8 billion in unpaid bills, tax revenues are declining, spending is accelerating and it has yet to approve a FY 2017 budget. If this were a private corporation, it would have been taken through bankruptcy court and emerged with new owners at this point.

But the true financial condition is even worse than advertised.   Let’s examine that underfunded pension estimate for a moment.  That number would be based on the existing actuarial assumed liabilities vs. the allegedly marked to market value of the assets.   I can say with 110% certainty that the total value of the assets are over-estimated by at least 10% and probably more.  Included in its cesspool of investments would be items like private equity tech investments, high yield-turned-distressed bonds, overvalued real estate and energy investments and, of course, derivatives.   There’s no way that the people running the fund have properly marked to market any of the above toxic assets.

The now-Senator and supremely corrupt Michael Bennett plugged the Denver Public Employee pension fund for a cool $250 million of losses on interest rate derivatives that he bought from his former colleagues at JP Morgan.   Denver’s pension fund is tiny compared to Illinois’ grotesque public employee entitlement monstrosity.

I don’t rely on the mainstream media for updates on the Illinois financial saga.  But every time I run across updates on the situation it has become worse.

I wonder if Obama will avoid the State of Illinois’ funeral the way he’s avoiding SCOTUS Justice Scalia’s funeral:  LINK.  Obama is a real class act…

The Entire Pension System Is A Ticking Time Bomb

Forewarned is forearmed:   If you have the ability to cash out of your 401-K plan, you should do so now or be prepared to suffer the consequences of the most corrupted Ponzi scheme in financial market history (notwithstanding the U.S. Treasury debt scheme)

It’s been my belief that one of the primary reasons the Fed is propping up the stock market is to prevent a complete catastrophe in the nation’s pension system – both public and private.   The culprit is underfunding.  The underfunded of status of every single State pension fund is highly visible.  However, through the magic of GAAP accounting and widespread upper management corporate fraud, most private pension funds may be even more underfunded than State funds.

The pension fund “time bombs” are beginning to detonate.  While the troubles with the Chicago and Illinois public retirement funds have been widely reported, last week a $17 billion private sector “multi-employer pension pension fund” announced that many of its beneficiaries will soon incur payout cuts as high as 60%.  This was not mentioned in the mainstream financial media:   Central States Pension Fund payout cuts

This is what happens when payout liabilities “catch up” to an underfunded asset base.

The total size of the retirement asset market is around $18 trillion.  Media attention gets focused on State pension funds, nearly all of which are significantly underfunded. In fact, one study showed that as of last year every State fund was underfunded and the cumulative amount of underfunding was $4.7 trillion: LINK.   It’s probably safe to assume that corporate/private pensions are underfunded as well by at least that much.

Here’s a recent article from the Denver Post which offers a surprisingly candid assessment of the Colorado Public Employees retirement fund (PERA):

PERA’s unfunded liability rose last year (to $24.6 billion) and its state and school divisions — its largest — each finished at a funding level lower than the year before: 59.8 percent and 62.8 percent, respectively. These figures fluctuate, of course, but the funding levels for both are lower now than they were in 2010 when the system’s reforms kicked in.  LINK

For the sake of argument, let’s assume that on a “macro” basis, the amount of “base case” underfunding is around 30%.  This level assumes that all assets in every fund – public and private – are accurately marked to market.   But this is highly unlikely.  I know from an inside source at one public pension fund that the fund he helps manage has about 20% of its assets allocated to private equity funds.  A significant stock market sell-off would  annihilate the value of p/e investments.  Then there’s illiquid real estate and derivatives holdings. In general those are “mark to model” assets which are more likely “marked to fantasy.”

If a bona fide, independently audited “mark to market” exercise were performed on all pension funds – public and private – it is likely that the “base case” true level of underfunding is more like 50% rather than the 30% I suggested above.

Again, a serious stock market sell-off would incinerate the carrying value of those asset sectors.  This problem is compounded by the fact that the pension fund “hurdle rate” ROR is 7.5% – in some cases it’s still 8%.   These were realistic “bogeys” when Treasury bonds were yielding a “normal” interest rate.  The ZIRP policy of the Fed has destroyed the ability of pension funds to generate anywhere close to 7.5% on the fixed income portion of their assets, forcing most to overweight high risk equity bets and below investment grade fixed income assets (junk bonds, CLO’s, risky mortgage structures, etc).

“Underfunding” of a pension fund is the same dynamic as debt.  To the extent that a pension fund is underfunded, it “owes” that amount of money to fund.  But underfunding is worse than plain debt.  It’s a Ponzi scheme.  As cash payouts increase at a faster rate than cash contributions, eventually the fund hits the wall.  Just ask the beneficiaries of the Central States Pension Fund mentioned above.

When the Fed loses control of its ability to keep the stock market propped up – which will happen sooner or later – the pension fund collapse in this country will be the financial equivalent of a nuclear apocalypse.

Here Come Pension Fund Benefit Cuts

Talk to anyone who is involved in the management of a pension fund and they will tell you the unspoken horror is that every pension fund in the country is underfunded – most of them horrifically underfunded.

A large Teamsters pension fund – 407,000 beneficiaries – just received notice that benefit cuts are coming  because the fund has to financially reorganize:  Teamsters Pension Fund Cuts

For decades corporations have been underfunding their true future benefit obligations as a means of manipulating GAAP net income for the purpose of maximizing upper management net income-based performance compensation.

There will be a wave of this coming.  Many large pension funds admit to being underfunded by 30-50%.  But these valuation assessments include an unrealistically high long term ROR assumption of 7.5% (some even higher).  Plus every pension fund invested in illiquid alternative assets like private equity deals is more than likely marked too high on the value of those investments.

When the Fed finally loses its ability to keep interest rates artificially low and a safety net under the stock market, most pension funds in this country will be wiped out.

The State Of Kansas Pension Is Desperately Underfunded

Not that the State of Kansas public retirement pension system is in much worse condition than just about every other State’s public pension fund.  I know for a hard fact that Colorado’s is significantly underfunded.  I think the tax revenues from weed sales is helping defer the day of reckoning in terms of having to raise taxes or debt.   But not for Kansas.   Kansas is looking at issuing a “Pension Obligation Bond.”  This is a muni bond that would be the general obligation of the taxpayers of Kansas BUT the cash raised would be given to the pension fund managers to play with and try to earn impossible rates of return.   I go into detail about how this deal would work in this podcast with my colleague Rory Hall of The Daily Coin:

This is nothing more than just another scheme to kick the can down the road on the fiscal nuclear bomb that big State pension retirement systems have become to the taxpayers…