Thursday, April 17, 2014
FAIRFIELD-SUISUN, CALIFORNIA
99 CENTS

Pension debt uncertainty may ripple into bond markets

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From page C1 | December 08, 2013 | Leave Comment

This should come as no surprise, but it is a glaring example of the problems that cities, counties and states will have if they want, or need, to right their overloaded pension systems.

For years legislators in Illinois have been trying to fix what The Wall Street Journal describes as “the nation’s most broken state public-employees retirement system . . .” It was a rare occasion when Democrats and Republicans in a state not known for political fraternity could agree on a difficult issue. I’m guessing that Illinois is not the only state facing gargantuan pension problems, so I would bet that legislators in other states are watching the situation carefully.

The recommended fix consists primarily of raising the retirement age for young, newly enrolled workers, trimming very expensive cost-of-living increases and putting a lid on the salary on which pensions are calculated to eliminate a $100 billion pensions shortfall. The Associated Press reported that the new rules will save the state $160 billion over the next three decades and fully fund state’s beleaguered pension systems by 2044.

I admit that I’m surprised that the legislation made it to the desk of Gov. Pat Quinn, a Democrat, and even more surprised that Quinn signed the legislation into law. After all, he most likely running for re-election next year, so doing the “right thing” might well sink his candidacy because of probable strong opposition from Illinois unions.

The Illinois governor is not the only elected official facing the pension shortfall monster. Rahm Emanuel, now mayor of Chicago after a stint as a senior White House aide, is in charge of a city with an enormous pension shortfall. If you know even a little bit about the nation’s “Second City,” you would know that previous mayors and aldermen were not known for fiscal prudence. Mayor Emanuel has said flatly that if nothing is done to mitigate the pension shortfall, the only solution will be property tax increases and cuts in services.

There’s at least one other major problem that could result from an insolvent pension system. That would be the deterioration in the perceived safety of any and all municipal bonds issued by the city of Chicago. It would become difficult, if not impossible, for Chicago to issue municipal bonds with what would amount to a pension fund bankruptcy looming over its finances. In addition, municipal bond funds that hold Chicago, or even the state of Illinois, obligations, might see their new asset value weaken.

What legislators are faced with is potential anger among current state workers who are already protesting that promises be kept, regardless of whether or not it turns the city’s financial system on its head. As an aside comes news this week that a judge has given the green light to allow Detroit’s pension funds to be included as that city’s massive bankruptcy filing.

State treasury officials in Illinois are quick to point out that the state constitution stipulates that debtholders be paid first in the event of a severe financial breakdown. That should mean that Chicago and Illinois bondholders have nothing to worry about, and there’s no reason to think otherwise.

But there is still the problem of uncertainty, which bondholders, and indeed, most investors, aren’t comfortable with. We don’t know what the ripple effect might be in the event of a major pension fund disaster. Imagine, Chicago could become kind of a Midwestern city of Vallejo.

Bud Stevenson, a retired stockbroker, lives in Fairfield. Reach him at Bsteven254@aol.com.

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