Season Investments


There Will Also Be Bailouts

Posted on December 6, 2016

“The money has to come from somewhere.” – Keith Brainard, Nat’l Assoc of State Retirement Administrators

2016-12-06_pension.jpgDuring the recent election season we saw many hot button issues come to the forefront and dominate the conversation. Immigration, foreign policy, health care, tax reform…and the list goes on. But one of the most important financial and economic dilemmas currently facing our country – and perhaps the most important from an immediacy standpoint – remains lurking beneath the mainstream’s radar. While most of the time I feel like the media (and those who obsessively watch “the news”) consistently blow things out of proportion, in this case I feel quite the opposite. A real and present danger is being swept under the rug due to a lack of politically agreeable solution. The danger I’m referring to is the looming crisis lying in wait within our state and local pensions.

Back in June I wrote a post entitled There Will Be Cuts profiling the current malaise of the enormous Central States Pension Fund. After re-reading this post I honestly believe it is one of the most important topics we have ever covered on our blog. While it is still not dominating the headlines, in the past six months the looming crisis has begun to receive more and more attention in the media. A handful of articles, brought to my attention by Ben Carlson whom I read every morning, have recently shed more light on the shocking realities facing public pension funds around the country.

The New York Times, for instance, just ran a seriously mind-boggling story profiling the Dallas police and firefighter pension fund. According to the plan’s actuary, the plan has an unfunded liability of nearly $7 billion, or roughly seven times the city’s annual general fund budget. This has occurred as a result of grossly unrealistic plan assumptions and benefit guarantees that were put in place all the way back in 1993. Now, after 23 years of unmet expectations, there is a Texas-sized problem bearing down on the city of Dallas. Here are a couple of startling quotes pulled directly from the article,

“The City of Dallas has no way to pay this. If the city had to pay the whole thing, we would declare bankruptcy.” - Lee Kleinman, City Council member

“It’s not going to be pleasant. Without some cuts this whole thing will come crashing down…” - John Whitmire, State Senator

“We all know some of the benefits, guaranteed, were just probably never realistic. It was good while it lasted, but we’ve got some serious financial problems because of it.” - John Whitmire, State Senator

“Dallas appears to be walking into the fan blades of municipal bankruptcy.” – Michael Rawlings, Dallas City Mayor

These are city council members, state senators and mayors. Talking about Dallas, TX. Suggesting it may be on the verge of bankruptcy. This is nothing short of a crisis.

2016-12-06_CT_pension.jpgAnother high profile situation is found in Connecticut where the state is now spending 10% of its annual budget to pay down unfunded pension liabilities. Despite being the richest per capita state in the country, its 49% pension funding shortfall (roughly $26 billion) is the third worst in the country behind Illinois and Kentucky. From a recent WSJ article,

The state’s pension problems represent “a ticking time bomb,” said State Sen. L. Scott Frantz, a Republican whose district includes the wealthiest section of the state. He is worried residents will leave and Connecticut will “end up as another Detroit,” a city that filed for bankruptcy protection in 2013, absent more dramatic changes.

That’s a United States Senator. Talking about the state of Connecticut. Suggesting it may be on the verge of bankruptcy. Again, this is nothing short of a crisis.

By far the saddest report I read was in reference to Erie, Pennsylvania, where public schools are being absolutely crushed under the weight of burdensome pension costs. From another WSJ article,

Students in Erie receive stapled copies of “Everyday Mathematics” rather than the hardcover textbook. Two winters ago, 21 buckets were needed to catch all the leaks from the ceiling of a second-grade classroom following a snowstorm. Since 2011, one-fifth of the workforce has been eliminated and three schools have closed.

Unfortunately the problems are not constrained to just a few corners of the country. This is a national issue that is just beginning to come to a head. The average funded status of state pension plans has been estimated to be in the 40-60% range on total pension liabilities of several trillion dollars…not a small issue. Unfortunately there is no easy fix, and certainly no politically attractive one. Hard decisions will have to be made, and they will have to include some give and take from all vested parties. There Will Be Cuts…but they won’t be enough, so There Will Also Be Bailouts

If you ask me what I am most concerned about from a financial/economic perspective I would have a hard time identifying something that would top this issue. I am typically a level-headed guy, but quite honestly the more I understand the ins and outs of this crisis the angrier I get. The problems we face today are the result of decades of poor leadership, bad decision making, empty political promises and a growing spirit of greed and entitlement at all levels of society. The writing has been on the wall for many years, yet no materially corrective action has been taken. Our children are already suffering as a result. It’s time to stop kicking the can down the road and for the generations of workers and political leaders who created this mess to make the tough decisions necessary to right the ship. Not everyone will be happy with the solutions, but the money is going to have to come from somewhere. 

Ironically, if we managed our clients’ money the way our elected officials have managed the public pension funds over the past handful of decades we would be in jail and our clients would be on the streets. Luckily we have a little more common sense than they do. Planning conservatively for realistic outcomes means we have to set a course for over-funding our clients’ objectives. This creates margin, opens up options and ultimately empowers them with freedom to pursue what makes their lives truly rich.

david_headshot_bw.jpgAuthor David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.

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