Here’s a report from some Stanford graduate students estimating that the California pension systems are underfunded by approximately $500 billion or approximately $36,000 for every California household (i.e., taxes on Californians are likely to increase by $36,000 per household at some point in the next decade). The report covers only three of California’s pension systems, so the total overhang will presumably be larger. This report makes one realize the impossibility of being a municipal bond investor. You can’t rely on the ratings agencies, whose corruption and incompetence were exposed in the Collapse of 2008 (every bond was rated AAA until it became worthless and then Moody’s or S&P decided to downgrade it). You can’t rely on public budget numbers because pension obligations are obscure and may be hidden in union contract fine print. So why buy these assets? If you want a bond in dollars, buy a Treasury (the federal government can and will print money to pay you). If you want to get higher yield along with diversification, buy the sovereign debt of some other country, preferably in that country’s currency (since that is the only way to mitigate the risk of a U.S. dollar collapse, as predicted by John Paulson, the most successful investor of the last decade).
10 thoughts on “California pension systems have a $500 billion deficit”
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The downside to buying California debt is ameliorated by the likelihood that the federal government will simply bail them out – as in them first, meaning everyone else takes a far second place. The potential of such a bailout is, IMHO, far higher in this administration than it would be in that of the poor lad/lass who gets to clean up the messes presently being made – that is, a bailout for CA is likely sooner rather than later, I’d think.
I’ve been puzzling about the munis question for a while. I haven’t found any deep sources, but I get the impression that there were relatively few municipal defaults back in the 30’s. But back then, they didn’t have massive pension obligations, so it’s still quite reasonable to expect some significant defaults. At least flirtations with default used as political theater to bludgeon public employee unions into pension concessions.
thrill:
Arnold seems to have gotten no traction with a Federal bailout thus far. To the extent this depends on the party affiliation of the Governor, maybe Obama, Pelosi, Feinstein and Boxer have some vague idea that voters should earn their bailout by installing Gov Moonbeam II? Seriously, though, it’s probably nothing so crass. There just isn’t any appetite for more bailouts: the tacit policy seems to be state & local austerity combined with Federal AFDB (that’s Aid to Families with Dependent Bankers aka Banker Welfare).
Phil : Are you familiar with Peter Schiff ?
Worth checking out
From 2006 where he calls the 2008 collapse :
To those who say the Federal government will bail out California: who is going to bail out the Federal government?
The common assumption that the Federal government can just print dollars is false. At some point that will drive the price of the foreign oil we depend on for our very lives into the stratosphere.
At some point, whether we like it or not, the spending, deficits, borrowing, and game of ‘extend and pretend’ must come to an end. It is not going to be pretty when it happens.
Folks: As none of us are members of Congress, I don’t think it is productive to speculate about whether or not the U.S. government will print yet more money to bail out the states. Much more practical questions to debate would be How an investor can evaluate municipal bonds? Are the ratings agencies now doing anything different? Does California have yet more pension obligations beyond the three systems studied by the Stanford group?
Daniel: With money printing comes inflation. So while the price of foreign oil will increase, wages are likely to increase as well (although probably not as much).
Phil: I’ve been wanting to buy sovereign debt of other countries, specifically Singapore, but my broker told me the minimum is $100k. So investing in foreign government bonds is not so trivial if you’re not an accredited investor. If you know of an easy way, please let us know.
Fabian: It looks as though https://www.spdrs.com/product/fund.seam?ticker=BWX may be what you want: “The Barclays Capital Global Treasury Ex-US Capped Index includes government bonds issued by investment-grade countries outside the United States, in local currencies, that have a remaining maturity of one year or more and are rated investment grade”
Note the high expense ratio of 0.5%. You’re definitely sending a lot of Wall Street folks’ kids to private school.
Sam: I watched the Peter Schiff videos. Thanks. I hadn’t heard of him before. I don’t see what he adds to the national debate, frankly. Anyone who opens up the Wall Street Journal can read op-eds about how the government is too large a fraction of the economy. Anyone who visits the Cato Institute’s Web site can learn about how government workers are paid 2X what their private sector counterparts earn. Anyone who reads the news can figure out that we’re pouring not only all of our own money on the health care bonfire but that we’re adding our childrens’ and childrens’ childrens’ money too.
To be influential in politics, one needs a compelling story for voters. Schiff’s story of “work harder” and “become as well educated and skilled as an above-average Chinese citizen” is not what voters want to hear. Advocates of smaller government have occasionally won elections in the U.S., but they didn’t sound like Schiff. Compare a Ronald Reagan speech to the two youtube clips!
Phil : you can read the Wall Steet Journal (and the most recent economist) saying American need to reduce borrowing (private and public) and grow manufacturing and real exports now. You could hear Schiff saying it four years ago. (and saying Freddie and Fannie were going to go bankrupt, and that housing prices would fall, and that the big investment banks were going to go bankrupt)
We have to start measuring economists and public policy advocates as we do scientists, not by their ability to describe but their ability to predict.
Sam: There were plenty of bearish economists and investors from 1995-2010. I don’t think that we can single out Schiff as a unique clairvoyant (where was he when John Paulson was making $15 billion shorting mortgages and banks?).
I’m not sure that there is any historical precedent for a democracy doing what you suggest, i.e., making a rational decision regarding its leadership. Germans probably needed a leader who wouldn’t invade Russia, but they elected Hitler. Argentina needed leaders who would keep their economic policies within the realm of the possible, but they elected demagogues of various sorts. The recovery procedure was not for Argentine voters to wise up, but for smart Argentines to emigrate to more promising countries. Check out http://philip.greenspun.com/blog/2009/03/16/how-rich-countries-die/ ; the final result of England having powerful special interest groups was its fading into insignificance as an economy, not the election of plain-speaking politicians who promised only what was realistic.
[Lest we think that this is a new phenomenon, consider that Cassandra was great at predicting stuff, but she was not elected to public office either in Troy or Mycenae.]