Tag: Pension Crisis (page 1 of 2)

The Ponzi Scheme That’s Over 100x The Size Of Madoff

Authored by Simon Black via SovereignMan.com,

By January 1920, much of Europe was in total chaos following the end of the first World War.

Unemployment soared and steep inflation was setting in across Spain, Italy, Germany, etc.

But an Italian-American businessman who was living in Boston noticed a unique opportunity amid all of that devastation.

He realized that he could buy pre-paid international postage coupons in Europe at dirt-cheap prices, and then resell them in the United States at a hefty profit.

After pitching the idea to a few investors, he raised a total of $1,800 and formed a new company that month– the Securities Exchange Company.

Early investors were rewarded handsomely; within a month they had already received a large return on investment.

Word began to spread, and soon money came pouring in from dozens, then hundreds of other investors.

By the summer of 1920, the company’s founder was receiving more than $1 million per day from investors.

His name was Charles Ponzi. And as you could guess, it was a total scam.

Ponzi wasn’t really generating any investment returns. He was simply taking the new investors’ money to pay the old investors.

The business collapsed later that year, giving rise to the term “Ponzi Scheme”.

The most famous Ponzi Scheme in recent history was the case of Bernie Madoff, whose scam robbed investors of $65 billion.

But today there’s another major Ponzi Scheme that’s literally 100x the size of Bernie Madoff’s.

I’m talking about pension funds.

Pensions are the giant funds responsible for paying out retirement benefits to workers.

And if you think calling them a “Ponzi Scheme” is sensational, it’s not.

Pension funds (including Social Security) literally make payments to their beneficiaries with money contributed by people in the work force.

In other words, the money that people pay in to the pension fund is paid out to the people receiving benefits.

In theory this could go on indefinitely as long as

a) there’s a sufficient ratio of workers paying into the system vs. retirees receiving benefits; and

 

b) the pension funds are receiving an adequate return on investment

When one (or both) of these conditions is not being met, the pension is considered to be “underfunded,” and it starts burning through its cash balance.

Eventually it will burn through all of the fund’s assets until there’s nothing left. Poof.

Credit-rating agency Moody’s estimates state, federal and local government pensions are $7 trillion short in funding.

And corporate pension funds are underfunded by $375 billion.

One of the big drivers behind this is that investment returns are way too low.

Pension funds need to invest in safe, stable assets (like government bonds), but have to achieve yields of around 7% per year in order to stay solvent.

But today with government bonds yielding 3% or less (and in some cases bond yields are NEGATIVE), they aren’t achieving their targets.

One or two years with sub-optimal investment returns is not catastrophic.

But it’s been like this now for a decade.

And that’s just problem #1.

Problem #2 is that the ratio between workers and retirees is moving in the wrong direction.

As an example, despite all the hoop-lah about the unemployment rate falling in the Land of the Free, the number of retirees receiving Social Security is rising MUCH more rapidly.

Ten years ago in November 2007, the Bureau of Labor Statistics calculated that 146 million Americans were working.

Today that figure is 153 million, a 4.8% increase over the past decade.

Social Security, on the other hand, was paying benefits to 34.4 million Americans in November 2007, versus 44.2 million today– a 28.5% increase.

These are government statistics– and the numbers clearly show a terrible trend: there aren’t enough workers to pay for retirees.

The problems persists across state and local pensions as well.

The State of Kentucky’s Teachers’ Retirement System, for example, saw a 64% increase in retirees just in the last twelve months.

Unsurprisingly Kentucky’s retirement system is massively underfunded.

It’s so bad that Governor Matt Bevin is publicly attacking teachers who retire early (early retirement means that someone is taking benefits sooner and paying less into the pension fund).

Bottom line– this trend is real:

– Pension funds are earning a lower investment return than they require

 

– The ratio of people paying in to the fund vs. people receiving benefits is moving in the WRONG direction.

This is how Ponzi schemes invariably unravel.

Again, I’m not trying to be sensational. These are facts.

And given that just about everyone at some point probably plans on retiring, it’s important to be able to have an objective, data-driven conversation about the topic.

I know it’s uncomfortable. We want to believe so badly that the system is going to work.

I also want to be the starting Quarterback of the Dallas Cowboys. But that’s probably not going to happen either.

Retirement is a BIG component of a Plan B– which is fundamentally about taking sound, sensible steps to be in control of your own fate.

And there ARE plenty of options.

For example, you can look into a self-directed SEP IRA or Solo(k), which both allow you to contribute 10x more each year for retirement than a conventional structure.

Plus these structures allow you greater flexibility in where you can invest your retirement savings– real estate, lucrative private businesses, even cryptocurrency.

Just ONE great investment through a more flexible structure can make an enormous difference to your retirement.

And even if the Ponzi pension crisis somehow miraculously rights itself, you certainly won’t be worse off having your own independent nest egg.

It just makes sense… no matter what happens (or doesn’t happen) next.

Do you have a Plan B?

http://WarMachines.com

“It’s Not Sustainable” – Sacramento Lashes Out At Calpers After Raising Pension Payments

In the latest sign that America’s looming pension crisis is inching closer to an all-our collapse that will inevitably end in a series of bailouts – or worse, the failure to pay out retiree’s coveted benefits – a handful of California cities are lashing out at CALPers after being forced to hike pension contributions to offset expectations for long-term returns that have been revised lower by the state pension system.

Ten of the largest local governments in the capital region can expect to pay a total of $216 million to CalPERS in fiscal 2018-19, an increase of $27 million over this year, according to the Sacramento Bee. And nearly half of that increase will be borne by one local government – the city of Sacramento.

The Sacramento region’s largest local governments will see pension costs go up by an estimated 14 percent next fiscal year, starting a series of annual increases that many city officials say are “unsustainable” and will force service cuts or tax hikes.

 

The increases come after CalPERS in December reduced the expected rate of return from investments, forcing local governments and other participants in the state’s retirement plan to pay more to cover the cost of pensions.

As one might expect, city officials are less than pleased. According to Leyne Milstein, the city of Sacramento’s finance director, said the city’s pension costs will double in seven years, and while city revenues have also increased in recent years, thanks in part to a strong real-estate market, the rise won’t be nearly enough to offset the increased cost.

“It’s not sustainable,” Milstein said. “These costs are going to make things incredibly challenging.”

In a report this month, Joe Nation, a researcher at the Stanford Institute for Economic Policy Research, wrote that “employer pension contributions are projected to roughly double between 2017 and 2030, resulting in the further crowd out of traditional government services.”

Nation said he supports tax increases to pay for pension obligations, although he adds that it would be extremely difficult to muster political support for such a tax.

In a futile exercise that resembles banging one’s head against a wall, local government officials from across the state, including West Sacramento, complained to CALPers board members, warning that they would need to cut services and raise taxes to put more money toward pensions.

“We don’t know how we’re going to operate,” said Oroville’s finance director, Ruth Wright, who suggested that a doubling of pension costs in five years could force the city into the nuclear option. “We’ve been saying the bankruptcy word.”

Of course, there’s little CALPers can do. If it doesn’t mandate the increases, it knows that will increase its culpability when the music stops and every asset has been liquidated.

To wit, Steve Maviglio of the labor-backed Californians for Retirement Security said officials have the means to address the increased costs. “If city officials are truly interested in meeting their obligations, they always have that opportunity at the bargaining table or providing more revenue thru measures on the ballot,” he said.

Of course, this exercise in cya isn’t nearly enough to stave off the inevitable collapse. Nation questions whether the new CalPERS return rate is too optimistic. In his report, he provides estimates for how much local governments can expect to pay if the fund’s investments don’t meet projections. In 12 years, the city of Sacramento would see pension costs go up $94 million a year under his alternative projection.

To afford these higher costs absent higher revenues, Sacramento would have to cut 25% of police and fire services after cutting other less essential services.

Milstein said she won’t estimate when or if the city will have to start cutting employees if the current financial forecast proves correct. In the city’s current budget, officials said, “Given the current revenue forecast, the city alone cannot absorb the increased costs of providing retirement benefits.”

Some groups, including the League of California Cities are lobbying CalPERS to consider funding options besides raising employer rates, including possibly suspending cost-of-living adjustments for pensioners and looking at working current workers into less generous plans.

As we’ve noted many times, defined benefit pension plans are, in many cases, a Ponzi scheme…

Current assets are used to pay current claims in full despite insufficient funding to pay future liabilities…but unlike Wall Street Ponzi schemers like Bernie Madoff, nobody goes to jail because everybody is complicit.

While California’s problem is certainly dire, pension costs directly triggered budget battles in state capitols across the US this year. Connecticut is still struggling to pass a budget that meaningfully reduces an expected $3.5 billion two-year deficit.

Indeed, as the chart below illustrates, underfunded pensions are an endemic problem.

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Dow 500,000?

Authored by Lance Roberts via RealInvestmentAdvice.com,

I genuinely admire Morgan Housel. I think he is a brilliant and talented writer. However, he sent out a tweet on Friday that really struck a chord with me.

It’s an innocuous tweet, meant with the best of intentions to leave you with a sense of optimism as you headed into your weekend.

I get it. Really.

As Bob Farrell once quipped:

“Bull markets are more fun than bear markets.” 

Bull markets also “sell” financial products, services, and offerings. Wall Street makes money selling products and services to “Main Street” who makes money with higher prices. Financial media makes money as advertisers market their “wares.” Being bullish also gets views, likes, comments, and shares. Bull markets thrive when “greed” erases the memories of previous “bear market” losses.

As Gordon Gecko said:

“Greed is good.” 

The problem with being “bullish all the time” is that it is also very dangerous.

This is particularly the case in late-stage “bull markets,” where poor investment decisions, and excessive portfolio “risk,” are masked by seemingly ever-rising prices. Previously bad investment ideas, products, and strategies tend to resurface in a different form or package. Investment strategies like “buy and hold” and “dollar cost averaging” become popular even though they are absolutely guaranteed to leave you well short of your financial objectives in the future.

So, what does this have to do with Morgan’s tweet?

It has everything to do with one of my “pet peeves,” and the biggest fallacy pushed by Wall Street today – “compound returns.”

Markets Don’t Compound

Morgan states that in 30-years, if the Dow grows at just 5% annually, it will hit 500,000. However, if the Dow actually compounded returns at 5%, in the future, as Morgan suggests, it would have done so in the past and would ALREADY be at 500,000. 

But it’s not. We are just stuck here at a crappy ole’ 23,000.

There is a huge difference between compound returns and average returns. The historical return of the markets since 1900, including dividends, has averaged a much higher rate of return than just 5% annually. Therefore, the Dow should actually be much closer to 1,000,000 than just 500,000.

But it’s not.

Nope…we are just hanging out way down here at 23,000.

Why? Because crashes matter. This is particularly the case when it comes to your financial goals and investing time horizons.

Think about it this way.

If “buy and hold” investing worked the way that it is preached, then why are the financial statistics of 80% of Americans so poor?

The three biggest factors are: 

  1. Destruction of capital;
  2. Lack of savings, and;
  3. Time.

While lost capital gain be regained, the time lost “getting back to even,” cannot be. Unfortunately, we don’t live forever, and time is our ultimate enemy. This is also, after two major bear markets, the majority of “boomers” are simply unprepared financially for retirement. 

It is also the reason why we are facing a massive “pension crisis” in the not so distant future as capital destruction, low contribution rates, and over-estimation of returns has led to massive shortfalls to meet required distributions in the future.

Who wouldn’t love a world where everyone just invests some money, the markets rise 6% annually and everyone one’s a winner. 

Unfortunately, there is a vast difference between an “index” which benefits from share buybacks, substitutions, and market capitalization weighting versus a portfolio invested in actual dollars. The chart below shows the S&P 500 index (nominal since that is the way it is primarily discussed) versus the actual, inflation-adjusted value, of a $100,000 investment and compared to the 6% annual return rate promised by Wall Street.

See the problem? People 30-years ago who were hoping to retire, simply can’t. It will likely be the case for individuals today looking to retire 30-years from now.

With markets now back to the second highest level of valuations on record, forward returns over the next 10-years are going to be substantially lower than they have been over the past 10-years.

That isn’t being bearish. That is just math.

Dr. John Hussman previously wrote the most salient point on this topic.

“Put simply, most apparent ‘opportunities’ to obtain investment returns above zero in conventional assets over the coming decade are based on a misunderstanding of valuations, total returns, and historical yield relationships. At current valuations, virtually everything is priced for a decade of zero.” 

Throughout history, bull market cycles are only one-half of the “full market” cycle. This is because during every “bull market” cycle the markets, and economy, build up excesses which are “reverted” during the following “bear market.”

As Sir Issac Newton once stated:

“What goes up, must come down.” 

Looking beyond the very short-term overly optimistic view of “this time is different,” the coming unwinding of current speculative extremes will occur with the completion of the current market cycle. As I noted in this past weekend’s missive:

“Also, when we look at 20-year trailing returns, there is sufficient historical evidence to suggest total, real returns, will decline towards zero over the next 3-years from 7% annualized currently. 

(These are trailing 20-year total real returns, not forward)”

“Re-read that last sentence again and look closely at the chart above. From current valuation levels, the annualized return on stocks by the end of the current 20-year cycle will be close to 0%. A decline in the next 3-years of only 30%, the average drawdown during a recession, will achieve that goal.”

The second-half of this current cycle will begin likely sooner, rather than later. As stated, it is a function of time (length of market cycles), math (valuations) and physics (price deviations for long-term means.)

I am not bullish or bearish.

My job as a portfolio manager is simple; invest money in a manner that creates returns on a short-term basis while reducing the possibility of catastrophic losses over the long-term.

While “bulls have more fun” while markets are rising, both “bulls” and “bears” are owned by the “broken clock” syndrome during the completion of the full-market cycle.

The biggest secret in achieving long-term investment success is not necessarily being “right” during the first half of the cycle, but by not being “wrong” during the second half.

It’s okay to be “always be bullish” with your attitude, just not with your money.

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Kentucky Republicans Cave On Pension Reform; Stick It To Taxpayers With “Kick The Can” Approach Instead

After months of planning and cogitating over how to address the failing public pension systems in their state, which are somewhere between $40 and $80 billion under water, Governor Matt Bevin and the leaders of the General Assembly’s Republican majorities released their plan earlier today and it appears to be nothing more than the same old “kick the can down the road” approach to “pension reform” that has perpetuated the pension ponzi in this country for decades while doing absolutely nothing to address the actual crisis.

Here is a summary of the ‘plan’ courtesy of the Courier-Journalnotice that aside from putting new teachers into a “401(k)-style” defined contribution plan, the Republican proposal does pretty much nothing else except demand that more taxpayer dollars be diverted to service failing pension plans.

Here are highlights of the multi-point proposal:

 

  • There is no increase in the full retirement age for current workers

 

  • There will be no reductions in pension checks for retirees, and it protects health care benefits for them.

 

  • Future non-hazardous employees and teachers will be required to enroll in 401(k)-style plans.

 

  • Hazardous duty employees, such as police officers and firefighters, will continue in the same system they are in now.

 

  • The plan would close a loophole to ensure payment of death benefits to families of hazardous employees.

 

  • The plan would stop the defined benefits plans for all legislators, moving them into the same plan as other state employees under the jurisdiction of Kentucky Retirement Systems.

Not surprisingly, Governor Bevin, who as a politician is worried not so much about the long-term solvency of his state’s pensions as he is about getting through the next election cycle, said the plan “will be a model for this nation” as it “keeps the promise” to public workers and delivers on his promise to “do what is legally and morally right.”

In reality, of course, Bevin’s plan does nothing to “keep any promise” and simply delays the inevitable collapse of a ponzi scheme that will eventually buckle from a wave of retiring baby boomers who have been sold a lie for decades.

Just as quick reminder to Bevin, below is a recap of the changes that his own pension consultants told Kentucky’s Public Pension Oversight Board would be required to save the pensions in his state (courtesy of the Lexington Herald Leader)…suggestions that he seemingly dismissed in their entirety…

An independent consultant recommended sweeping changes Monday to the pension systems that cover most of Kentucky’s public workers, creating the possibility that lawmakers will cut payments to existing retirees and force most current and future hires into 401(k)-style retirement plans.

 

If the legislature accepts the recommendations, it would effectively end the promise of a pension check for most of Kentucky’s future state and local government workers and freeze the pension benefits of most current state and local workers. All of those workers would then be shifted to a 401(k)-style investment plan that offers defined employer contributions rather than a defined retirement benefit.

 

PFM also recommended increasing the retirement age to 65 for most workers.

 

The 401 (k)-style plans would require a mandatory employee contribution of 3 percent of their salary and a guaranteed employer contribution of 2 percent of their salary. The state also would provide a 50 percent match on the next 6 percent of income contributed by the employee, bringing the state’s maximum contribution to 5 percent. The maximum total contribution from the employer and the employee would be 14 percent.

 

For those already retired, the consultant recommended taking away all cost of living benefits that state and local government retirees received between 1996 and 2012, a move that could significantly reduce the monthly checks that many retirees receive. For example, a government worker who retired in 2001 or before could see their benefit rolled back by 25 percent or more, PFM calculated.

 

The consultant also recommended eliminating the use of unused sick days and compensatory leave to increase pension benefits.

Kentucky

 

All of which just reminds us once again of how we once summed up public pensions in this country:

Defined Benefit Pension Plans are, in many cases, a ponzi scheme.  Current assets are used to pay current claims in full despite insufficient funding to pay future liabilities… classic Ponzi.  But unlike wall street and corporate ponzi schemes no one goes to jail here because the establishment is complicit.  Everyone from government officials to union bosses are incentivized to maintain the status quo…public employees get to sleep better at night thinking they have a “retirement plan,” public legislators get to be re-elected by union membership while pretending their states are solvent and union bosses get to keep their jobs while hiding the truth from employees.  

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Study Of 10-Year State Pension Returns Highlight Full Extent Of Public Pension Ponzi

A new study of public pension returns by Cliffwater LLC has found that the median U.S. state pension plan returned just 5.9% annually over the 10 years ended June 30, 2016.  Meanwhile, as Pension and Investments notes, the top performing state pension, the $15.6 billion Oklahoma Teachers’ Retirement System, was the only fund that managed to eek out a return over 7% during the same period.

U.S. state pension plans returned a median annualized 5.9% for the 10 years ended June 30, 2016, vs. 6.8% for the 10 years ended June 30, 2015, said Cliffwater’s most recent annual state pension performance report.

 

The average 5.7% return for the 10 years ended June 30, 2016, fell within a wide range of individual pension plan returns (3.7% to 7.1%).

 

Once again, the two top-performing state pension plans for the period were the $15.6 billion Oklahoma Teachers’ Retirement System, returning 7.1%, and the South Dakota Investment Council returning 6.8% for the $10.5 billion South Dakota Retirement System. In third place was the $7 billion Missouri Local Government Employees Retirement System, returning 6.7%. All returns cited are annualized figures.

Of course, as we’ve noted on numerous occasions, the problem with those returns is that most public pensions in the U.S. have randomly decided to assume a long-term return of 7.5%, or 1.6% higher than what they’ve actually been able to achieve in practice. All of which only serves to mask the true scale of the pension crisis in the U.S. by discounting future liabilities at an artificially high rate.

As we noted in a post entitled “An Unsolvable Math Problem: Public Pensions Are Underfunded By As Much As $8 Trillion,” lowering discount rates from just 7.5% to 6.0% could result in a 65% increase in underfunded liabilities.

Pension Underfudning

But you don’t have to take our word for it, even Kentucky’s State Budget Director, John Chilton, admitted in a recent letter sent out to the Kentucky Employees’ Retirement System that if pensions were subjected to the same rules governing single-employer private plans that their underfunded level would double and federal law would have already required “that all benefits be frozen and the plans terminated.”  Per The State Journal:

“It is well known that all of the Commonwealth’s pension plans are in a crisis. Using the same investment rates of return that corporate plans are required to use – the Corporate Bond Index rate – the aggregate underfunding for all of Kentucky’s eight plans goes from $33 billion to $64 billion,” he wrote in the letter.

 

“Furthermore, if Kentucky plans were subject to federal standards for single-employer private plans, six of the plans would be designated as having severe funding shortfalls because their funded status is less than 60 percent. As such, federal law would require that all benefits be frozen and the plans terminated. This is true even using the old 2016 actuarial assumptions, rather than the more realistic discount rates and other assumptions required of private plans.

 

“The need for significant reform is evident to anyone looking at the health of the Commonwealth’s plans within that larger context.”

 

The letter said total employer contributions for Fiscal Year 2017, which ended June 30, were $857,311,370.  If there is no legislative action, that rises to an estimated $872,677,346 in FY 2018, the current fiscal year, and $1,483,863,927 in FY 2019, an increase of over $611 million, from this fiscal year.

Kentucky

Adding insult to injury, Cliffwater found that well over 50% of public pension funds (adjusted for hedge fund allocations) are invested in public equities…

The alternative investment consultant’s report also looked at pension funds’ asset allocations and performance by asset class.

 

As of June 30, 2016, the plans had an average asset allocation of 48% public equities (down two percentage points from 2015), 26% alternatives (up two percentage points), 24% fixed income (up one percentage point), and 2% cash (down one percentage point).

 

According to Cliffwater, most of the alternatives increase for the year was directed to private equity, private debt and opportunistic investments. Within alternatives, the average allocation as of June 30, 2016 was 36% private equity, 30% real estate, 18% hedge funds, 13% real asset and the remainder in other alternatives.

 

Looking at alternative performance, the median return for private equity was 9.9% for the 10 years ended June 30, and 5.8% for real estate. Individual pension funds’ real estate returns varied the most of any asset class for the 10-year period, Cliffwater noted.

…All of which raises two very important questions: (1) how is it possible that pension underfundings continue to surge when 50% of assets have participated in one of the biggest equity bubbles in history and (2) when the current equity bubble bursts, which in inevitably will, will it result in a cascading failure of retirement systems across the country and finally expose the public pension ponzi for great lie that it has always been?

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Weekend Reading: Tax Cut Wish List

Authored by Lance Roberts via RealInvestmentAdvice.com,

On Wednesday, the President announced his plan to cut taxes for Americans, return jobs to America and return the country to economic prosperity.

It’s a tall order to fill, and the proposed tax reform is a “Christmas Wish List” that will have to checked twice to determine which parts are “naughty” and “nice.”

As I pointed out yesterday,

“The belief that tax cuts will eventually become revenue neutral due to expanded economic growth is a fallacy. As the CRFB noted:

 

‘Given today’s record-high levels of national debt, the country cannot afford a deficit-financed tax cut. Tax reform that adds to the debt is likely to slow, rather than improve, long-term economic growth.’

 

The problem with the claims that tax cuts reduce the deficit is that there is NO evidence to support the claim. The increases in deficit spending to supplant weaker economic growth has been apparent with larger deficits leading to further weakness in economic growth. In fact, ever since Reagan first lowered taxes in the ’80’s both GDP growth and the deficit have only headed in one direction – lower.’

That little green bump in the deficit was when President Clinton “borrowed” $2 trillion from Social Security to balance the budget, and since there were no cuts to spending, led a surplus that lasted about 20-minutes.

The problem is that the tax plan may not provide the benefits as hoped. While President Trump suggests the plan will return “trillions” of dollars locked up overseas to create jobs, the reality, according to Goldman Sachs, is likely closer to $250 billion that will primarily go to share buybacks, dividends, and executive compensation.  

Of course, such actions do not boost economic growth but are a boon to Wall Street and the 10% of the economy that invest in the market. 

But here is the key point with respect to tax cuts. History is replete with evidence that shows tax cuts DO NOT lead to a rapid growth in the economy. As shown below, the slope of economic growth has been trending lower since the “Reagan tax cuts” were implemented.

Lastly, tax cuts have relatively low economic multipliers particularly when they primarily only benefit those at the top of the income spectrum. With the average household heavily indebted, credit is being used to sustain the standard of living, there is likely to be little transfer of “tax savings” back into the economy.

It is a simple function of math. But the following chart shows why this has likely come to the inevitable conclusion, and why tax cuts and reforms are unlikely to spur higher rates of economic growth.”

As is always the case…“it’s the debt, stupid.” 

However, here are plenty of discussions both for and against the tax plan so you can decide for yourself.


Trump Tax Cut Plan


Markets


Research / Interesting Reads


A bull market is like sex. It feels best just before it ends.” – Warren Buffett

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What Could Go Wrong? (For Public Pensions, More Than You Know)

Authored by Patrick Watson via MauldinEconomics.com,

Here’s a loaded question for you: “What could go wrong?”  

In some contexts, it can express mistaken confidence, as in, “Sure I’ll put my hand between that crocodile’s jaws. What could go wrong?”

Investors should ask the same question before entering a position. “What risks am I taking with this trade? What could go wrong if it doesn’t go as planned?”

But here’s the problem: What if you never think to ask the question because you have no idea you’re in that trade?

And guess what—this is your problem if you are a taxpayer anywhere in the US.


Photo: DWS via Flickr

Pension Pain

Part of my job is helping John Mauldin with the research for his Thoughts from the Frontline letters. Regular readers know John isn’t a doom-and-gloom guru. He’s optimistic on most of our big challenges.

Except for a few things—like the brewing state and local pension crisis.

The more John and I dig into it, the worse it looks. We have both spent many hours trying to find any good news or a silver lining, without success.

All over the US, states, cities, school districts, and other governmental entities have promised their workers generous retirement benefits, but haven’t set aside enough cash to pay what they will owe. At some point, perhaps soon, either they will have to cut benefits to retirees or stick taxpayers with a huge bill, or both.

You can read John’s September 16 letter, Pension Storm Warning, to learn more. Then you’ll see why he says to Build Your Economic Storm Shelter Now.

What else could go wrong? Plenty.


Photo via Flickr

Healthcare Goes on the Books

Local governments often give retired police officers, firefighters, teachers, and other workers a pension plus healthcare benefits.

Healthcare is expensive even in the best circumstances. Imagine your health insurer had promised to cover your medical expenses but hadn’t set aside any cash to pay for it.

Remarkably, that’s exactly what has happened. Governments currently disclose their retiree healthcare liabilities only in footnotes to their financial statements. Many have saved little to no money to cover those future expenses.

That’s about to change.

Starting in 2018, the Governmental Accounting Standards Board—the source of generally accepted accounting principles (GAAP) for state and local governments—will force officials to record healthcare liabilities on their balance sheets. Pew Charitable Trusts estimates the national shortfall will add up to $645 billion.

That’s on top of the estimated $1.1 trillion in unfunded pension liabilities they already had. In other words, this giant problem that no one knows how to solve is about to get 59% worse!

Or, more accurately, it’s going to look 59% worse. The healthcare shortfall isn’t new. What’s new is that local governments have to stop obscuring it.

What else could go wrong? Plenty.


Photo: AP

Unbudgeted Crisis

Now, let’s add another crisis on top of the already-terrible one that just got 59% worse.

You’ve probably heard about the opioid drug abuse that is killing thousands of Americans. Putting numbers on it is tricky—often, multiple factors contribute to the same death. The Centers for Disease Control estimates opioids played a role in more than 33,000 deaths in 2015. No one thinks the numbers have improved since then.

The deaths aren’t evenly distributed. This Reuters graphic shows the heaviest concentrations in the Midwest, New England, and New Mexico.

It’s probably no coincidence that some of these states also suffered above-average economic pain in the last decade or two.

The deaths from overdose and the even larger number of near-deaths are putting a huge strain on local government finances in those regions.

A recent Reuters investigation found costs soaring for everything from ambulances to autopsies. Cities and counties are racking up huge bills for courts, prosecutors and public defenders, jails, and treatment programs.

The small towns and counties dealing with this opioid plague are often the same ones whose pension plans and healthcare expenses are already underfunded.

That’s bad news for current retirees, workers who hope to retire, and taxpayers who will ultimately foot the bill. In a word, everyone.

But that’s not all.

Costly Storms

Last weekend at the Texas Tribune Festival here in Austin, I heard Houston Police Chief Art Acevedo discuss his Hurricane Harvey experience. As more areas flooded, he kept the entire department on duty for six straight days, 24 hours a day.

Acevedo said he knew this wasn’t in the budget, but the alternatives were worse. Lives were at stake, and the city needed its protectors more than ever.

The hurricane is over, but the Harvey expenses are just starting. Houston may have to spend $250 million on the disposal of flood debris… and the city is only part of the affected area.

Houston’s pension plans were already on shaky ground, so this won’t help. Many local governments in Florida, Puerto Rico, and the US Virgin Islands may see the same, thanks to Irma and Maria.

So what does it mean to you?

For one, we should plan for substantially higher state and local taxes in the future.

And if you’re a public worker or retiree, you better think about how you will make ends meet if your benefits get slashed.

I’m going to do my part by working even harder to find income-generating investments for Yield Shark subscribers, so they can replace what the pension crisis may cost them.

This is, as John Mauldin says, a problem we can’t just muddle through. All we can do is prepare for it—and now is the time to start.

See you at the top,

http://WarMachines.com

Six-Figure Pensions For University Of California Teachers Surge 60% Since 2012

Back in January 2017, the University of California system of schools approved their first in-state tuition hike in six years.  And while one might hope that the extra millions of dollars raised as a result of those hikes would go toward a better education for students, in reality, a large chuck will go to fund the exorbitant pensions of retired teachers. 

As the Los Angeles Times recently pointed out, there are over 5,400 retirees in the UC system drawing over $100,000 per year, a 60% surge since 2012.  Moreover, there are nearly 3 dozen former teachers drawing over $300,000 per year. 

Last year, more than 5,400 UC retirees received pensions over $100,000. Someone without a pension would need savings between $2 million and $3 million to guarantee a similar income in retirement.

 

The number of UC retirees collecting six-figure pensions has increased 60% since 2012, a Times analysis of university data shows. Nearly three dozen received pensions in excess of $300,000 last year, four times as many as in 2012. Among those joining the top echelon was former UC President Mark Yudof, who worked at the university for only seven years — including one year on paid sabbatical and another in which he taught one class per semester.

 

The average UC pension for people who retired after 30 years is $88,000, the data show.

 

In fact, the LA Times even provided this helpful chart detailing which former professors are sticking it to current students, and their parents, the most….apparently the prize goes to former UC President Mark Yudof who collects $357,000 per year after working for only 7 years in the university system.

 

Meanwhile, if just reviewing the list above isn’t enough to make you violently ill, consider how Yudof managed to secure his $357,000 in annual payments.  To summarize, he negotiated a sweetheart deal that capped his pension payout after 7 years, he worked 5 of those years, took a “sabbatical year” for “health reasons” in year 6, and taught 1 class a semester in year 7 before retiring with a pension worth millions.

The top 10 pension recipients in 2016 include nine scholars and scientists who spent decades at the university: doctors who taught at the medical schools and treated patients at the teaching hospitals, a Nobel Prize-winning cancer researcher and a physicist who oversaw America’s nuclear weapons stockpile.

 

The exception is Yudof, who receives a $357,000 pension after working only seven years.

 

Under the standard formula — 2.5% of the highest salary times the number of years worked — Yudof’s pension would be just over $45,000 per year, according to data provided by the university.

 

But Yudof negotiated a separate, more lucrative retirement deal for himself when he left his job as chancellor of the University of Texas to become UC president in 2008.

 

“That’s the way it works in the real world,” Yudof said in a recent interview with The Times.

 

The deal guaranteed him a $30,000 pension if he lasted a year. Two years would get him $60,000. It went up in similar increments until the seventh year, when it topped out at $350,000.

 

Yudof stepped down as president after five years, citing health reasons. Under the terms of his deal, his pension would have been $230,000. But he didn’t immediately leave the university payroll.

 

First, he collected his $546,000 president’s salary during a paid “sabbatical year” offered to former senior administrators so they can prepare to go back to teaching. The next year he continued to collect his salary while teaching one class per semester, bringing his tenure to seven years and securing the maximum $350,000 pension.

 

In 2016 he got the standard 2% cost-of-living raise, resulting in his $357,000 pension.

It’s almost as if he planned to scam the system from the moment he signed his contract…

Pension

 

Of course, with a $15 billion funding gap, the UC’s pension ponzi is only getting started with their plans to jam their soaring pension costs down the throats of students and their parents…

“I think this year’s higher tuition is just the beginning of bailouts by students and their parents,” said Lawrence McQuillan, author of California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis. “The students had nothing to do with creating this, but they are going to be the piggy bank to solve the problem in the long term.”

...but it’s ok because the kids will just take out more student loans which will all be socialized at some point anyway.

http://WarMachines.com

Teachers Demand $3,200 From Each Kentucky Household To Fund Pension Ponzi For 2 Years

We have written frequently over the past couple of weeks about the disastrous public pension funds in Kentucky that are anywhere from $42 – $84 billion underfunded, depending on which discount rate you feel inclined to use. As we’ve argued before, these pensions, like the ones in Illinois and other states, are so hopelessly underfunded that they haven’t a prayer of ever again being made whole.

That said, logic and math have never before stopped pissed off teachers and/or clueless legislators from throwing good money after bad in an effort to ‘kick the can down the road’ on their pension crises. As such, it should come as no surprise at all that the Lexington Herald Leader reported today that Kentucky’s 365,000 teachers and other public employees are now demanding that taxpayers contribute a staggering $5.4 billion to their insolvent ponzi schemes over the next two years alone. To put that number in perspective, $5.4 billion is roughly $3,200 for each household in the state of Kentucky and 25% of the state’s entire budget over a two-year period. 

Kentucky’s General Assembly will need to find an estimated $5.4 billion to fund the pension systems for state workers and school teachers in the next two-year state budget, officials told the Public Pension Oversight Board on Monday.

 

That amount would be a hefty funding increase and a painful squeeze for a state General Fund that — at about $20 billion over two years — also is expected to pay for education, prisons, social services and other state programs.

 

“We realize this challenge is in front of us. That’s obviously part of the need for us to address pension reform,” said state Sen. Joe Bowen, R-Owensboro, co-chairman of the oversight board.

 

“In the short-term, yeah, we’re obligated to find this money,” Bowen said. “And everybody is committed to do that. We have revealed this great challenge. We have embraced this great challenge, as opposed to previous members of the legislature, perhaps.”

 

In presentations on Monday, the pension oversight board was told that total employer contributions for KRS in Fiscal Years 2019 and 2020 would be an estimated $2.47 billion each year, up from $1.52 billion in the current fiscal year. Nearly $995 million of that would be owed by local governments. The remaining $1.48 billion is what the state would owe.

 

The Teachers’ Retirement System estimated that it would need a total of $1.22 billion in Fiscal Year 2019 and $1.22 billion in Fiscal Year 2020. That would include not only an additional $1 billion to pay down the system’s unfunded liabilities but also $139 million to continue paying the debt service on a pension bond that won’t be paid off until the year 2024.

Of course, the $5.4 billion will do absolutely nothing to avoid an inevitable failure of Kentucky’s pension system but what the hell…

Pension

As we’ve said before, the problem is that the aggregate underfunded liability of pensions in states like Kentucky have become so incredibly large that massive increases in annual contributions, courtesy of taxpayers, can’t possibly offset liability growth and annual payouts.  All the while, the funding for these ever increasing annual contributions comes out of budgets for things like public schools even though the incremental funding has no shot of fixing a system that is hopelessly “too big to bail.”

KY

So what can Kentucky do to solve their pension crisis?  Well, as it turns out they hired a pension consultant, PFM Group, in May of last year to answer that exact question.  Unfortunately, we suspect that PFM’s conclusions, which include freezing current pension plans, slashing benefit payments for current retirees and converting future employees to a 401(k), are somewhat less than palatable for both pensioners and elected officials who depend upon votes from public employee unions in order to keep their jobs…it’s a nice little circular ref that ensures that taxpayers will always lose in the fight to fix America’s broken pension system.

Be that as it may, here is a recap of PFM’s suggestions to Kentucky’s Public Pension Oversight Board courtesy of the Lexington Herald Leader:

An independent consultant recommended sweeping changes Monday to the pension systems that cover most of Kentucky’s public workers, creating the possibility that lawmakers will cut payments to existing retirees and force most current and future hires into 401(k)-style retirement plans.

 

If the legislature accepts the recommendations, it would effectively end the promise of a pension check for most of Kentucky’s future state and local government workers and freeze the pension benefits of most current state and local workers. All of those workers would then be shifted to a 401(k)-style investment plan that offers defined employer contributions rather than a defined retirement benefit.

 

PFM also recommended increasing the retirement age to 65 for most workers.

 

The 401 (k)-style plans would require a mandatory employee contribution of 3 percent of their salary and a guaranteed employer contribution of 2 percent of their salary. The state also would provide a 50 percent match on the next 6 percent of income contributed by the employee, bringing the state’s maximum contribution to 5 percent. The maximum total contribution from the employer and the employee would be 14 percent.

 

For those already retired, the consultant recommended taking away all cost of living benefits that state and local government retirees received between 1996 and 2012, a move that could significantly reduce the monthly checks that many retirees receive. For example, a government worker who retired in 2001 or before could see their benefit rolled back by 25 percent or more, PFM calculated.

 

The consultant also recommended eliminating the use of unused sick days and compensatory leave to increase pension benefits.

Meanwhile, PFM warned that the typical “kick the can down the road approach” would not work in Kentucky and that current retiree benefits would have to be cut.

“This is the time to act,” said Michael Nadol of PFM. “This is not the time to craft a solution that kicks the can down the road.”

 

“All of the unfunded liability that the commonwealth now faces is associated with folks that are already on board or already retired,” he said. “Modifying benefits for future hires only helps you stop the hole from getting deeper, it doesn’t help you climb up and out on to more solid footing going forward.”

Of course, no amount of math and logic will ever be sufficient to convince a bunch of retired public employees that they have been sold a lie that will inevitably fail now or fail later (take your pick) if drastic measures aren’t taken in the very near future. 

http://WarMachines.com

Weekend Reading: Yellen Takes Away The Punchbowl

Authored by Lance Roberts via RealInvestmentAdvice.com,

September 20th, 2017 will likely be a day that goes down in market history.

It will either be remembered as one of the greatest achievements in the history of monetary policy experiments, or the beginning of the next bear market or worse.

Given the Fed’s inability to spark either inflation or economic growth, as witnessed by their dismal forecasting record shown below, I would lean towards the latter.

The media is very interesting. Despite the fact there is clear evidence that unbridled Central Bank interventions supported the market on the way up, there is now a consensus that believes the “unwinding” will have “no effect” on the market.

This would seem to be naive given that, as shown below, the biggest injections of liquidity from the Fed have come near market bottoms. Without the proverbial “punch bowl,” where does the “support” come from to stem declines?

I tend to agree with BofA who recently warned” the paint may be drying but the wall is about to crumble.”

This point can be summarized simply as follows: there is $1 trillion in excess TSY supply coming down the line, and either yields will have to jump for the net issuance to be absorbed, or equities will have to plunge 30% for the incremental demand to appear.”

“An unwind of the Fed’s balance sheet also increases UST supply to the public. Ultimately, the Treasury needs to borrow from the public to pay back principal to the Fed resulting in an increase in marketable issuance. We estimate the Treasury’s borrowing needs will increase roughly by $1tn over the next five years due to the Fed roll offs. However, not all increases in UST supply are made equal. This will be the first time UST supply is projected to increase when EM reserve growth likely remains benign.

 

Our analysis suggests this would necessitate a significant rise in yields or a notable correction in equity markets to trigger the two largest remaining sources (pensions or mutual funds) to step up to meet the demand shortfall. Again, this is a slower moving trigger that tightens financial conditions either by necessitating higher yields or lower equities.”

Of course, as I have discussed previously, a surge in interest rates would lead to a massive recession in the economy. Therefore, while it is possible you could experience a short-term pop in rates, the end result will be a substantial decline in equities as money flees to the safety of bonds driving rates toward zero.

“From many perspectives, the real risk of the heavy equity exposure in portfolios is outweighed by the potential for further reward. The realization of ‘risk,’ when it occurs, will lead to a rapid unwinding of the markets pushing volatility higher and bond yields lower. This is why I continue to acquire bonds on rallies in the markets, which suppresses bond prices, to increase portfolio income and hedge against a future market dislocation.”

My best guess is the Fed has made a critical error. But just as a “turnover” early in the first-quarter of the game may not seem to be an issue, it can very well wind up being the single defining moment when the game was already lost. 

In the meantime, here is what I am reading this weekend.


Politics/Fed/Economy


Markets


Research / Interesting Reads


“If you are playing the rigged game of investing, the house always wins.” ? Robert Rolih

http://WarMachines.com

1 Million Ohio Public Employees Face Pension Cuts As Another Ponzi Teeters On The Brink

We’ve written frequently of late about the pension crisis in Kentucky where pensioners are facing potentially catastrophic benefit cuts as their politicians finally admit that they’ve been sold a fantasy for decades (see: Pension Consultant Offers Dire Outlook For Kentucky: Freeze Pension And Slash Benefits Or Else).

Unfortunately, Kentucky is not unique as there is a never-ending stream of similar pension failures popping up daily all around the country.  The latest such example comes to us from Ohio as the Dayton Daily News notes that the Ohio Public Employees Retirement System (OPERS) has been forced to consider COLA cuts for its 1 million pensioners in order to keep the fund solvent.

Ohio’s biggest public pension system is considering cutting the cost of living allowances for its 1-million members as a way to shore up the long-term finances of the fund.

 

Ohio Public Employees Retirement System trustees on Wednesday discussed options that could affect all current and future retirees, including tying the cost of living allowance to inflation and capping it and delaying the onset of the COLA for new retirees.

 

No decision has been made and trustees will discuss the options again in October. So far, some 72,000 members responded to an OPERS survey about possible changes. OPERS spokesman Todd Hutchins said 70 percent of retirees responding to the survey report that they prefer that the COLA be capped, rather than frozen.

So how bad is OPERS?  Per the latest valuation, Ohio taxpayers are on the hook for a roughly $20 billion underfunding.  Ironically, the fund ended 2016 with the highest underfunding in it’s history, after being nearly fully funded in 2007, despite a 275% surge in the S&P off the lows in 2009.  Perhaps someone can explain to us how these pensions stand a chance of ever again being fully funded if they can’t even manage to improve their balance sheet during one of the biggest equity bubbles in history?

 

Be that as it may, like all pensions the OPERS underfunding is only as good as the garbage assumptions used to calculate it.  As the following table shows, a mere 1% reduction in OPERS’ discount rate would result in a $12 billion increase in the fund’s net liability.

 

Ironically, even OPERS’ own financial report pegs its “Weighted Average Long-Term Expected Real Rate of Return” at just 5.66%.

 

Not surprisingly, OPERS is just one of many Ohio public pensions currently facing cuts.

OPERS is the latest of the five public pensions systems in Ohio to consider benefit cuts.

 

The State Teachers Retirement System of Ohio in April voted to indefinitely suspend the COLA for retired teachers. Trustees said they weren’t certain that the cut would be enough to shore up the finances of the $72-billion fund.

 

Ohio Police & Fire Pension Fund is expected to hire a consultant to help restructure its health care benefits. OP&F announced in May it would switch in January 2019 to issuing stipends to each retiree, who can then use the money to purchase coverage.

 

School Employees Retirement System, which covers janitors, bus drivers and cafeteria workers, is taking steps to link its cost of living allowance to inflation, cap it at 2.5 percent, and delay its onset for new retirees.

Meanwhile, by protesting earlier this week Ohio employees demonstrated that they’re still in the “Shock and Denial” phase of dealing with the news that their pensions were always just a clever little fairy tale told to earn their votes.  Luckily, “Anger and Bargaining” is only 2 steps away in the 7-step process…

http://WarMachines.com

This $700 Billion Public Employee Ticking Time Bomb Is Only 6.7% Funded; Most States Are Under 1%

We’ve spent a lot of time of late discussing the inevitable public pension crisis that will eventually wreak havoc on global financial markets.  And while the scale of the public pension underfunding is unprecedented, with estimates ranging from $3 – $8 trillion, there is another taxpayer-funded retirement benefit that has been promised to union workers over the years that puts pensions to shame…at least on a percentage funded basis.

Other Post-Employment Benefits (OPEB), like pensions, are a stream of future payments that have been promised to retirees primarily to cover healthcare costs.  However, unlike pensions, most government entities don’t even bother to accrue assets for this massive stream of future costs resulting in $700 billion of liabilities that most taxpayer likely didn’t even know existed. 

As a study from Pew Charitable Trusts points out today, the average OPEB plan in the U.S. today is only 6.7% funded (and that’s if you believe their discount rates…so probably figure about half that amount in reality) and many states around the country are even worse.

States paid a total of $20.8 billion in 2015 for non-pension worker retirement benefits, known as other post-employment benefits (OPEB).  Almost all of this money was spent on retiree health care. The aggregate figure for 2015, the most recent year for which complete data are available, represents an increase of $1.2 billion, or 6 percent, over the previous year. The 2015 payments covered the cost of current-year benefits and in some states included funding to address OPEB liabilities. These liabilities—the cost of benefits, in today’s dollars, to be paid in future years—totaled $692 billion in 2015, a 5 percent increase over 2014.

 

In 2015, states had $46 billion in assets to meet $692 billion in OPEB liabilities, yielding a funded ratio of 6.7 percent. The total amount of assets was slightly higher than the reported $44 billion in 2014, though the funding ratio did not change. The average state OPEB funded ratio is low because most states pay for retiree health care benefits on a pay-as-you-go basis, appropriating revenue annually to pay retiree health care costs for that year rather than pre-funding liabilities by setting aside assets to cover the state’s share of future retiree health benefit costs.

 

State OPEB funded ratios vary widely, from less than 1 percent in 19 states to 92 percent in Arizona. As Figure 1 shows, only eight have funded ratios over 30 percent. These states typically follow pre-funding policies spelled out in state law. Many of them also make use of the expertise of staff from the state pension system to invest and manage plan assets.

 

Looking at the problem on a relative basis, you find that several states have accrued net OPEB liabilities totaling in excess of 10% of the personal income generated within their borders.

Pew compared states 2015 OPEB liabilities with 2015 state personal income to show these liabilities in relation to the potential resources that states could draw on to cover the liabilities. The major ratings agencies and other financial research organizations commonly use personal income as a metric to illustrate untapped revenue sources and as an indicator of how flexible states can be in meeting their obligations under changing budget conditions. The research shows significant overall reported OPEB liabilities, but the relative size varies widely. (See Figure 2).

 

The primary driver for the variation in OPEB liabilities is the difference in how states structure health care benefits for retirees. As a percentage of personal income, the liabilities range from less than 1 percent in 16 states to 16 percent in New Jersey.  Alaska, which has the highest ratio of liabilities to personal income at 42 percent, is a clear outlier among the 50 states because of generous benefit levels that can reach up to 90 percent of premiums for some retired workers. States that provide eligible retirees a monthly contribution equal to a flat percentage of the health insurance coverage premium report the largest liabilities—and could face the greatest fiscal challenges because their costs automatically increase as plan premiums do.

 

Conversely, those states with fixed-dollar premium subsidies provide a smaller benefit and report lower liabilities. Their exposure to health care cost inflation is also lower, because a fixed-dollar subsidy does not rise with the plan premium.  Lastly, the states that only provide access to a retiree health plan, with no subsidy, have the lowest liabilities as a percentage of personal income.  Although these plans do not make an explicit monthly premium contribution to retirees, many offer retirees a reduced premium through a group rate, which is an implicit subsidy. The Governmental Accounting Standards Board (GASB), the private, independent organization that sets accounting and financial reporting standards for U.S. state and local governments, requires plans to recognize these implicit subsidies in plan financial reporting.

 

Meanwhile, the cost increases of healthcare premiums seem to massively exceed inflation and/or wage growth year after year.

In contrast, a number of states with higher premium contributions—including California and New Jersey—reported significantly greater liabilities beginning in 2014, reflecting increases in assumed future costs.   California’s plan actuary attributed $7.1 billion of the state’s $7.9 billion liability increase to changing demographic assumptions to account for longer retiree life expectancy in that year.New Jersey’s 2014 hike included a 5 percent increase in liabilities caused by changes in its mortality assumptions and a 9 percent jump linked to changes in health care cost assumptions. For states with the largest year-over-year change in OPEB liabilities, changes in assumptions were the largest driver in increasing costs.

But we’re sure it’s OK, it’s not as if there is a massive wave of baby boomers that are about to retire and ask for these benefits to be paid anytime in the near future…

http://WarMachines.com

Kentucky Budget Director Admits Pension Underfunding Would Double If “Realistic Discount Rates” Used

We’ve frequently argued that public pensions in the U.S. are nothing more than elaborate ponzi schemes being propped up by unrealistic accounting assumptions that make them seem more healthy than they actually are.  As it turns out, the State Budget Director of Kentucky, John Chilton, is coming around to our way of thinking. 

In a letter sent out to the Kentucky Employees’ Retirement System last Friday, Chilton told Kentucky employees that if their pensions were subjected to the same rules governing single-employer private plans that their underfunded level would double and federal law would have already required “that all benefits be frozen and the plans terminated.”  Per The State Journal:

“It is well known that all of the Commonwealth’s pension plans are in a crisis. Using the same investment rates of return that corporate plans are required to use – the Corporate Bond Index rate – the aggregate underfunding for all of Kentucky’s eight plans goes from $33 billion to $64 billion,” he wrote in the letter.

 

“Furthermore, if Kentucky plans were subject to federal standards for single-employer private plans, six of the plans would be designated as having severe funding shortfalls because their funded status is less than 60 percent. As such, federal law would require that all benefits be frozen and the plans terminated. This is true even using the old 2016 actuarial assumptions, rather than the more realistic discount rates and other assumptions required of private plans.

 

“The need for significant reform is evident to anyone looking at the health of the Commonwealth’s plans within that larger context.”

 

The letter said total employer contributions for Fiscal Year 2017, which ended June 30, were $857,311,370.  If there is no legislative action, that rises to an estimated $872,677,346 in FY 2018, the current fiscal year, and $1,483,863,927 in FY 2019, an increase of over $611 million, from this fiscal year.

As we pointed out last week, Kentucky’s public pensions face a daunting funding hole of $33-$84 billion, depending on your discount rate assumptions, according to a recent analysis conducted by PFM Group.

Kentucky

The problem is that the aggregate underfunded liability of pensions in states like Kentucky have become so incredibly large that massive increases in annual contributions, courtesy of taxpayers, can’t possibly offset liability growth and annual payouts.  All the while, the funding for these ever increasing annual contributions comes out of budgets for things like public schools even though the incremental funding has no shot of fixing a system that is hopelessly “too big to bail.”

KY

 

So what can Kentucky do to solve their pension crisis?  Well, as it turns out they hired a pension consultant, PFM Group, in May of last year to answer that exact question.  Unfortunately, PFM’s conclusions, which include freezing current pension plans, slashing benefit payments for current retirees and converting future employees to a 401(k), are somewhat less than ‘perfectly acceptable’ for both pensioners and elected officials who depend upon votes from public employee unions in order to keep their jobs…it’s a nice little circular ref that ensures that taxpayers will always lose in the fight to fix America’s broken pension system.

Be that as it may, here is a recap of PFM’s suggestions to Kentucky’s Public Pension Oversight Board courtesy of the Lexington Herald Leader:

An independent consultant recommended sweeping changes Monday to the pension systems that cover most of Kentucky’s public workers, creating the possibility that lawmakers will cut payments to existing retirees and force most current and future hires into 401(k)-style retirement plans.

 

If the legislature accepts the recommendations, it would effectively end the promise of a pension check for most of Kentucky’s future state and local government workers and freeze the pension benefits of most current state and local workers. All of those workers would then be shifted to a 401(k)-style investment plan that offers defined employer contributions rather than a defined retirement benefit.

 

PFM also recommended increasing the retirement age to 65 for most workers.

 

The 401 (k)-style plans would require a mandatory employee contribution of 3 percent of their salary and a guaranteed employer contribution of 2 percent of their salary. The state also would provide a 50 percent match on the next 6 percent of income contributed by the employee, bringing the state’s maximum contribution to 5 percent. The maximum total contribution from the employer and the employee would be 14 percent.

 

For those already retired, the consultant recommended taking away all cost of living benefits that state and local government retirees received between 1996 and 2012, a move that could significantly reduce the monthly checks that many retirees receive. For example, a government worker who retired in 2001 or before could see their benefit rolled back by 25 percent or more, PFM calculated.

 

The consultant also recommended eliminating the use of unused sick days and compensatory leave to increase pension benefits.

Even if all of that is accomplished, State Budget Director John Chilton said Kentucky would still need to find an extra $1 billion a year just to keep its frozen pension systems afloat. Moreover, absent tax hikes the state will ultimately be forced to cut funding for K-12 schools by $510 million and slash spending at most other agencies by nearly 17% to make up the difference.

Meanwhile, PFM warned that the typical “kick the can down the road approach” would not work in Kentucky and that current retiree benefits would have to be cut.

“This is the time to act,” said Michael Nadol of PFM. “This is not the time to craft a solution that kicks the can down the road.”

 

“All of the unfunded liability that the commonwealth now faces is associated with folks that are already on board or already retired,” he said. “Modifying benefits for future hires only helps you stop the hole from getting deeper, it doesn’t help you climb up and out on to more solid footing going forward.”

Of course, no amount of math and logic will ever be sufficient to convince a bunch of retired public employees that they have been sold a lie that will inevitably fail now or fail later (take your pick) if drastic measures aren’t taken in the very near future. 

Nicolai Jilek, the legislative representative for the Kentucky Fraternal Order of Police, said expecting first responders to work until they are 60 is problematic given the physical requirements of the job.

 

“We’re very grateful that PFM is just offering recommendations … that they are not lawmakers because his plan would be horrible for first responders,” Jilek said.

 

Stephanie Winkler, president of the Kentucky Education Association, shared a similar sentiment.

 

“The PFM had some pretty drastic recommendations that we think are not what’s in the best interest of public school employees and public school students,” Winkler said.

 

Jim Carroll, president of Kentucky Government Retirees, said his group would likely sue if the legislature proceeds with PFM’s recommendation to roll back the cost of living adjustment that retirees received between 1996 and 2012.

 

“We think its very clear that the cost of living adjustments that were granted to us are ours as long as we are retirees in the system,” Carroll said.

As such, no matter the long-term consequences, we suspect the “kick the can down the road” approach to pension reform will continue to win right up until the plans actually run out of money…then we’ll all lose together.

http://WarMachines.com

Pension Storm Coming: “This Will Become One Of The Most Heated Battles Of My Lifetime”

By John Mauldin from Mauldin economics

This time is different are the four most dangerous words any economist or money manager can utter. We learn new things and invent new technologies. Players come and go. But in the big picture, this time is usually not fundamentally different, because fallible humans are still in charge. (Ken Rogoff and Carmen Reinhart wrote an important book called This Time Is Different on the 260-odd times that governments have defaulted on their debts; and on each occasion, up until the moment of collapse, investors kept telling themselves “This time is different.” It never was.)

Nevertheless, I uttered those four words in last week’s letter. I stand by them, too. In the next 20 years, we’re going to see changes that humanity has never seen before, and in some cases never even imagined, and we’re going to have to change. I truly believe this. We have unleashed economic and technological forces we can observe but not entirely control.

I will defend this bold claim at greater length in my forthcoming book, The Age of Transformation.

Today we will zero in on one of those forces, which last week I called “the bubble in government promises,” which I think is arguably the biggest bubble in human history. Elected officials at all levels have promised workers they will receive pension benefits without taking the hard steps necessary to deliver on those promises. This situation will end badly and hurt many people. Unfortunately, massive snafus like this rarely hurt the politicians who made those overly optimistic promises, often years ago.

Earlier this year I called the pension mess “The Crisis We Can’t Muddle Through.” Reflecting since then, I think I was too optimistic. Simply waiting for the floodwaters to drop down to muddle-through depth won’t be enough. We face an entire new ocean, deeper and wider than we can ever cross unaided.

Storms from Nowhere?

This year marks the first time on record that two Category 4 hurricanes have struck the US mainland in the same year. Worse, Harvey and Irma landed directly on some of our most valuable and vulnerable coastal areas. So now, in addition to all the problems that existed a month ago, the US economy has to absorb cleanup and rebuilding costs for large parts of Texas and Florida, as well as our Puerto Rico and US Virgin Islands territories.

Now then, people who live in coastal areas know full well that hurricanes happen – they know the risk, just not which hurricane season might launch a devastating storm in their direction. In a note to me about Harvey, fellow Rice University graduate Gary Haubold (1980) noted just how flawed the city’s assumptions actually were regarding what constitutes adequate preparedness. He cited this excerpt from a recent Los Angeles Times article:

The storm was unprecedented, but the city has been deceiving itself for decades about its vulnerability to flooding, said Robert Bea, a member of the National Academy of Engineering and UC Berkeley emeritus civil engineering professor who has studied hurricane risks along the Gulf Coast.

The city’s flood system is supposed to protect the public from a 100-year storm, but Bea calls that “a 100-year lie” because it is based on a rainfall total of 13 inches in 24 hours.

“That has happened more than eight times in the last 27 years,” Bea said. “It is wrong on two counts. It isn’t accurate about the past risk and it doesn’t reflect what will happen in the next 100 years.” (Source)

Anybody who lives in Houston can tell you that 13 inches in 24 hours is not all that unusual. But how do Robert Bea’s points apply to today’s topic, public pensions? Both pension plan shortfalls and hurricanes are known risks for which state and local governments must prepare. And in both instances, too much optimism and too little preparation ultimately have devastating results.

Admittedly, public pension liabilities don’t come out of nowhere the way hurricanes seem to – we know exactly where they will strike. In many cases, we know approximately when they’ll strike, too. Yet we still let our elected officials make impossible-to-fulfill promises on our behalf. The rest of us are not so different from those who built beach homes and didn’t buy hurricane or storm surge insurance. We just face a different kind of storm.

Worse, we let our government officials use predictions about future returns that are every bit as unrealistic as calling a 13-inch rain in Houston a 100-year event. And while some of us have called pension officials out, they just keep telling lies – and probably will until we reach the breaking point.

Puerto Rico is a good example. The Commonwealth was already in deep debt before Irma blew in – $123 billion worth of it. There’s simply no way the island can repay such a massive debt. Creditors can fight in the courts, but in the end you can’t squeeze money out of plantains or pineapples. Not enough money, anyway. Now add Irma damages, and the creditors have even less hope of recovering their principal, let alone interest.

Puerto Rico is presently in a new form of bankruptcy that Congress authorized last year. Court proceedings will probably drag on for years, but the final outcome isn’t in doubt. Creditors will get some scraps – at best perhaps $0.30 on the dollar, my sources say – and then move on. We’re going to find out how strong those credit insurance guarantees really are.

“That’s just Puerto Rico,” you may say if you’re a US citizen in one of the 50 states. Be very careful. Your state is probably not so much better off. In 10 years, your state may well be in the same place where Puerto Rico is now. I’d say the odds are better than even.

Are your elected leaders doing anything about this huge issue, or even talking about it? Probably not.

As it stands now, states can’t declare bankruptcy in federal courts. Letting them do so would raises thorny constitutional issues. So maybe we’ll have to call it something else, but it’s going to end the same way. Your state’s public-sector retirees will not get what they were promised, and they won’t take the outcome kindly.

Blood from Turnips

Public sector bankruptcy, up to and including state-level bankruptcy, is fundamentally different from corporate bankruptcy in ways that many people haven’t considered. The pension crisis will likely expose those differences as deadly to creditors and retirees.

Say a corporation goes bankrupt. A court will take all its assets and decide how to divvy them up. The assets are easy to identify: buildings, land, intellectual property, cash, etc. The parties may argue over their value, but everyone knows what the assets are. They won’t walk away.

Not so in a public bankruptcy. The primary asset of a city, county, or state is future tax revenue from households and businesses within its boundaries. The taxpayers can walk away. Even without moving, they can bypass sales taxes by shopping elsewhere. If property taxes are too high, they can sell and move. When they take a loss on the sale, the new owner will have established a property value that yields the city far less revenue than it used to receive.

Cities and states don’t have the ability to shed their pension liabilities. They are stuck with them, even as population and property values change.

We may soon see an example of this in Houston. Here in Texas, our property taxes are very high because we have no income tax. Your tax is a percentage of your home’s taxable value. So people argue to appraisal boards that their homes are falling apart and not worth anything like the appraised value. (Then they argue the opposite when it’s time to sell the home.)

About 200 entities in Harris County can charge taxes. That includes governments from Houston to Baytown to Hedwig Village, plus 20 independent school districts.

There’s a hospital district, port authority, several college districts, the flood control district, a multitude of utility districts, and the Harris County Department of Education. Some homes may fall within 10 or more jurisdictions.

What about those thousands of flooded homes in and around Houston; how much are they worth? Right now, I’d say their value is zero in many cases. Maybe they will have some value if it’s possible to rebuild, but at the very least they ought to receive a sharp discount from the tax collector this year.

Considering how many destroyed or unlivable properties there are all over South Texas, I suspect cities and counties will lose billions in revenue even as their expenses rise. That’s a small version of what I expect as city and state pension systems all over the US finally face reality.

Here in Dallas I pay about 2.7% in property taxes. When I bought my home over four years ago, I checked our local pension and was told we were 100% funded. I even mentioned in my letter that I was rather surprised. Turns out they lied. Now, realistic assessments suggest they will have to double the municipal tax rate (yes, I said double) to be able to fund fire and police pension funds. Not a terribly popular thing to do. At some point, look for taxpayers to desert the most-indebted cities and states. Then what? I don’t know. Every solution I can imagine is ugly.

Promises from Air

Most public pension plans are not fully funded. Earlier this year in “Disappearing Pensions” I shared this chart from my good friend Danielle DiMartino Booth:

Total unfunded liabilities in state and local pensions have roughly quintupled in the last decade. You read that right – not doubled, tripled or quadrupled: quintupled. That’s nice when it happens on a slot machine, not so nice when it’s money you owe.

You will also notice in the chart that much of that change happened in 2008. Why was that? That’s when the Fed took interest rates down to nearly zero, meaning it suddenly took more cash to fund future payments. Also, some strapped localities conserved cash by promising public workers more generous pension benefits in lieu of pay raises.

According to a 2014 Pew study, only 15 states follow policies that have funded at least 100% of their pension needs. And that estimate is based on the aggressive assumptions of pension funds that they will get their predicted rate of returns (the “discount rate”).

Kentucky, for instance, has unfunded pension liabilities of $40 billion or more. This month the state budget director notified local governments that pension costs could jump 50-60% next year. That’s due to a proposed reduction in the system’s assumed rate of return from 7.5% to 6.25% – a step in the right direction but not nearly enough.

Think about this as an investor. Do you know a way to guarantee yourself even 6.25% average annual returns for the next 10–20 years? Of you don’t. Yes, some strategies have a good shot at doing it, but there’s no guarantee.

And if you believe Jeremy Grantham’s seven-year forecasts (I do: His 2009 growth forecast was spot on), then those pension funds have very little hope of getting their average 7% predicted rate of return, at least for the next seven years.

Now, here is the truth about pension liabilities. Let’s assume you have $1 billion in funding today. If you assume a 7% compound return – about the average for most pension funds – then that means in 30 years that $1 million will have grown to $8 billion (approximately). Now, what if it’s a 4% return? Using the Rule of 72, the $1 billion grows to around $3.5 billion, or less than half the future assets in 30 years if you assume 7%.

Remember that every dollar that is not funded today means that somewhere between four dollars and eight dollars will not be there in 30 years when somebody who is on a pension is expecting to get it. Worse, without proper funding, as the fund starts going negative, the funding ratio actually gets worse, sending it into a death spiral. The only way to bring it out of the spiral is with huge cuts to other needed services or with massive tax cuts to pension benefits.

The State of Kentucky’s unusually frank report regarding the state’s public pension liability sums up that state’s plight in one chart:

The news for Kentucky retirees is quite dire, especially considering what returns on investments are realistically likely to be. But there’s a make or break point somewhere. What if pension plans must either hit that 6% average annual return for 2018–2028 or declare bankruptcy and lose it all?

That’s a much greater problem, and it’s a rough equivalent of what state pension trustees have to do. Failing to generate the target returns doesn’t reduce the liability. It just means taxpayers must make up the difference.

But wait, it gets worse. The graph we showed earlier stated that unfunded pension liabilities for state and local governments was $2 trillion. But that assumes an average 7% compound return. What if we assume 4% compound returns? Now the admitted unfunded pension liability is $4 trillion. But what if we have a recession and the stock market goes down by the past average of more than 40%? Now you have an unfunded liability in the range of $7–8 trillion.

We throw the words a trillion dollars around, not realizing how much that actually is. Combined state and local revenues for the US total around $2.6 trillion. Following the next recession (whenever that is), the unfunded pension liabilities for state and local governments will be roughly three times the revenue they are collecting today, and that’s before a recession reduces their revenues. Can you see the taxpayer stuck between a rock and a hard place? Two immovable objects meeting? The math just doesn’t work.

Pension trustees don’t face personal liability. They’re literally playing with someone else’s money. Some try very hard to be realistic and cautious. Others don’t. But even the most diligent can’t control when the next recession comes, or when the stock market will crash, leaving a gaping hole in their assets while liabilities keep right on rising.

I have had meetings with trustees of various government pensions. Many of them want to assume a more realistic discount rate, but the politicians in their state literally refuse to allow them to assume a reasonable discount rate, because owning up to reality would require them to increase their current pension funding dramatically. So they kick the can down the road.

Intentionally or not, state and local officials all over the US made pension promises that future officials can’t possibly keep. Many will be out of office when the bill comes due, protected from liability by sovereign immunity.

We are starting to see cities filing for bankruptcy. That small ripple will be a tsunami within 7–10 years.

But wait, it gets still worse. (Do you see a trend here?) Many state and local governments have actually 100% funded their pension plans. Some states and local governments have even overfunded them – assuming they get their projected returns. What that really means is that the unfunded liabilities are more concentrated, and they show up in unlikely places. You think Texas is doing well? Look at some of our cities and weep. Look, too, at other seemingly semi-prosperous cities all over the country. Do you think the suburbs of Dallas will want to see their taxes increased to help out the city? If you do, I may have a bridge to sell you – unless you would rather have oceanfront properties in Arizona.

This issue is going to set neighbor against neighbor and retirees against taxpayers. It will become one of the most heated battles of my lifetime. It will make the Trump-Clinton campaigns look like a school kids’ tiddlywinks smackdown.

I was heavily involved in politics at both the national and local levels in the 80s and 90s and much of the 2000s. Trust me, local politics is far nastier and more vicious. And there is nothing more local than police and firefighters and teachers seeing their pensions cut because the money isn’t there. Tax increases of up to 100% are going to become commonplace. But even these new revenues won’t be enough… because we will be acting with too little, too late.

This is the core problem. Our political system gives some people incentives to make unrealistic promises while also absolving them of liability for doing so. It also places the costs of those must-break promises on innocent parties, i.e. the retirees who did their jobs and rightly expect the compensation they were told they would receive.

So at its heart the pension crisis is really not a financial problem. It’s a moral and ethical problem of making and breaking promises that profoundly impact people’s lives. Our culture puts a high value on integrity: doing what you said you would do.

We take a job because the compensation package includes x, y and z. Then someone says no, we can’t give you z, so quit and go elsewhere.

The pension problem is going to get worse as more and more retirees get stuck with broken promises, and as taxpayers get handed higher and higher bills. These are irreconcilable demands in many cases. It’s not possible to keep contradictory promises.

What’s the endgame? I think much of the US will end up like Puerto Rico. But the hardship map will be more random than you can possibly imagine. Some sort of authority – whether bankruptcy courts or something else – will have to seize pension assets and figure out who gets hurt and how much. Some courts in some states will require taxes to go up. But courts don’t have taxing authority, so they can only require cities to pay, but with what money and from whom?

In many states we literally don’t have the laws and courts in place with authority to deal with this. And just try passing a law that allows for states or cities to file bankruptcy in order to get out of their pension obligations.

The struggle will get ugly, and innocent people on both sides will be hurt. We hear stories about retired police chiefs and teachers with lifetime six-digit pensions and so on. Those aberrations (if you look at the national salary picture) are a problem, but the more distressing cases are the firefighters, teachers, police officers, or humble civil servants who served the public for decades, never making much money but looking forward to a somewhat comfortable retirement. How do you tell these people that they can’t have a livable pension? We will see many human tragedies.

On the other side will be homeowners and small business owners, already struggling in a changing economy and then being told their taxes will double. This may actually happen in Dallas; and if it does, we won’t be alone for long.

The website Pension Tsunami posts scores of articles, written all across America, about pension problems. We find out today that in places like New York and Chicago and Cook County, pension funds have more retirees collecting than workers paying into the fund. There are more retired cops in New York and Chicago than there are working cops. And the numbers of retirees just keep growing. On an individual basis, it is smart for the Chicago police officer to retire as early possible, locking in benefits, go on to another job that offers more retirement benefits, and round out a career by working at least three years at a private job that qualifies the officer for Social Security. Many police and fire pensions are based on the last three years of income; so in the last three years before they retire, these diligent public servants work enormous amounts of overtime, increasing their annual pay and thus their final pension payouts.

As I’ve said, this is the crisis we can’t muddle through. While the federal government (and I realize this is economic heresy) can print money if it has to, state and local governments can’t print. They actually have to tax to pay their bills. It’s the law. It’s also an arrangement with real potential to cause political and social upheaval that Americans have not seen in decades. The storm is only beginning. Think Hurricane Harvey on steroids, but all over America. Of all the intractable economic problems I see in the future (and I have a vivid imagination), this is the most daunting.

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Fleecing Taxpayers Won’t Fix The Pension Crisis

Authored by Nick Giambruno via InternationalMan.com,

Public pensions are a financial time bomb… and I see two ways to profit from the explosion.

In the US, unfunded public pension liabilities have surpassed $5 trillion. And that’s during an epic stock and bond market bubble.

Predictably, the government’s go-to “solution” is already making matters worse.

At first, distressed states simply increase taxes.

The state comptroller of Illinois—the most financially troubled state thanks to its pension crisis—summed it up well. He said: “We can’t go bankrupt and we can’t print money. Taxpayers are going to have to pay this bill.”

State governments always squeeze property owners the hardest.

Last year, Americans paid over $300 billion in property taxes. In Illinois and other states, property tax bills exceeding $10,000 per year are not uncommon.

Most governments continually raise property tax rates, especially governments in bad financial health. It’s easy to simply ratchet up property taxes to bring in more revenue.

Case in point: Greece, where the country’s bankrupt government has made owning property a burden.

The following excerpt from The Guardian shows just how far Greece’s government has gone (emphasis mine):

The joke now doing the rounds is: if you want to punish your child, you threaten to pass on property to them… Greeks traditionally have always regarded property as a secure investment. But now it has become a huge millstone, given that the tax burden has increased sevenfold in the past two years alone.

It’s happened in Greece. It’s happened in Illinois, which has some of the highest property taxes in the US (and rising). And it will happen elsewhere, especially in states struggling to meet pension obligations.

Here’s an excerpt from a local Chicago news outlet. The telling headline reads “Cook County property tax bills cause outrage”:

“Our taxes increased fivefold,” said William Phillips of Rogers Park. “I was expecting it to go up maybe twice as much but not four to five times as much.”

“My tax bill increased almost $1,200 dollars,” said Cornes King of Chatham.

“More than tripled. The city’s piece more than tripled,” said Logan Square resident Janelle Squire.

Fleecing Taxpayers Won’t Fix This Crisis

Politicians don’t seem to realize (or care) that it’s mathematically impossible—and counterproductive—to try to solve the pension crisis by raising taxes.

Even if tax rates double in places like Illinois, it still won’t solve the problem. And that’s assuming the overall tax collected stays the same—which it wouldn’t.

Higher taxes would make more people leave the state and actually decrease the amount collected.

This trend is already underway. More than half a million people have left Illinois over the past decade. That includes over 3,000 millionaires who’ve fled Chicago in recent months.

Many left for a simple reason: rising taxes.

Nonetheless, raising taxes is exactly what politicians are doing. And they’ll continue to do it, even though they’re long past the point of diminishing returns.

The Other Easy “Solution”

Ultimately, the Federal Reserve will paper over the pension crisis by printing more currency.

Politically, it seems impossible that the government would default outright on its promises to millions of its own employees when the Fed can simply print more currency.

Ultimately, this will turn a local debt crisis into a national currency crisis. And many states will effectively default on their pension obligations anyway, since those payouts will be made with depreciated currency.

The pension crisis has clear investment implications for gold.

When the government tries to “solve” the pension crisis with the printing press, I expect investors to rush into gold.

Gold has been a reliable safe-haven asset for thousands of years. Unlike paper money, it has intrinsic value. That value does not depend on a politician’s promise.

I think gold will reach not just multiyear highs, but all-time highs.

That’s why you should position yourself now.

I think everyone should own some physical gold. Gold is the ultimate form of wealth insurance. It’s preserved wealth through every kind of crisis imaginable. It will preserve wealth during the next crisis, too.

Gold Isn’t the Only Way to Profit

The pension crisis is making states desperate for every penny they can get.

That desperation is making them open to new ideas. Necessity has a way of quickly changing people’s minds.

Because of that, I expect many states to further soften their marijuana laws as they look for more sources of revenue.

In many of the states that have or will legalize cannabis, the tax revenue will exceed that of alcohol and tobacco. That’s not something a cash-strapped state can turn away from.

Just look at what’s happened in Colorado, which legalized recreational use in 2012. Last year, its marijuana industry generated $1.3 billion in sales and $200 million in tax revenue.

A decade ago, Colorado was receiving zero in marijuana taxes.

The industry has also generated over $250 million in taxes for Washington state already.

In California, a recent study estimated that cannabis taxes would bring in at least $1.4 billion dollars each year.

Soon, cannabis tax revenue will become a permanent part of many state budgets. This will encourage other states to follow suit.

Cannabis taxes will generate a lot of money. Still, legalizing and taxing marijuana won’t solve the multitrillion-dollar pension crisis. However, for our purposes as investors, it doesn’t have to.

We’re betting that the pension crisis will boost the US marijuana industry.

It’s already forcing states to look for new sources of revenue. Inevitably (and probably soon), they’ll find the economic benefits of legalized marijuana too good to pass up.

Legalized medical marijuana has already been approved in 29 states, plus Washington, DC. And eight states (plus DC) have approved recreational use.

It’s only a matter of time before other states start cashing in on this trend, too.

And the best way for investors to cash in on the coming US legal marijuana boom is through select publicly traded cannabis companies.

Those who get into these companies stand to make a fortune in the months ahead.

That’s why we recently released a new exclusive video. It has all the details on how you can get in ahead of the herd. Click here to watch it now.

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