What Meredith Whitney was talking about
Meredith Whitney’s prediction last November of hundreds of billions of dollars in municipal defaults over the next 12 months was totally wrong. But she was right on one thing: pension plans for state and local workers are unsustainable. I totaled up the data in a new paper by Robert Novy-Marx and Joshua Rauh (page 50) and got a nationwide funding shortfall of approximately $1.19 trillion. This data is from June 2009; pension fund data is only reported every three years, so it wouldn’t reflect the large equity-market increases over the last two years. But it’s still a whopping sum. On average U.S. public pension funds are only 61% funded.
The chart above shows the ten states with the least funded pension plans on a percentage basis. Illinois has the worst problem, as it does on many muniland metrics.
There are not any easy solutions to this problem. Options for states include cutting other expenses or raising taxes to make larger pension contributions. States generally cannot lower or terminate already promised benefits as these are rights enshrined in state constitutions. There have been cases where future increases have been lowered or withdrawn, and this can help make up the shortfall.
Meredith Whitney was right about the pension issue but offered no solutions. This problem can simmer for decades before pension funds are exhausted, but not addressing the problem means it gets bigger and costs more to fix. This is one of muniland’s biggest problems, and one to be aware of since bond markets punish states for unsustainable pension loads.
Full data table here.