What Meredith Whitney was talking about

August 25, 2011

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 There have been cases where future increases have been lowered or withdrawn, and this can help make up the shortfall.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.


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Do the numbers above include unfunded OPEB liabilities? If not, from my research it seems that OPEB plans are 0% funded for the most part and could really cause a problem for municipalities in the future as well.


Posted by AndySpeight | Report as abusive

Hi Andy:

Thanks for sharing your thoughts.

I’m very interested in this topic.

The Rauh paper didn’t take other pension and employment benefits into account that I know of and this data doesn’t include them. Courts have generally held that those benefits can be reduced or eliminated so I’m not sure they are as big a problem.

Posted by Cate Long | Report as abusive

Summarizing a detailed report, Mayor Alvin Brown’s Pension Transition Committee recommended three general options to “reduce the current crisis of cost” in funding the City’s pension plans:
• Reducing benefits for new and current employees.

• Increasing employee contributions.

• Terminating, freezing or closing current pension plans and setting up lower-cost plans.

“It is with a strong sense of urgency that we report to the mayor our findings and recommendations regarding the City of Jacksonville’s defined pension benefit system,” said the committee report.

It said the total of all City plans was most recently reported to be more than $1.6 billion and pension costs are expected to “skyrocket by more than 50 percent or more in the next five years if the current pension structure remains in place.”

http://www.jaxdailyrecord.com/showstory. php?Story_id=534339

Posted by Cate_Long | Report as abusive


Thanks for the feedback. As a municipal credit analyst, I am also very interested in this topic and look forward to reading any other future posts regarding unfunded pensions/opebs.


Posted by AndySpeight | Report as abusive

It would be great to have updated data, as the equity markets have rallied 22% from June 30 2009 closing.

Posted by SLooi | Report as abusive

I agree SLooi. If you are aware of more current data please let me know. Pension returns are reported at three year intervals and the intervening periods can have substantial swings in equity valuations.

Posted by Cate Long | Report as abusive