Late Friday, the City of Stockton, California released its “Plan of Adjustment” for how it intends to treat its creditors in bankruptcy. The plan has been in the works since the city filed for protection under chapter 9 of the United States Bankruptcy Code on June 28, 2012. Stockton’s City Council will vote on the plan this week, on October 3rd.
According to Moody’s latest report on local government pensions, Chicago’s adjusted pension and debt burden (relative to its tax base) is the largest in the nation. The city is now putting about 8 percent of its revenues toward its pension funds. But the pensions are so underfunded that if the city made the full annual pension payment it would amount to 28 percent of revenues. The city has seriously neglected funding its pension plans.
The pension doomsayers, who claim that pensions are direly underfunded and losing ground, may be surprised to hear that public pension assets grew to their highest-ever level for the last fiscal year (ending June 30). Strong equity market returns helped propel the national median investment return to 12.4 percent. The whiff of panic about public pensions should be subsiding, except for the ongoing hot spots like Puerto Rico, Illinois and Chicago. Overall, the winds have calmed.
Although the media is full of hair on fire stories about the level of funding in public pension funds some of the funds are in great shape. State run pension systems like the North Carolina Local Government, Wisconsin Retirement System and numerous Washington state funds have extremely high funding levels, near 100 percent in the latest figures from 2011. Each plan has different state funding requirements, retiree benefit schemes, asset mix and projected investment returns. But each plan has been prudently managed, and, most importantly, excessive benefits have not been promised to retirees.
I’ve been involved in a local community effort to downsize a large proposed hospital expansion in my tiny historic village, Rhinebeck, New York (population 2,657). It’s been very interesting because it exposes many of the issues that I’ve long studied and thought about. There is the broad issue of what level of profitability hospitals can have while still being tax exempt from property and corporate income taxes. There are issues around the levels of executive compensation. And most interestingly is the question of non-profit hospital being used as shells for profit-making entities. And what does all this do to their status as tax-exempt institutions?
The implosion of the global credit bubble in 2007 and 2008 laid bare the inflated credit ratings on several trillion dollars of US structured finance products. These inflated ratings were a big contributor to the creation of a global credit bubble. In many cases these AAA securities suffered major principal losses as the underlying mortgages defaulted at rates that had never been modeled or even imagined. Bill Gross of Pimco famously said in 2007: