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January 15, 2018 | Drastic Pension Cuts Will Hit California, Kentucky, Other States

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
The CA Supreme Court will rule on pension cuts. Curiously, the court’s ruling will be irrelevant in case of bankruptcy.

California Governor Jerry Brown said legal rulings may clear the way for making cuts to public pension benefits, which would go against long-standing assumptions and potentially provide financial relief to the state and its local governments.

Brown said he has a “hunch” the courts would “modify” the so-called California rule, which holds that benefits promised to public employees can’t be rolled back. The state’s Supreme Court is set to hear a case in which lower courts ruled that reductions to pensions are permissible if the payments remain “reasonable” for workers.

“There is more flexibility than there is currently assumed by those who discuss the California rule,” Brown said during a briefing on the budget in Sacramento. He said that in the next recession, the governor “will have the option of considering pension cutbacks for the first time.”

That would be a major shift in California, where municipal officials have long believed they couldn’t adjust the benefits even as they struggle to cover the cost. They have raised taxes and dipped into reserves to meet rising contributions. The California Public Employees’ Retirement System, the nation’s largest public pension, has about 68 percent of assets needed to cover its liabilities. For the fiscal year beginning in July, the state’s contribution to Calpers is double what it was in fiscal 2009.

“In the next downturn, when things look pretty dire, that would be one of the items on the chopping block,” Brown said.

Pension Cuts Are Coming

It’s refreshing to hear a politician admit the obvious: Pension cuts are coming.

However, whether or not the cuts are “reasonable” is irrelevant in cases of bankruptcy. Bankruptcy is under federal, not state law.

Municipal Bankruptcy State Laws

The above map is from Governing.Com.

Municipalities located in states that are green, generally have a right to declare bankruptcy. Those in purple don’t. There could be bankruptcy legislation at the national level that would supersede state constitutions and I am in favor of that.

Meanwhile, despite the enormous gains in the stock market in the past decade, CALPers is still only 68% funded, and that even assumes 7-8% returns into the future.

Illinois and Kentucky are much worse off.

Even 3% gains would devastate most pension plans. Steep actual losses are likely.

Translation: Things are dire and pension cuts are coming.

Municipalities will resort to bankruptcy if necessary, in states that allow it. Those states that do not allow municipal bankruptcy will be forced one way or another to do so.

Mike “Mish” Shedlock

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January 15th, 2018

Posted In: Mish Talk

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