The oncoming wave of public pension debt is even bigger than it seems

The pension crisis in Dallas, Texas, is starting to create panic among beneficiaries – and the situation is beginning to balloon out of control.

Panicked local retirees have pulled $220 million from the fund for police officers and firefighters – in a six-week period between August and September – following a recommendation that they no longer be allowed to take out large blocks of money.

The fund is now near collapse and is seeking a massive bailout. The Dallas Police and Fire Pension System has asked the city for a one-time infusion of $1.1 billion, an amount roughly equal to Dallas’ entire general-fund budget.

But it’s not even close to what the pension fund needs to be fully funded.

How could this happen when Dallas is one of the largest and fastest-growing cities in the country?

After risking their lives, retired Dallas firefighters and police could lose more than half of their pensions.
After risking their lives, retired Dallas firefighters and police could lose more than half of their pensions.

The answer is simple: Mismanagement and unrealistic expectations.

The Dallas Police and Fire Pension System was, at one time, well regarded in the pension world for its diversity among asset classes. But a series of aggressive real estate bets from Hawaii to Paris and a conflict over the value of those properties triggered more than $500 million in losses. That left the fund with enough to pay just 45% of future benefits.

Yes, you read that right: The fund can only afford to pay less than half of its future benefits.

Officials are warning that without major changes, the pension could go broke by 2027. What’s more concerning is that the plan is reportedly $7 billion in debt. And if a court ordered the city to cover that debt, it couldn’t. And that could send the city into bankruptcy.

So who’s on the hook for the shortfall? That’s right, you, the taxpayer.

Think about this: To pay just the one-time $1.1 billion cash infusion, they would have to increase the property tax rate by 130%. Yikes!

This is a massive crisis ready to spread throughout the nation. And besides mismanagement and unrealistic expectations, America’s aging demographic is also exacerbating the problem, with fewer workers paying for benefits.

What is happening in Dallas is an extreme example of what’s happening in many other places around the country.

Dallas is not alone: California, Connecticut, Illinois, and New Jersey all face similar problems.

In fact, S&P Global Ratings recently cut its rating on New Jersey’s general-obligation-bonds, citing the state’s rising pension liabilities as the main catalyst for the downgrade.

I have been warning of a looming pension crisis for years, and 2017 looks to be the tipping point.

And don’t forget: The pension crisis – like the approaching sovereign debt crisis – is not just a U.S. problem. It’s a global problem.

I am putting together a full Wave analysis report on the looming pension crisis, so be on the lookout for it early next year.

Stay safe and best wishes,

Larry

 

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Comments 34

  1. vega November 28, 2016

    odd the executive branch pensions never have a shortfall or are forced to take cuts, just like in the corporate world, even when in bankruptcy.

    austerity for the masses, good times for the rich and connected.

    Reply

    • tom seaton November 29, 2016

      Executives and and politicians should not get one penny more than us little guys. If people under them only get 50% so should they. and the ones that lost the money should get “nothing” instead of huge a bonus. I was a union worker for 35 years.Our local’s pension was about the same condition as Dallas firefighters. my pension went down from about $1441.00 to $724.00. we were not “bailed out” why should we bail out certain groups and not others. we are all in this together. we need to demand that pensions not be allowed to “play” the stock market with our money. the market is going to crash again soon, and millions of peoples pensions will be wiped out. it will be a lot worse than last time.

      Reply

  2. KJ November 28, 2016

    Thanks
    Larry

    Reply

  3. RZ November 28, 2016

    You have been saying, Here it comes!

    Reply

  4. cbanalyst November 28, 2016

    My mother used to say, “Chickens come home to roost” The Liberals love to garner votes by giving away things, never thinking about the possible consequences. Voters are also to blame for putting in these failures decade after decade. Now, when the bills need to be paid, there is no money. I say, raise the taxes sufficent to meet these unearned but committed obligations. Maybe if the taxpayers finally realize that there is “no free lunch” and that they will be the ones to pay for this extravagance, they will elect responsible stewards of their money.

    Reply

    • Toney November 29, 2016

      Unfortunately the “taxpayers” realize there is “no free lunch” for taxpayers!! Its the non taxpayers eating the lunch that the problem!! Helping people is one thing, creating generations of dependency is quite another!

      Reply

    • John November 29, 2016

      I think back to the day when many local politicians were elected based on the perception of their voters that they would be good stewards of finite resources…dollars coming from them. Those politicians have not been “fun” or with it for decades now, as guarding the wallet is not a charismatic enough activity. In the brave new world, federal money is “free”, state money is “free”, college education and health care are supposed to be free. Maybe Cadillac Escalades will follow. Put another way, spending other people’s money is a lot more fun than frugality, and, frugality is no longer either appreciated or understood.

      Reply

    • Jerry November 29, 2016

      Yes, bringing in a few hundred thousand from the middle east with no vetting a dumping them on the welfare rolls is arrogant stupidity. The dems see them as “voters” promising that we will support them on welfare for the rest of their lives. Trump is right, time to support veterans and Americans FIRST, dump illegal aliens fast.

      Reply

  5. Chemiker November 28, 2016

    So many agencies “prove” that they are solvent by assuming totally unrealistic returns. My state’s pension assumes that it will get more than 8% return. I asked our state Treasurer who his broker was, as I wanted in. No answer.

    Reply

  6. Christopher Cooke November 28, 2016

    Like a voice in the wilderness, but it should be like an atomic explosion. This is going on all over the country and will literally “sink”us. The problem is so huge that unless the promises are reduced/abrogated, almost every state and municipality will go broke, and there is a limit to how much the taxpayer is able to pay. ” It will be easier for a camel to fit thru the eye of a needle than to solve this problem.”

    Reply

  7. Fred Phil November 28, 2016

    Thanks Larry

    I enjoy your commentaries. I hope your forecast for a wall of money heading for the US markets comes true.

    Best Wishes
    Fred

    Reply

  8. Tony Ferrari November 28, 2016

    Larry— very interesting article.– I hope in your next –future article , you will address
    Employee monetary (mandated) participation including a reasonable percentage,
    that would be deducted from their payroll, to help fund same. Also, the wording,that will eliminate future, early lump sum payments.

    Reply

  9. steven November 28, 2016

    if you want to start a run on a bank or any depository fund for that matter, just tell the depositors that they will not be allowed to withdraw their money next week. The scene in the bank in Mary Poppins was quite real, and a foreshadow of what is to come.

    Reply

  10. young lee November 28, 2016

    Gold?
    Down below $1200.
    What now?

    Reply

    • UDO November 29, 2016

      young lee,
      further down !!!!

      Reply

  11. Bruce D. Noyes November 28, 2016

    Thank you.

    Reply

  12. F151 November 28, 2016

    You mentioned California…and you are RIGHT. For several decades now, Democratic Party politicians have promised huge pension benefits to the government unions. These benefits were totally beyond the government’s ability to pay. Taxpayers were promised pension fund returns of at least 7%. Most have been lucky to break above 1%. After the union members got the taxpayer’s tax funds….they voted again for the Dems that gave it….and the cycle of corruption started again with more huge raises and pension bonanzas given the next year…and again the next year…and so on. As with Dallas….these ill-advised California-union corrupt promises will soon come home to roost/bust. And the same for Illinois….and other cities run by Democrats….Be careful if you invest in Munis.

    Reply

  13. ron goddard November 28, 2016

    good on you larry, a very true picture of smoke and mirrors by idiots in charge. now we have a world wide problem of over population and diminishing food supplies, and a huge credit bust, except maybe in russia and china will send people off their rockers and blame the government. keep up the good work.

    Reply

  14. H. Craig Bradley November 28, 2016

    NOT MY PROBLEM

    Most of the general public still thinks this will all just “blow-off” and go away, like the Greek Debt Crisis a number of years ago. What the public does not know or fully realize is how much suffering the Greek pensioners are now experiencing, as well as the high unemployment and poverty levels. It could happen here.

    The problem in America is we can still “sweep the dirt” under the carpet for an extended period of time to come. Just look at how long Puerto Rico has been on a problem list of sorts. 2027 is still a full decade or 10 years away. So, many can figure its “someone else’s problem”. We seem unconcerned until a real crisis hits us. Detroit was Detroit. Nobody much cared because most residents left town a long time ago.

    Reply

  15. Ronald Bingel November 28, 2016

    Are we close to a bottom in the gold stocks or do we still have far to go. I have been waiting for your buy signal. I have been reading your articles for years. Thanks Ron Bingel

    Reply

  16. Stanley Dean November 28, 2016

    Simple: Starting with Senators and congress,

    1. Put them on the Medicare Plan that a lot of us are on.

    2. Calculate how much you owe and how much you have.

    3. Privitize them and give them their share of the money. If it has to be discounted at
    25%, so be it. Oh and don’t forget to tell them to die on time or that will be 100%
    on them.

    Reply

  17. paul November 28, 2016

    When police and fire personal retire making over 100,000 in retirement what do you expect ?
    Only a matter of time before the end comes ..

    Reply

  18. Drewry November 28, 2016

    Everything is bigger and better in Texas..Over the top enthusiasm has its price.
    High risk investments are difficult to be sustainable for pension funds.
    Promises made in high times …are not able to be met in times of slow growth.
    Solution is to reset expectations to a lower level. Eventually move to
    Employee / Employer. Contribution plan.. These big pensions and promises
    were made in many large Municipalities.

    Maybe the stock market will bail them out. …. then again. maybe not.

    Reply

  19. Randy November 28, 2016

    Texas already has some of the highest property taxes in the country as it does not have a state income tax. Dallas residents could not afford to pay much more than what they pay now. The Pension Benefit & Guaranty Corp probably doesn’t have the reserves for this large of a bail out. So, Would Dallas default on its municipal bonds or just let the pension fund go bankrupt? And, “What would the ripple effect look like?”

    Reply

    • H. Craig Bradley November 29, 2016

      WHY GREED IS BAD

      The Federal Pension Benefit and Guaranty Corporation does not cover public pensions, to my knowledge, only private pensions. Even then, its woefully underfunded. Current law and policy limits payouts to no more than $ 55,000/year per pensioner (claimant). So, if your state public pension or city employee pension fund promises you 100% of your salary in retirement or for about 25-30 years, then maybe its too good to be true (realized).

      Sure, $120,000/year in retirement sounds pretty good- too good if you think sensibly. Problem is, local politicians promised too much to too many (unions) for too long. Pensions are not entitlements. So, not correcting this funding imbalance while there still is time is a catastrophe in the making. By the time the pension funds play-out, its way too late to do anything about it.

      Reply

  20. Rog November 29, 2016

    It’s crunch time for your gold predictions, Larry.
    Here’s what Harry Dent says:
    In short, I reiterate my warning to sell gold. I said to do so just before the top in 2011 and on the exact day of the silver top, and again recently when we got near that $1,400 target.

    I’m saying it again now for those that didn’t heed my warning – and I understand the natural emotional attachment to gold – but that just won’t hold in this deflationary environment as gold is primarily an inflation hedge, and yes, a commodity driven by consumption from consumers like the Chinese and Indians.

    Modi’s potential impact on gold is the most urgent reason to sell yet. Don’t wait until his policy announcement in case it occurs. Gold could shed $200 in a day or two. Cut your losses now!
    …..
    Well you can’t both be right, he thinks it will go down to $700.
    Which one of you is the genius?
    Rog

    Reply

    • H. Craig Bradley November 29, 2016

      SUPPLY/ DEMAND REALITIES IN GOLD

      The future risk is there will be a ton of buyers at $700.00/ounce and the likelihood of a premium being imposed (+ 20%) to conserve the supply of gold at bullion wholesalers (dealers). Such a low price will draw-in many more retail buyers, as it did in 2015 for silver (coins), amounting to a “run on gold bullion”. In the end, the net price will be more than you think, certainly not the spot price.

      Reply

  21. Toby Howes November 29, 2016

    Larry,

    Barring a mighty collapse today & tomorrow … can you confirm that now is the time to go long on US indexes given that the Dow will have achieved your trigger target of a monthly close over 18,500. Additionally, what’s your view on the scale of any pull back from here.

    Kind Regards

    Reply

  22. Supersonic Scientist November 29, 2016

    The whole concept of a pension is and always was fully retarded.

    When you stop working, you stop getting paid…end of story. If you are too stupid to save for your own future and rely on your former employer to fund your retirement and they go belly-up, you get what you deserve.

    Reply

  23. Prairie Network November 29, 2016

    So if this pension issue is so true then there is no need for the International communication service to operate either and there will be no need for the BEA BANK to operate either which is the Federal banking system in the USA and there is no need for WTC wind farm and SYNDGAS to operate either
    the BEA BANK pays out to all people in USA for socail sercurity payments and to all fireworkers and to all emergancy workers and to all Police officers of USA and now your telling me that this is wrong but i think that you are wrong of making ilegal federal statments to scare the public too

    Reply

  24. Ron November 29, 2016

    Hopefully, Trump will follow through on his ideas to reduce the Fed Employees through attrition.. and to reduce the pension plan_ to reflect the Real World ..
    If he can do that, he will embarrass the States into following his lead…

    Why should a State or Police or Fire employee be allowed to boost their last few years before retirement with special treatment, such as Overtime and last minute promotions
    to increase their pensions to nearly the amount of their regular pay?
    Private Companies do not use Overtime to calculate pension levels..

    When a Cop is killed on duty, there have been cases where the rank was raised or a promotion was given posthumously to boost the Spousal survivor pension…
    It seems like a caring thing to do… but is it fair to the taxpayer when MOST employees get a boost when they retire at the full pension amount of around 80% of their pay,
    with a Cost of Living increase as well ?
    This is also based on 25 years of service… but who in Private Business has a number that low?

    Pensions are not supposed to exceed the 80% level of the average of the last five years of Regular earnings… Some say that even this is far too_ generous, since
    private companies are not this generous if they even still have a defined Benefits
    Pension … Most do not..
    I won’t mention that elected Politicians also get “Paid” Healthcare as well.
    No wonder there are so many Lawyers in politics.
    It is Government employees who need to be accused of Privilege, regardless of color or race.

    Reply

  25. D. Braatz November 29, 2016

    Friends: Ever hear of “Smoke and Mirrors”? Remember, the Federal Government wants to get rid of cash and have all money, transactions and your life become digital. Money is becoming an abstract idea. You won’t be able to hold it or physically see it, or know what it looks like and you won’t need a wallet except to hold one plastic, transaction card. It won’t even be called a money card. This problem will just fade off into some digital world on a Government controlled hard drive some where. So don’t get overly concerned.

    Reply

  26. Paul Terry November 29, 2016

    Do not forget the fringe benefits that go along with the pension. Example paid health insurance for life. This is not to say fire and police are not important but unfortunately without some changes there is only one way this is headed.

    Reply

  27. GerryT November 29, 2016

    The pending nationwide pension defaults are attributed to the financial juggling by our Politicians instead of actuarial adjusting. The pension collapse will put the final nail in the coffin of the middle class!

    Reply