2010 June 13 Sunday
NY Governments To Borrow From Pension Fund

State and local governments in New York State will borrow money from the state pension fund which they will use to make their yearly payments to the same pension fund. So basically they will pretend to pay their pension obligations.

ALBANY Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund. And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund from the same pension fund.

They are hoping that in a few years they'll have a lot more money with which to pay both past and current pension obligations. I doubt it will play out that way. I expect high energy costs to prevent a big economic recovery. So all the governments trying to kick the problem down the road a few years are just setting themselves up for an even bigger crisis in a few years.

Municipal bankruptcies will occur at rates last seen in the Great Depression of the 1930s. Whether governments go into bankruptcy will depend on whether they can cut retirement benefits without bankruptcy. State and local tax increases will be hard to implement because the US federal government will raise taxes to deal with its own dire plight. The people will feel overtaxed just from federal taxes without getting hit harder by state and local taxes.

The states are in deep financial trouble, especially where government employees are allowed to form unions. I expect a migration away from the states which have strong government employee unions.

All the US states have unrealistically high assumptions for rates of return in their pension plans. The extent of their underfunding of their pension plans is therefore far larger than it looks. When Peak Oil causes a sustained economic contraction the size of their unfunded pension liabilities will soar to levels that will force states to declare bankruptcy if they can't cut pension benefits short of bankruptcy. Only one other development would allow them to avoid bankruptcy: hyperinflation. If the federal government inflated away their debts and obligations. But if their retiree pension benefits are indexed to inflation then even hyperinflation might not help them much.

Share |      By Randall Parker at 2010 June 13 06:33 PM  Economics Entitlements


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