One of Mayor Nutter's big ideas on taking office last year was to bail out the long-term underfunded Philadelphia city pension system by selling billions of dollars in bonds to raise new pension investment funds.
When bond markets froze, Nutter decided to wait. Good call by the mayor: A Bloomberg LP review of state and municipal bond bailouts in New Jersey and elsewhere shows they ended up costing taxpayers more than doing nothing, because borrowing costs have been higher than investment returns. Story here. Excerpts:
"Public pension funds across the U.S. are hiding the size of a crisis that’s been looming for years. Retirement plans play accounting games with numbers, giving the illusion that the funds are healthy... With stock market losses this year, public pensions in the U.S. are now underfunded by more than $1 trillion...
"Dozens of retirement plans in the U.S. have issued more than $50 billion in pension obligation bonds during the past 25 years -- more than half of them since 1997 -- public records show.... The public gets nothing from pension bonds -- other than a chance to at least temporarily avoid paying for higher pension fund contributions. Pension bonds portend the possibility of steep tax increases..."
The only real cure is to increase year-to-year subsidies and cap future pensions. Michigan, Alaska and Puerto Rico have gone to extremes -- instead of reducing payments to affordable levels, they scrapped guaranteed pensions altogether for new employees, though Michigan, at least, has a worker-directed 401(k)-type retirement plan.
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