Feeling The Impact of Pension and Healthcare Costs

SNW Asset Management has written at length about unfunded pension and healthcare costs in the past.  Now, we have hard examples of the real impact on public services and the social effects, as well as the cost to future generations.  For example, the distressed City of Detroit will spend 33% of its general fund budget on pension and healthcare cost in next year’s budget.  The budget reduces the City’s workforce from 10,400 to 9,800, while maintaining police and fire positions.  Stockton, the bankrupt city of 300,000 80 miles east of San Francisco, has cut a quarter of its police force.  Now officers in Stockton only respond to crimes in progress, and its crime rate is soaring.  In other California jurisdictions and across the State of Texas, finance officials are using capital appreciation bonds to defer  principle and interest payments up to 40 years.   In Texas, for instance, Leander Independent School District enrollment has doubled since 2003 to 34,000. This district bordering Austin has the fifth-highest total debt among Texas’s 1,024 school jurisdictions, or about $79,000 per student when including interest costs, according to the Texas Bond Review Board.  The school district is mortgaging its future with capital appreciation bonds.  Both California and Texas legislatures are banning the use, or limiting the maturity dates, of capital appreciation bonds. These issues are beginning to resonate with union members.  A coalition of private unions and employers is proposing changes to the Employee Retirement Income Security Act of 1974, the federal law that governs the pension plans of about 10 million people, which would include reducing benefits  paid to retirees, the first time in four decades that such cuts would be allowed.  These plan participants are realizing that, without modification to current retiree's benefits, plans will run out of money and the result will be fewer benefits for all participants. Moving forward, our readers will likely continue to see us write on this topic, as the impacts on credit quality can be profound and the impact on distressed credit bond holders uncertain.