Monday, January 21, 2013

Moody's Bankrupts Six California Counties

Back on July 2, 2012, Moody’s announced proposed adjustments on how it evaluates public sector pension data... Moody’s proposed changes in evaluating pension funds are:

The assumed rate of return on pension fund investments will be lowered from 7.75 percent to 5.5 percent. The lower the interest rate on pension fund investments, the larger the cash contribution required by employees or counties. Public pension funds have assumed unrealistically high investment return rates based on inflation during the Mortgage Bubble.

Municipalities will be required to catch up on its unfunded pension liabilities in 17-years, not the 20 to 30 year period now used.

Full payment of borrowed principal and interest – called full amortization — will be required in making pension payments. This means that level payments will be required, not graduated payments that start low and rise over time.
Mind you, we're not talking about poor counties in every case here.  San Mateo and Marin counties were ranked the #2 and #3 wealthiest counties in California in 2011, with median incomes of $82,000 and $77,000 respectively.  But if you take more out of the bank than you put in long enough, you can generate a hole that virtually impossible to fill.
Catch-up pension payments will have to increase in the six counties by 192 percent. And existing aggregate pension bond payments will have to be increased by a total of $177 million total in the six affected counties to avoid insolvency. As Dickerson states, this will result in consuming 98 percent of all the property taxes in the six counties for pensions only...
The question is whether the counties affected (and others in a similar position elsewhere) will be able to find the funds to make the payments required through a combination of increased revenue and service cuts, or whether the populations of the counties will decline sharply when the taxes increase and services decrease, and people move to more economically congenial locations.

The pension bust is going to be one of the big stories for the next 10-15 years.  Money that can't be repaid, won't.

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