SINKING STATE OF STATES (FINAL EDITION)
By Charles Payne, CEO & Principal Analyst
2/19/2010 9:42:28 AM Eastern Time
The Pew Charitable Trust put together the most comprehensive report on the status of retiree benefits faced by states. The price tag of $2.73 trillion (yes, with a "t") is said to be conservative. The report is a sobering message that things simply must change, there is no way this runaway train isn't going to derail and wreck the entire economy. Here's the irony; as it turns out it's the general public that are the servants and the private workers that are literally milking the system. Of course defenders of the system like to bring up the military, police, or teachers but the system is out of control and totally unfair. The system is gamed, twisted, and manipulated. Sounds like the stock market. The thing is that we can make money in the stock market and it's voluntary; everyone is going to be on the hook to promises made by states to its workers.
In fact, the title of the report is "Promises with a Price" and it's 73 pages of eye-popping data that doesn't even take into account the economic meltdown of the last couple of years. People that are petrified over the prospects the earth will get one degree hotter over the next century don't bat an eye at the fact there will be a time when 12% of U.S. GDP is spent on servicing debt. The Federal government can print cash, however, states cannot. Key numbers from the report:
We've already seen how violently pensioners reacted to new austerity measures announced in Greece, but beggars can't be choosy. Still, I wonder what will happen. The notion of hiking taxes on the majority to pay for a sliver of the workforce is preposterous, and yet I think that's the game plan. In the Pew piece there is talk of other measures, including:
* Raising the retirement age and closing loopholes.
* Increasing premiums and co-pays.
* Raising the number of years of employment required for lifetime or fully subsidized benefits.
* Set up irrevocable trust.
One thing that must be fixed is the final salary conundrum. I'm sure you have a friend or family member that has embarked on a campaign of goosing the final salary. With most states setting pension payments based on the last year of work many public workers hit the overtime hard and do other things to hike the final pay. It's not illegal, and in fact it's enterprising. But it's not fair that everyone else will have to work real overtime for many years to cover this scam. Some states even add in accrued sick leave and vacation time. One way to offset this situation is to average the pay over the last three and even a five year employment period. It's a step in the right direction. But in the end public workers can't be guaranteed inflation adjusted payments in retirement that could easily last three decades.
According to the report, in 1980 35% of private sector workers had a defined pension plan, and that number will drift to 13% by 2016. 90% of public workers have defined pension plans while the number of the private sector has slid to 20%.
As of fiscal year 2006, states had set aside $1.99 trillion of the $2.35 trillion in pension promises. But not all states are doing so well. Over the past decade only 1/3 have consistently set aside the amounts actuaries said was necessary. Twenty states funded less than 80% as of the end of FY06, and many states have seen levels of funding drop precipitously. The bigger danger is from healthcare and other non-pension benefits owed. There are ten states that actually have larger unfunded liabilities for non-pension benefits than pension benefits. Take California, which has an unfunded liability of $46.7 billion out of $355.5 in pension liability, but its other post employment benefits (OPEB) outside of pension is in the hole for $47.9 billion.
The Pew Center isn't a right leaning organization, on the contrary, it is decidedly left leaning. The fact is that everyone smells the roses as they wilt in the heat of deficits, debts, and doubts.
The Fed Makes It Move
Well, we knew it was coming but most figured it would be next month at the FOMC gathering. Perhaps that is why stocks tumbled after the Fed hike rates at the discount window to 0.75% from 0.50%. This begins a period of normalization by the Fed that could see them sell assets rather than hike fed fund rates. But, the timetable for those events, especially the latter are still a mystery. This is still something of a gambit in the sense there is still abnormal demand in historic context, but the trend is clear, and maybe banks will be able to be borrow from other banks. The dollar exploded, while the euro declined to a nine month low.
I think that the initial reaction was overdone, but let's see how the action unfolds today as it is obvious the market is eager to rally. The big question is can stocks and the dollar move higher at the same time? Well, there has to be real job growth, no gimmicks and no phony baloney stuff about the jobs that could have been lost.
By the way, next week the FDIC comes out with its troubled banks list, and it will take on more meaning. Essentially, the discount rate was the same as fed funds so the key was the 30-day duration which now shifts back to overnight. Will banks play ball with other (even more desperate) banks? Let's see.
There is another plan from the Administration to save the housing market. Saying it's a "good start", the White House is dipping into TARP funds for $1.5 billion to help homeowners. I'm not sure of the details but I'm frustrated that taxpayer money has become a piggybank for the White House, and today will be used to try to get a Democrat reelected. If there is outrage over businesses using their own money to promote political candidates it's even more over the top that your money would be used to prop up Harry Reid. As for this new plan it's probably more of the same, where taxpayers (operative word there "payers") will not be eligible.
There is a new report out today from the U.S. department of Health and Human Services (HHS) that takes a scathing look at the health insurance industry and recent hikes in premiums. While I was shocked at the hike announcements, I learned from interviewing a high-ranking executive at WellPoint (WLP) that the company has fewer members and those staying are older with significant health issues. In other words, their costs are much higher. I think that this augers for cross state competition, but instead the vilification card is being played ahead of next week's healthcare summit.
The title of the report:
"Insurance Companies Prosper, Families Suffer: Our Broken Health Insurance System"
This should scare any person in business or that works for a business because the goal of all for profit businesses is to "prosper." This language opens the door for attacks on any business in any industry. When I leave the dry cleaners I have less money and they have more. Is that fair to my family? My clothes are clean. Naturally this is a springboard to go after oil companies, drug companies, and energy companies but the dream scenario would be to tamp down all businesses and limit those mean-spirited thing called profits.
In the meantime, there is an independent study saying insurer premium for Medicare Advantage plans will increase an average of 14.2% this year. This isn't great news for the Administration which cut government payments to the plan last year and plans further cuts as part of reform. Seniors are going to be upset as they will have to pay an extra $5.00 a month for a total of $39.60; last year the increase was only $1.75. Seniors have been promised reform and cuts to Medicare Advantage wouldn't hurt them, but that goes against commonsense. So, too, does the notion Secretary Sebelius put forward that the more people in the healthcare system the lower administrative costs for insurers.
Economic Data
January Consumer Price Index (CPI)
One observation worthy of notice is that when combining yesterday's PPI report with today's CPI report, it's clear that companies are eating higher costs for energy, transportation, etc. Rather than pass on higher costs, companies may have extracted enough costs from their business models, at least in the near-term, to keep prices to end consumers at bay. That said, we wonder if this scenario will remain as 2010 progresses. With most companies having trimmed the low hanging fruit (reducing headcount, curtailing pension contributions) from their cost structures and made structural enhancements to processes as well, at some point companies must try to recoup higher costs of doing business.
This morning's CPI for the month of January came in at +0.2% on the headline (consensus: +0.3%), but was at -0.1% for the core (consensus: +0.1%). Declines were notched in hotel fares, home ownership, new cars, clothing, and airfares.
Note from Research Analyst, Brian Sozzi
* The -1.0% decline in consumer prices for apparel may actually be a positive for the sector. With all the storms during the month and the fact chain store sales have been up and down, it suggests retailers did not give the store away and that new spring goods held at close to full markup (January is last month of 4Q for retailers). February may be a different story, however, given the large amount of storm activity and the subsequent markdowns we are seeing in mall-based specialty retailers and off-mall retailers.
del bernacca però non c'è da stupirsi.
