Wednesday, November 26, 2008

Pension Finance: State of New Jersey Is Insolvent

From Mish's Global Economic Trend Analysis:
The state of New Jersey is insolvent. Bankrupt might be a better word. New Jersey is $60 billion in the hole on pension funding and the Governor is planning on skipping payments in a "pension payment holiday" until 2012 so as to not increase property taxes. To top it off, the ongoing plan assumptions are 8.25%. Sorry NJ, that simply is not going to happen.

The Star Ledger is reporting New Jersey pension funds lost $23B so far this year....
...While Clark delivered his report to the State Investment Council in Trenton, Gov. Jon Corzine was in Atlantic City promising a convention of local government officials that he would let them postpone about a half-billion in payments they are scheduled to make to the pension funds in April.

Specifically, Corzine proposed letting local governments skip paying $541 million of the $1.1 billion due. They would gradually work their way back to full payments by 2012 under his plan....

Mish continues:
What Happens Now?

New Jersey is burning $5.2 billion a year. If the market is flat over the next 5 years, New Jersey will have a minimum of $118 billion in obligations and will be sitting on $31.8 billion. But what happens if the S&P falls to 450 or 600?

S&P 500 at 600 would be a drop of 24% from here. Assuming the pension plan assets dropped the same, plan assets would fall to $44 billion. On a drop to 450 on the S&P, plan assets would fall 43% from here to approximately $33 billion.

At $5.2 billion a year, New Jersey's pension plan would be completely out of cash in about 6 years in my worst-case scenario of a drop to 450 on the S&P.

However, even on a drop to 600 or 700 on the S&P (highly likely in my estimation), New Jersey, would run out of cash rather quickly putting in $1 billion a year and taking out $5.2 billion a year while assuming growth rates of 8.5% that are totally unrealistic.

Can The Market Recover?

Many expect the stock market to be blasting back to new highs once the bottom is in. This too is an unrealistic expectation. It's all about earnings and risk taking, and both earning and risk taking have peaked. Please consider a snip from Peak Earnings.
One of the implications of Peak Credit is that financial earnings have peaked. And because of reduced leverage, earnings in the financial sector are not coming back for decades. Those earnings were all a mirage in the first place.

Next consider homebuilders given that lending standards have dramatically tightened at banks. Those profits are never coming back. What happenes to profits at major pharmaceuticals if and when the Obama administration allows drug imports from Canada and other places?

One must also factor into the earnings equation boomers facing retirement in the wake of falling home prices and retirement accounts taking a cliff dive. Trillions in potential spending power has been wiped off the books.

Expect boomers to travel less than expected, buy fewer toys (boats, cars etc) than expected, gamble less than expected, and downsize much more than expected in every aspect. This in turn will reduce the earnings potential of non-financial corporations for decades to come. Thus expectations that a new rip roaring bull market will commence once the market bottoms is sadly misplaced.

In the meantime, remember that rising unemployment, rising credit card defaults, rising foreclosures, rising numbers of walk aways, and declining earnings of non-financials means we have not even bottomed yet.

This secular bear market will last a lot longer and be much deeper than anyone thinks. Sadly, very few are prepared for it....