Dallas to Declare Bankruptcy?
The New York Times just reported that the Dallas police and firefighters pension plan is $7 billion short of meeting its obligations and needs an immediate bailout of $1 billion just to stay afloat. The problem is that Dallas’ annual budget is $3 billion.
But in January Dallas’ pension plan trustees will open the 2017 legislative session with demands for $1 billion to keep the plan from defaulting. “It’s a ridiculous request,” said Dallas Mayor Michael Rawlings, but according to Moody’s, Dallas has more pension debt, relative to its balance sheet, than any other major American city except Chicago.
How did this happen? And why all of a sudden?
The answer, predictably, goes back to a decision made by Dallas city council officials in 1993 to offer policemen and firefighters about to retire (at age 50, by the way) a bonus to stay on longer.
The offer: a fully-funded side account, paid by the city, earning 8.5 percent interest, tax-deferred, if they would put off retiring for a few years.
The assumptions made at the time were that the funds would come from two places: a five-percent annual growth rate in employment, which would bring in lots of new blood (and contributions), and a nine-percent annual rate of return on those contributions.
Neither of those assumptions panned out.
DYI: A five-percent annual growth rate in employment??? From the beginning a Ponzi like scheme to make the numbers work. Of course as with all of the best laid plans of mice and men this one quickly went bad. Interest rates continued their downward march reducing bond returns and seven years later the stock market would no longer deliver the returns needed as well.
How long were they planning on having this early retirement going?? If you retire at age 50 and live until age 80; that is 30 years of benefits! Wow! That is a huge stress in of itself; then with the add-on side account the hand writing was on the wall but no one was willing to read. The markets were hot as a pistol back then creating the thinking that high percentage returns were baked in the cake forever! Anyone with a bit of value driven historical perspective would have thrown cold water onto this misguided venture. A kill joy back then - would have said his piece and hoped like hell he or she would not be fired.
I'm certain there was a bit of vote buying going on as well. A too good to be true pension that sucks in policemen and firefighters (who have little understanding of pension mathematics) who as a group will vote for the Mayor and Council Members in record numbers. In a low voter turnout a block of voters such as the policemen and firefighters could very easily tip the balance in their favor.
Just when it seems impossible for these State and local pension plans to get any worse....it will and sooner than later.
November 28, 2016
John P. Hussman, Ph.D.
We continue to view the equity market as tracing out an extended two-year top formation, at what is presently the third most extreme level of market overvaluation in history.
Enthusiasm about a runaway market “breakout” to the upside is clearly evident in fresh sentiment extremes, with advisory bullishness rising to 55.9% and bearishness down to 21.6% (Investors Intelligence), but the fact is that the S&P 500 Index closed Friday less than 4% above its May 2015 high, and just 1% above its August 2016 high. The broader NYSE Composite Index remains below the level it set in July 2014, though with a slightly positive return including dividends. The stock market has reestablished an extreme overvalued, overbought, overbullish syndrome of conditions that - unlike much of half-cycle advance from 2009 to mid-2014 - lacks internal uniformity, particularly among interest-sensitive and globally-sensitive sectors. For that reason, the recent marginal highs are more consistent with a “blowoff” than a “breakout.”
Frankly, regardless of how market action plays out on a shorter horizon, I still expect the S&P 500 to surrender its entire total return since 2000 over the completion of the current market cycle. The interim returns are likely to represent little but temporary paper gains, except for investors who exit. Even in that event, some other investor would then be in the position of holding the bag. In aggregate, the U.S. equity market is unlikely to avoid a roughly $10 trillion paper loss by the completion of this market cycle.
We’ve shown similar and only slightly less accurate relationships back to the early 1900’s using other valuation measures. Nothing - not the Great Depression, penicillin, World War II, the digital computer, the atomic bomb, Mr Potato Head, the microprocessor, the 1970’s inflation, the Cold War, the breakup of the Soviet Union, the expansion of global trade, the tech bubble, 9/11, the global financial crisis - nothing - has durably changed the mapping between reliable valuation measures and subsequent 10-12 year market returns. We cannotsay the same thing for shorter segments of the market cycle, where speculation, panic, and shifts in investor risk-preferences play a critical role. But to imagine that stocks are priced as desirable long-term investments here is a denial of every lesson of market history.
DYI: Stocks are going to be blasted with a very normal decline of around 45% to 60%! Why would this be normal?? Valuations are very pricey - so pricey a 60% decline would only have stocks marginally undervalued. To have valuations back at the bottom of 1982 stocks would need to retreat - after inflation - around 85%! That's not a typo! 85%! To arrive there will take one of two additional market cycles. Also during a market smash of this magnitude the Fed's only know one thing - lower rates! Will we see negative rates?? My guess is most likely yes for Treasuries of 5 years of less and with 10 year T-bonds under 1% and 30 year T-bonds under 2%!
What will this do to the Dallas Police and Firefighter's pension? Dallas you will need to get "lawyered up" as bankruptcy is on your horizon. Dallas will have a lot of company as many other cities and States are in the same boat. Plus a hell of a lot of disappointed employees with many having to continue working well into their 70's. Employees with 401k's will be affected especially if they are carrying a high percentage in stocks. Most will have to work into their 70's as well.
A very dismal picture but not for DYI. My model portfolio speaks for itself as we wait for better values ahead.
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