VERY: Crestmont Research’s Ed Easterling has a must-read (reprinted on John Mauldin’s website) on why state finances are about to get a whole lot worse. The reason has to do with pensions. Contributions to pensions are pretty easy to estimate and so are the payouts; the hard part is estimating investment returns. As Ed explains:
The return assumption should reasonably relate to the types of investments that are used by the pension plan. The mix of investments depends upon the risk profile that the pension plan is willing to accept… [but] the pension plan is not accepting the risk. The pension plan is just a conduit, a legal entity that stands between the retirees and the taxpayers. Most states have laws that provide some or complete protection for specified benefits promised to retirees. Therefore, the ultimate risk falls upon the taxpayers—not on retirees or the pension plan itself. It is more accurate to say that the mix of investments depends upon the risk profile that pension plan managers are willing to place on the taxpayers.
So here’s the problem:
The reason that past performance is not a reasonable indicator is that conditions change. For example, as recently as five years ago you could walk into a bank and receive 4% on a certificate of deposit; the U.S. Government paid 5% for investments in its short‐term notes. Today, with the same money, the interest rate is less than 1%. It is not reasonable to assume yesteryear’s rate of return for the future.
Yet that is exactly what the public pension plans are doing. They continue to assume that their investments will average around 8% annually despite the change in conditions.
Bonds held by public pension plans return far less than 8%. Real estate and other non‐traditional investments struggle to achieve 8%. Finally, the largest part of the portfolio for most public pension plans, investments in the stock market, has not been priced to return 8% for more than a decade!
…the blended rate of return will more likely be 3% to 5% instead of the 7.5% to 8% currently assumed by most state pension plans. The result is an ongoing gap of near 4% annually that will cause an ever‐widening shortfall for state pension plans.
Conclusions for you? Since these problems are at the state and local level, expect higher taxes of all sorts in the not-too-distant future: income taxes, property taxes, sales taxes, you name it. And be careful about investing in municipal bonds, as some governments will not turn out to be as financially solvent as they seem. We do recommend you read the whole thing here.
ANGRY: All the Angry Birds apps are on sale for $0.99, down from their usual $2.99. This includes the original, Rio, Space, Seasons, Star Wars, and Bad Piggies. No coupon or code required, just visit the Apple app store. We’ve been resisting Star Wars and Bad Piggies, but this was enough to finally overcome our resolve and get us to sign up for more time-wasting.
EAT: Courtesy of Slickdeals, we learn that Chili’s gift cards are 50% off. This is being offered via Fatwallet and Ebates, and the deal structure is buy one card, get $5 cash back through either one of those portals. The catch is that you have to do it one card at a time, and you will have to clear your cookies and start at the portal each time in order to get your account properly credited. In addition to Chili’s you can use the cards at Maggiano’s, Macaroni Grill, and On The Border.
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