Government & Corporate Unfunded Pensions

In a recent interview with Charlie Rose, Chicago Mayor, Rahm Emanuel was asked to list the greatest challenge that lies ahead for his city, to which Emanuel replied, “addressing the pension deficit”.

U.S. city, municipal and state governments are massive employers and yet their workers don’t have pensions that are funded and ready for their retirement.

The theme surrounding the funding, reforming and creating pensions is currently one of my favourite topics of research.

In this post, I wanted to discuss some points that concern me about underfunded pensions.

Just to start, consider the social and financial effect that will involve millions of employees not having enough money to retire on. If cities continue to run high budget deficits and unfunded pension schemes, it will be difficult to recruit firefighters, police and health professionals.

Government can reduce their pension liabilities by increasing their revenues (higher property taxes, parking costs), cutting costs (less or infrequent services, fewer employees) or selling assets (infrastructure such as freeways, power stations or airports).

These pension deficits also exist amongst U.S. companies. But they are better at hiding it.

Over the past year, American corporations have bragged about the robustness of their balance sheets. They are quick to tell investors how they’ve restructured their affairs, sold off unwanted businesses, trimmed costs and grew their earnings.

Although, much of the earnings growth has been a function of cost cutting and not revenue growth, which is another story all together.

Amongst this self promotion, I noticed stories that proclaimed how certain companies have billions of dollars in “net cash” held on their balance sheet.

An example might look like something like, Company ‘A’ has a market capitalisation of $20 billion. It has total (long and short-term) debt of $2 billion whilst its cash or equivalent securities amounts to $4 billion, thus they have a “net cash” position of $2 billion. All of this looks OK until you discover they have an unfunded pension liability of $7 billion, which amounts to one-third of its market cap.

It is annoying that items such as goodwill and deferred tax benefits appear so clearly in a company’s list of assets (correctly, pension assets do not belong the company), but you need to dig deeper in order to find what their total obligations are.