The situation for municipal pension funds is beginning to deteriorate, according to Michael Lombardi, lead contributor to Profit Confidential. Lombardi believes the main problem facing all states and municipalities is their budget deficits.
In the article Public Pension Funds Hiding the Truth?, Lombardi says that what the states and municipalities are not telling the public is that they have not changed their future projection of earnings for their pension funds.
In this low-interest-rate environment, the average pension fund in America is still projecting average annual returns of seven percent to eight percent on their investment portfolio, says Lombardi. If we look at the past, the National Association of State Retirement Administrators has stated that, over the last 10 years, the return for public pension funds has been 5.7%.
Lombardi argues states or municipalities wont allow their public pension funds to take down their unrealistic rates of return because this will cause higher taxes and bigger budget deficits.
In Rhode Island, the state treasurer lowered her pension rate of return from 8.25% to 7.5%. This move increased the budget deficit by 300 million, says Lombardi. If estimated returns were in-line with the past 10 years at 5.7%, then the budget deficit would increase by 600 million more, bringing the total to 900 million.
Lombardi notes that this 300-million budget deficit is not paid for by additional government debt, but by union members who must increase their contributions to the pension fund.
In New York, there is a proposal to lower the estimated pension returns from eight percent to seven percent, says Lombardi. This would result in an additional budget deficit hole of 1.9 billion, which will not be financed through government debt.
Since members must pay this bill, Lombardi believes theres no way unions will stand for these higher contributions.
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Michael Lombardi, MBA, the lead Profit Confidential editorial contributor, has just released his most recent update of Critical Warning Number Six, a breakthrough video with Lombardis current predictions for the U.S. economy, stock market, U.S. dollar, euro, interest rates and inflation. To see the video, visit http://www.profitconfidential.com/critical-warning-number-six.