US Net Pension Liabilities Top $1 Trillion

A “lackluster performance” by pension assets, combined with increases in the present value of future benefits, has pushed net pension liabilities beyond $1 trillion in fiscal 2017, from $892 billion the previous year, according to a report from Fitch Ratings.

The report also identified seven states with “long-term liability burdens” that are more than 20% of personal income, led by Illinois, which had liabilities that are 29% of personal income. Another eight states carry what Fitch considers moderate long-term liability burdens that are between 10% and 20% of personal income. On the opposite end of the spectrum Nebraska had the lowest liability burden at 1.5% of personal income.

“States like Illinois, Kentucky, and New Jersey are feeling the effect of insufficient contributions in the form of severely underfunded pensions and rising budgetary demands for pension contributions,” Douglas Offerman, a senior director at Fitch Ratings, said in a release.

Fitch said the ratio of net pension liabilities to personal income rose to 3.6% for the entire US in fiscal 2017.

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According to the report, discount rate changes are also having a noticeable effect on state pensions, with 80 state-reported plans lowering their discount rates from the previous year.

“Many of the net pension liabilities that states have comprise pension obligations for non-state employees,” said Offerman, “usually local teachers, legally carried and directly funded by the state.”

Fitch said it recalculates state-reported pension liabilities based on a 6% discount rate for plans using a higher discount rate, adding that the pension liability burden of individual states, combined with bonded debt, varies widely.

The report also found that despite rising net pension liabilities, the median level of tax-supported debt relative to personal income remained virtually unchanged at 2.3% of personal income for fiscal 2017.

“States in general remain selective debt issuers and tend to do so primarily as capital needs arise,” said Offerman. “As a result, most states will continue to see only gradual shifts in their debt burdens from year to year.”

Ray Dalio, founder of the world’s largest hedge fund, is fearful for stock investors, as most are not equipped to handle the next bear market.

In a panel at Connecticut’s Greenwich Economic Forum broadcast by CNBC, the Bridgewater Associates chief said that since the world is “leveraged long,” he doesn’t “think there’s much to protect investors.”

He advised contrarians to brace themselves by having a strategic asset mix in their portfolios, maintaining a neutral balance in a downturn, and staying in good shape for the rebound. “That will distinguish the winners and losers,” he said.

Dalio, who noted that the US is in the seventh or eighth inning of the current cycle, said that the current bull market was driven by the Federal Reserve’s low interest rates, which are now being undone as the Fed has raised rates three times in 2018.

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“Everybody’s sort of leveraged long,” he said of the now “asymmetric” risks. “If you have a downturn, there’s not that much ability for that downturn to be dealt with effectively with monetary policy.”

A fourth interest hike is expected in December, pointed out Charley Ripley, a senior investment strategist at Allianz Investment Management.

“A December rate hike appears to be a likely event at this point, but the outlook ahead is very different as the market and the Fed have differing views on how many rate hikes are in the cards for next year,” Ripley told CNBC earlier this month.

The markets have experienced increased volatility throughout the year, most recently in October, when the S&P 500 almost saw a correction before November’s plodding rebound.

Afsaneh Beschloss, CEO of the $13.5 billion Rock Creek Group, who also spoke at the Greenwich panel, said rates will continue to go up 25 basis points along with wage boosts in the next 12 months.

“Those two things will potentially lead to a stagflation scenario later on in the cycle,” she said.

Bridgewater has about $160 billion in assets under management.

Tags: Bridgewater, Ray Dalio, Risk