(By Rich Bieglmeier)The Euro crisis has received a lot of print, and caused a lot of currency printing. The estimates of how many Euros it will take to create a "firewall" to contain the mess vary wildly. iStock has seen numbers anywhere from 500 million euros to more than a trillion.
Using the latest euro to dollar exchange rates, the total price tag in dollars is expected to be between $630 million and $1.26 trillion – ouch. But who really knows how many cockroaches are hiding behind Euros walls, it could cost more or less to exterminate the problem.
Unquestionably, the impact of a Lehman like event coming from across the Atlantic deserves a ton of press and needs to be addressed. However, the winds of another financial hurricane could be building mostly unnoticed - such a pretty butterfly.
According to PEW research, $1.38 trillion is a number every American should know. It's the difference between "states' assets and their obligations for public sector retirement benefits in fiscal year 2010" (latest figures available.) In English, it means the states in total owe $1.38 trillion more than they can afford to pay at the moment, and the bill continues to grow.
Looks fairly similar to a figure mentioned previously in the article, no? Yet, nowhere near the same ink, for now.
The PEW report notes that the stock market gains from 2010 to present will certainly help offset some of the difference, but not enough to "keep up in the long term without some combination of higher contributions from taxpayers and employees, deep benefit cuts, and, in some cases, changes in how retirement plans are structured and benefits are distributed."
On average, states target 8% a year returns to meet their funding needs. Of which, 60 cents on the dollar of return is market related, the remainder comes from employee and employer contributions.
Experts believe pension should be 80% funded to be considered healthy. Thirty-four states do not meet the benchmark, and only Wisconsin is 100% funded. Meanwhile, health care cost provisions are in worse shape than pension benefits.
"States have not done nearly enough to set aside money for their retirees' health care and other non-pension benefits such as life insurance. As of fiscal year 2010, they had put away only 5 percent of their total bill coming due for those benefits. Seventeen states set aside no money, and only seven states had funded at least 25 percent of this long-term liability" says PEW.
Of the 50 states, Illinois is the worst offender. Only 45% of its $138.8 billion pension liability is funded, a short fall of more than $76 billion. On the health care side of the ledger, PEW says the Land of Lincoln's $44 billion future bill is 0.1% funded. Which begs the question, why bother?
Illinois, alone, owes public sector retirement pensions and retiree health benefits IOUs to the tune of $120 billion, nearly equal to the EU's initial Spanish bank bailout and the Greeks are scheduled to receive. How long before Illinois Governor, Pat Quinn, asks Ben Bernanke for a bailout?
Do not laugh. If you think about it, market returns will have to make up for an $828 billion shortfall with 60 cents of every dollar required from earnings on investments. States cannot afford another market collapse. The 2008 crisis nearly wiped ‘em out.
While the world and Wall Street waits to see what the Federal Reserve will do to stimulate the economy on Wednesday, iStock says what choice does Ben Bernanke have but to print, print, print the stock market higher as bond yields can't go much lower.
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