Pension Crisis

Companies Should Avoid States With Huge Pension Debts, Warren Buffett Warns

A candid picture of how investors see the slowly unfolding pension crisis

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Rick Wilking/REUTERS/Newscom

Warren Buffett says he would shy away from making long-term investments in states that have rung up huge public pension liabilities, because sooner or later taxes will have to go up.

"If I were relocating into some state that had a huge unfunded pension plan I'm walking into liabilities," Buffett told CNBC's Becky Quick earlier this week. "I say to myself, 'Why do I wanna build a plant there that has to sit there for 30 or 40 years?' Because I'll be here for the life of the pension plan, and they will come after corporations, they'll come after individuals. They just—they're gonna have to raise a lotta money."

Buffett's remarks paint a candid picture of how investors and corporations see the slowly unfolding pension crisis that threatens to swamp many states' budgets for years to come. Unfunded pension debt across the 50 states totals a staggering $1.6 trillion, even by the plans' own (often overly rosy) accounting. But the obligations vary widely from state to state.

As Buffett suggests, that means states that have kept their pension systems relatively healthy have a competitive edge when trying to land large corporate investments like the new Amazon HQ2. Just as a state with lower tax rates might have an edge in attracting businesses, states with high pension debt will drive them away—because investors correctly see those unfunded liabilities as future tax rates.

Here's the rest of Buffett's response when asked about how public pension obligations would factor into his own investment strategies:

In the public sector, you know, it's a disaster. And, you know, some of the—it's interesting to me when they talk about these relocation problems, you know, and New York and Amazon, all that sort of thing, you know—I—if I were relocating into some state that had a huge unfunded pension plan I'm walking into liabilities. 'Cause I mean, who knows whether they're gonna get it from the corporate income tax or my employees—you know, with personal income taxes or what. But that—that liability isn't gonna—you can't ship it offshore or anything like that. And those are big numbers, really big numbers. And they may come—you can delay a long time. I mean, they—you're getting pushed maybe somewhat. But the politicians are the ones that really haven't attacked it in a good many states. And when you see what they would have to do—I say to myself, "Why do I wanna build a plant there that has to sit there for 30 or 40 years?" Beause I'll be here for the life of the pension plan—and they will come after corporations, they'll come after individuals. They just—they're gonna have to raise a lotta money.

Some states are already chasing pension revenue in increasingly convoluted ways. Illinois, which faces one of the nation's most significant pension problems, is considering a tax on private retirement savings to fund public pension obligations. New Jersey, another state that's deep in the red, is planning to use higher or new taxes on hotel rooms, e-cigarettes, marijuana, and ride-sharing to fund its pension debt.

Those measures are unlikely to be enough. Taxpayer contributions to public pension plans have increased dramatically since the Great Recession, yet "only 27 states contributed enough in 2016 to expect their funding gaps to decline if actuarial assumptions were met," according to a report the Pew Charitable Trusts released last year. Broader tax increases are likely to be needed, particularly in states where cutting pension payments to current and retired workers is forbidden by law.

Another economic downturn would make a bad situation much worse. A recent report by three researchers at the Harvard Kennedy School found that "public pension systems may be more vulnerable to an economic downturn than they have ever been." After subjecting state pension plans to a series of stress tests meant to simulate the consequences of a variety of adverse economic climates over the next two decades—including everything from another major recession to merely lower-than-expected investment growth—Greg Mennis, Susan Banta, and David Draine concluded that deeply indebted pension plans in places such as Kentucky and New Jersey face insolvency even if annual returns average 5 percent for the forseeable future.

Buffett's comments to CNBC make clear that it won't take another recession to keep major investments out of states already struggling with high levels of pension debt. States will have to raise "a lotta money"—and every dollar of it will be coming out of someone's pocket.

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46 responses to “Companies Should Avoid States With Huge Pension Debts, Warren Buffett Warns

  1. In other news: water is wet and the sun rises in the east.

    What would we do without the ‘Oracle from Omaha’? Truly, he is a national treasure.

    1. Incidentally, Franco is still dead.

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  2. “it’s interesting to me when they talk about these relocation problems, you know, and New York and Amazon”

    Except, NY does not have a large unfunded pension liability. They have roughly a 90% funded ratio on all of their large pension systems.

    Buffett remains largely a blowhard

    1. If you are assessing the health of a state based upon its unfunded pension liability alone then you don’t know much about state and local government (which is funny because Buffett use to own a muni bond insurance company).

      The biggest problem with IL and NJ is that both states continue to run large deficits (even when not making their full annual pension payments) and they are bleeding population and jobs. KY, which has a large pension deficit, is more likely to reform their system than IL and NJ are and it does not produce large continual deficits like the other two.

      This guy should stick with equities and stop trying to offer opinions on local governments, which he clearly knows nothing about.

      1. well there’s a long history of people underestimating Buffett. So I woudln’t be so sure he’s wrong here.

        1. Do you have any opinion that doesn’t rely on an appeal to authority?

          1. You are by far the most conservative commentator here.

            1. Sure you’re not confusing “chipper me timbers” with “chipper morning baculum/wood (eunuch)”?
              Because eunuch has 0 intellect or wit, and appeals to authority between making lame ass jokes.
              I don’t see timbers post all that often, so I don’t know if appeals to authority are characteristic or not.

      2. Pension funding gaps obviously shouldn’t be the only thing to consider… But they are A thing to consider. I think that’s all Buffett is sayin’.

    2. Except for the OPEB liabilities.

      1. OPEB is underfunded in every state, but is not a contractual obligation, like pensions, in every state except for a few

    3. “Except, NY does not have a large unfunded pension liability. They have roughly a 90% funded ratio on all of their large pension systems.”

      Except the high tax state of New York relies on a relatively small number of very rich people to pay the taxes that fund those pension systems and everything else that state spends money.

      And increasingly those very rich people are voting with their feet to pick up and move to places where they are not taxed so much – like Florida. Particularly now that the state and local tax deduction for federal income taxes has been capped at $10 K.

  3. To add some context to Buffett’s remarks, it recently became public that Deutsche Bank lost $1.6 billion on municipal bonds–and Buffet’s Berkshire Hathaway had sold them a bunch of insurance against default.

    “Deutsche Bank bought the roughly $7.8 billion portfolio of 500 municipal bonds, which funded schools in California, public works in Puerto Rico and transportation projects in New Jersey, among hundreds of other uses . . . .

    Deutsche Bank purchased additional default protection from Omaha-based Berkshire Hathaway Inc. Warren Buffett’s conglomerate agreed to insure the bonds against default in a complex deal involving derivatives called credit-default swaps. Deutsche Bank paid $140 million for the protection, up front.

    Inside the bank, the entire bond investment became known as the “Berkshire trade.”

    —-Wall Street Journal, February 20, 2019

    http://www.wsj.com/articles/de…..550691086?

    If you guessed that California, Puerto Rico, and New Jersey all have huge amounts of pension obligations relative to their tax revenue, you probably guessed right.

    1. What? Buffett has a personal interest in the short term health of pension funds?

      Next you will tell me they he sells instruments to avoid paying estate taxes!

  4. How odd is it that he is cognizant of this issue, yet is still a leftie in general.

    1. Buying a lefty news outlet–from the Washington Post to Disney/Cap Cities ABC–and paying off the lefties to leave you alone is a smart thing to do if you want them to leave you alone.

      Buffett is Bill Gates’ mentor, and Bill Gates buying stakes in things like MSNBC was about addressing his previous problems with anti-trust, etc. the same way Buffett did.

      If you don’t need to worry about the right coming after you because you’re rich, from a purely pragmatic perspective, why would pay them any attention at all?

    2. Like many Democrats he cares more about the power and centralization of the power than the little folks. Liberalism is just authoritarian bullshit wrapped in platitudes.

    3. I think he is an old school sane moderate lefty at least. He is definitely no AOC type.

      He seems to believe that a slightly better structured administrative state, with slightly higher taxes, and slightly higher services, is the moral thing to do, and isn’t THAT bad. AKA something like Germany.

      And in practice, he’s kind of right. I sure as hell don’t want a system like Germany, but their system is better thought out in some ways, and better funded structurally than ours… There are massive trade offs in economic growth/health I don’t think are even close to worth it, but bleeding hearts do.

      I think he’s realistic about these trade offs and such though, unlike all the mouth breather types who believe in free unicorns for all.

  5. Who cares what he thinks, I want to hear from his Secretary. She is the real taxpayer, after all

  6. Well this piece of advice seems like a no-brainer.

    1. So does keeping child rapists out. You got that one wrong somehow though…

      1. We’re obligated to import oppressors if they themselves are oppressed. After Germany lost world war 2, we were obligated to allow NAZI officers to seek asylum in the United States since they were being persecuted for their political beliefs.

        /chemjeff

  7. Like all the best capitalists, Warren Buffett is a Democrat.

    #UnbanPalinsButtplug

    1. So the DNC is the party of the rich. Agreed.

    2. Crony Capitalism will always be the most successful form.

  8. Amusing coming from mister ‘I don’t pay enough in taxes’ Buffett.

    1. All the leftists I personally know are in general for higher taxes, but then they do everything they can to avoid them. Leftists are fundamentally about shifting costs and risks from one set of people to another.

      1. Specifically, they want to shift costs onto someone else they are jealous of. When they are then told that they are the very rich that they decry they can never believe it.

        1. Since they became mega-wealthy under previous tax laws, they want to raise income taxes on everyone else to make it harder to become mega-wealthy. Notice they always claim they are for higher income taxes, as opposed to wealth-based taxes.

  9. Illinois, which faces one of the nation’s most significant pension problems, is considering a tax on private retirement savings to fund public pension obligations.

    So I guess the progressive folk who assured me this would never happen were…fibbing?

    1. In fairness, they thought it was true. Or they really wanted it to be.

  10. Or… the states go bankrupt and the retired public sector “servants” get shafted. At this point in time I just can’t work up any sympathy for them. I say this while having friends who depend on the public sector pensions.

    1. States cannot go bankrupt

      1. That’s what you think! In 21st century America, anything is possible!

    2. The host of a local radio station was talking about pension millionaires. Like in Philadelphia, they calculate your pension based on something like the average of the highest 3 of the last 5 years of your employment. Thus you can find $29,000 base salary city workers making in the low six figures at the end of their careers (through overtime, bonuses, etc.) that winds up boosting their pension payments quite generously. I’m sure their superiors are quite helpful in procuring all this “extra work” for their underlings 🙂

  11. “I wholly disapprove of my paying taxes and will defend to the death your obligation to pay it” – Warren Buffett and every other prog.

  12. Buffet is giving the bulk of his estate to the Gates Foundation specifically to avoid paying taxes on it.

  13. Maybe these states’ retired public employees could be taxed to make up the pension shortfalls? Seems as logical as most other ‘solutions’ proposed these days.

  14. There will be a federal taxpayer bailout of pension strapped states. Wall Street already knows this. No political will throw Granny’s muni bonds under the bus.

    We are doomed.

  15. Is this the same Buffet that says he isn’t paying enough taxes? If so, here is his chance to ante up and help pay for decades of bad decision making and political cronyism. Aren’t all taxes good for us? Cough up and smile or is it bend over and smile…I can never remember.

  16. Buffett speaks a truism, and commenters get froggy. Hmmm…. Buffett – commenters – Buffett – commenters …

    1. Nope

  17. It is a mistake to assume that people who have made great piles of money, like H. Ross Perot, Steve Jobs, Bill Gates, Warren Buffett?have anything worthwhile to say on other subjects.

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