Warren Buffett: “During the next decade, you will read a lot of news – bad news – about public pension plans.”
Thus warns Warren Buffett in his latest message to investors, part of Berkshire Hathaway’s annual report. And when the Oracle of Omaha speaks, most of the world listens. So here’s hoping his warning of the dangers that underfunded public pensions liabilities pose to state and local governments brings some needed public attention to this problem.
Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn’t afford. Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them. Unfortunately, pension mathematics today remain a mystery to most Americans.
The math being “a mystery to most Americans” is a major factor that has enabled state and local politicians to underfund pensions for years, by calculating contributions using discount rates based on overly optimistic investment return projections.
Despite reforms in more than 40 states, many pension funds are still in bad shape. As Benefits Pro’s Lisa Barron reports, “”Moody’s Investor Services estimates that the liability increased 24 percent, from $998 billion in 2011 to $1.2 trillion in 2012, the latest available data with audited results.”
Bloomberg‘s Noah Buyayar and Zachary Tracer further note:
Buffett may have called attention to public pensions because they will influence the business climate in which his company operates, said Tom Russo, a partner at Gardner Russo & Gardner. The U.S. is the largest market for Berkshire subsidiaries from utility owner MidAmerican Energy to auto insurer Geico. The cost to meet retiree benefits could cause governments to raise taxes, said Russo, whose firm invests in Buffett’s company.
The Berkshire report this year also included a memo about pensions that Buffett wrote to his friend and former Washington Post publisher Katharine Graham in 1975. In it, he advised her to first understand the promises that are being made.
“Rule number one regarding pension costs has to be to know what you are getting into,” Buffett wrote to Graham. “As will become so expensively clear to citizens in future decades, there has been even greater electorate ignorance of governmental pension costs.”
Expensively clear, indeed.