Would you invest in a state with large unfunded pension liabilities? Warren Buffett likely wouldn’t. In a long interview with CNBC this week, the famed billionaire investor was asked by viewer, “How do you see the unfunded pension liabilities across the United States affecting our economy over the next 10 years?” Part of his response (at 50:58):
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. [For the full transcript, see here.]
This isn’t the first time Buffett has warned about the danger to state finances posed by unfunded pension liabilities—five years ago, in his annual report to Berkshire Hathaway shareholders, he said, “During the next decade, you will read a lot of news—bad news—about public pension plans.”
Yet, the situation persists, because, as Buffett said in the CNBC interview this week (at 51:30):
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?” Cause 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 lot of money.
Indeed, the true level of taxation is reflected in the level of government spending. And unlike budgetary appropriations, which lawmakers need to approve periodically (usually annually), pension obligations are baked into the public finance cake, and must be paid one way or another. They also lead to higher borrowing costs for states. That’s something companies should probably consider when making location decisions.