Buffett says more bad news on pension funds during next decade

NEW YORK, March 1 Sat Mar 1, 2014 2:37pm EST

NEW YORK, March 1 (Reuters) - Berkshire Hathaway chief executive Warren Buffett warned on Saturday that the growing crisis in public pensions will intensify, with "a lot" of bad news to come.

In his annual letter to Berkshire shareholders, Buffett said: "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."

Buffett pointed out a 1975 memo he wrote to Katharine Graham, then chairman of The Washington Post Company, about the pitfalls of pension promises and the importance of investment policy.

In that memo, which is 38-1/2 years old, Buffett said the first rule regarding pension costs is "to know what you are getting into before signing up."

He wrote: "There probably is more managerial ignorance on pension costs than any other cost item of remotely similar magnitude. And, as will become so expensively clear to citizens in future decades, there has been even greater electorate ignorance of governmental pension costs."

Many state and local governments are struggling to meet their obligations to retirees, stemming from the economic crisis which put enormous pressure on state and municipal budgets as well as poor decision-making.

On Saturday, Buffett said: "During the next decade, you will read a lot of news - bad news - about public pension plans. I hope my memo is helpful to you in understanding the necessity for prompt remedial action where problems exist."

In the 1975 memo, Buffett said it is "next to impossible to decrease pension benefits in a large profitable company - or even a large marginal one."

He said that language allowing companies to terminate or alter their pension plans had been eroded by law.

Over the past year, Detroit's bankruptcy filing and then Puerto Rico's shaky finances - because of loss of industry, coupled with lavish pensions - have rattled investors and economists.

Last year, municipal bond funds hemorrhaged $62.6 billion in net outflows, according to Lipper, a Thomson Reuters unit. That's more than four times the previous outflow record of $15 billion in 1994.

But as the bonds have tumbled, yield-hungry investors have once again started diving in. Those funds have seen net inflows for six of the past seven weeks, their best such performance in a year.

"I think that the key issue for the municipal market is to distinguish the state and the local governments that have made changes and are paying in from the ones that haven't and have major problems," said Natalie Cohen, the head of muni research at Wells Fargo Securities.

"That's not to deny that it's not a problem," she said.

Moody's Investors Service, where municipal bond downgrades made up four of every five rating changes in U.S. public finance last year, said in January that despite increased stability overall, pockets of pressure remain throughout the country.

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (3)
JohnKrats wrote:
Thus sprach the billionaire who says we should pay more in taxes, yet, he fights the IRS tooth and nail at every turn.

Mar 01, 2014 3:12pm EST  --  Report as abuse
jw_collins wrote:
So then, if I read the article correctly, we have fiscal issues?

Mar 01, 2014 4:26pm EST  --  Report as abuse
JoshWeinstein wrote:
Warren Buffet is absolutely right. Just look at Illinois and Pennsylvania. Illinois pensions are underfunded by $100 billion and Pennsylvania by $50 billion.

Blaming the employees for this is a joke! The politicians promised the pensions, then they decided for decades that rather than contribute the state’s share, they would use that money to balance their budgets instead, leaving an IOU in the pensions. Well, guess what, those IOU’s are coming due.

The Republican response seems to be to blame the employees and specifically the unions for this whole mess. But how is it their fault? The politicians agreed to the pensions and then they didn’t properly fund them – they kept pushing the payments into future years. Now there are no more future years to push them into.

That is the whole problem with the way that government operates. The politicians currently in office can make all kinds of promises and borrow money to fund them. When the loans come due, they are long gone and someone else is left to deal with the problem. This worked for a few decades, but the financial crisis and aging population means this method will no longer work.

What now? Cities can go bankrupt, but states cannot. That leaves two options. Let the retired employees starve in the streets or raise taxes. Or a federal bailout??? The problem with that is that the federal government would almost no chance of ever recovering the money like they did with the TARP money (most of that has been paid back).

Mar 02, 2014 2:43am EST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

A tourist takes a plunge as she swims at Ngapali Beach, a popular tourist site, in the Thandwe township of the Rakhine state, October 6, 2013. Picture taken October 6, 2013. REUTERS/Soe Zeya Tun (MYANMAR - Tags: SOCIETY) - RTR3FOI0

Where do you want to go?

We look at when to take trips, budget considerations and the popularity of multigenerational family travel.   Video