Let's take a look at GE first. CNN Money (18 January) has an article that goes into the GE situation. Here are some major points:
1. When Jack Welch retired, there was a pension surplus of $14.6 billion (2001).
2. With Jeff Immelt, it all went down hill. The pension currently has a $31 billion problem (2016).
3. This was largely driven by money poorly spent on share buy backs and M&A.
4. Share buybacks equaled $40 billion. So if GE hadn't wasted money on buybacks (though additional cash would have been applied to higher dividend payouts), their liabilities could have been much smaller.
5. One example of an M&A purchase that went wrong was the acquisition of Alstom's power business, which is focused on coal-fueled turbines.
6. Though on the M&A front, if oil supply/demand disconnects arise as I suspect, Baker Hughes might work out as a solid M&A deal. But from what I've read, GE wants to sell off Baker Hughes. They should probably hold on for a few more years to see if the IEA forecasted crisis happens come 2020-ish.
7. GE isn't the only corporation with large pension deficits. GM is $18 billion short and Boeing is $20 billion short.
8. One thing that has been mentioned via CNBC (16 January) is that GE could break up as soon as Spring. Yet CNN Money has this quote: But analysts warned that GE's pension liabilities are so large that it could make dismantling the company very messy, if not impossible. Yeah, how do you split up the pension liabilities?
In summary, one could say that GE focused on pleasing Wall Street via share buy backs and attempted to please Wall Street via M&A versus properly taking care of their retirees. It appears based the CNN Money article that GE could have easily averted their current pension crisis by just maybe doing half of the buy backs that they did. Perhaps in GE's defense, few probably thought that interest rates would stay as low as they have for as long as they have. And as the article states: Yet GE also said that its pension liabilities could go down significantly if rates rise.
Now for California. George Skelton of the LA Times (18 January) suggests that it is now time for politicians to address a looming pension crisis.
Here are some juicy quotes:
1. It was revealed last year that the cost of retiree benefits in Los Angeles amounts to roughly 20% of the city’s general fund, which pays for basic services such as police and parks. In 2002, the cost was less than 5%.
The article doesn't do any forecasting, but this is not a good picture to have this percentage increase that much in 15 years.
2. The unfunded liabilities at the state and local level ranges from $333 billion to $1 trillion.
3. Just using the official numbers, [Joe Nation, Stanford public policy professor] says, the unfunded liability amounts to an average of $26,000 per household — fourth worst in the country. No. 1 is Connecticut at $38,000, followed by Alaska and Hawaii.
Now, of course, we don't know what the unofficial numbers are for Alaska, Connecticut and Hawaii, but if we just go with the $1 trillion level and assume that the other states are being more truthful, we obviously surge to number 1.
4. The article goes into how there are various conflicts in terms of pensions. Unions give money to politicians. Judges and Sacramental staffers who might need to do the reform (or propose the reforms) would also be hitting their pocketbooks.
Essentially, what happens when we finally go into a Wall Street bear market? Does the unfunded pension liability explode to $1 trillion?
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