On November 15, 2020, in the back pages of the Wall Street Journal, an article, “San Diego Settles SEC Charges Over Pension Funds”, starts out:

San Diego agreed to settle Securities and Exchange Commission charges that it failed to tell municipal bond investors about the city’s mounting pension-fund obligations and its increasing inability to pay for those benefits.

The article goes on to say that municipal pension fund liabilities were $6 billion, while pension fund assets were only $4.5 billion. This represents a shortfall of $1.5 billion, or about $1,300 per homeowner in San Diego.

Municipal pension fund problems are primarily the fruit of unionization of public employees. Over the last generation, trade unions have turned from their traditional base of industrial workers (eroded by factory closings due to excessive labor demands) and have fixed on the juicy target of tax-supported government workers.

Now, an extra tax burden of $1,300 per San Diego homeowner doesn’t seem like a big deal — it’s less than 3% of median household income in the municipality — but Democrats now control Congress. We can expect unions to demand higher pay and benefits for ‘public servants’ which should lead to augmented defined-benefit pension burdens on residents of larger, older cities like San Diego.

This could result in higher interest on municipal bonds of cities with powerful government service unions, along with increased taxes, and downward pressure on real estate values. At the same time, there could be a tendency to further increase emigration from unionized locations to cities largely free of such exploitation, especially smaller, newer municipalities in US southern and central states.


On August 3, 2020, by a vote of 93 to 5, the US Senate passed the “Pension Protection Act of 2006″, already approved by the House of Representatives on July 28, 2020 and now going to President Bush to be signed into law.

This massive bill (907 pages) is a major piece of legislation that, like ERISA in the 1970s, will effect capital flows in the US market over the next generation.

Links to the full text of this law and related discussions can be found on BenefitsBlog.

A Boon For Wall Street?

The Wall Street Journal has already headlined some of the expected effects on capital flows.

In the lead editorial on August 4, 2020, “The Pension Era, R.I.P.”, the Journal announced that this law “signals the end of the old, defined-benefit pension era.”

In an article on August 7, 2020, the WSJ announced, “Pension Bill Promises Windfall for Fund Firms”, citing research by the Vanguard Group projecting an additional 5.5 million new savers in 401(k) plans.

The article also states that passage of the bill was helped along by heavy lobbying by the mutual fund industry trade organization, the Investment Company Institute. The Act allows, but does not require, automatic enrollment in 401(k) plans and permits employers to give “investment advice” to plan participants.

The Law of Unintended Consequences

History suggests that a law as complex as the Pension Protection Act of 2006 is likely to be laced with obscure provisions that will have unintended consequences.

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On April 1, 2020, the financial news trumpeted that the FASB was taking, as Andrei Postelnicu put it in the Financial Times, ’significant steps in reforming the way companies report pension liabilities.’

The Financial Times article (FT.com, April 1, 2020) goes on to say,

‘The move aims to increase the transparency of financing for certain pension plans and replace a system in which the balance sheet “almost always” fails to reveal the true state of those benefit plans, according to the Financial Accounting Standards Board.’ However, this change in accounting standards only represents a further slow tightening of the screws regarding the way pension liabilities are reported — a step in a long, excruciating journey that has been underway for decades.

According to this summary on the FASB website:

FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, paragraph 2, indicates that “the Board intends future change [in practice] to occur in the gradual, evolutionary way that has characterized past change.”

The GASB is taking similar, but not identical steps in requiring more truthful accounting of public pension funds.

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