KeNo's Housing and Economic Portal: Monday March 8 Housing and Economic stories

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Eight States (Obama’s Illinois is the largest) Have Shortchanged Pensions, Pew Study Finds - (www.nytimes.com) Notice a trend here. Obama was one of 2 senators in Illinois and left them with the largest pension shortfall in the country. Obama seems to be running the US like he ran Illinois. He incorrectly believes huge deficit spending can solve all economic issues and believes a day of reckoning will never come. U.S. states face a total shortfall of at least $1 trillion in their funds for employees' pensions and retirement benefits, and their financial problems are quickly mounting, according to a report released by the Pew Center on the States on Thursday. Illinois is in the worst shape, with only 54 percent of its pension obligations funded, according to the report, which looked at fiscal year 2008. Because the analysis did not encompass the final six months of calendar year 2008 -- most states' fiscal year's end during the summer -- it does not include the market downturn that devastated many funds' investment portfolios. "The funding gap will likely increase when the more than 25 percent loss states took in calendar year 2008 is factored in," the report said. Regardless of stock market fluctuations, pension funds were destined to fall down a budget hole, the non-profit research center found. "Over the last 10 years, many states have shortchanged pension plans in good times and bad," said Susan Urahn, the center's managing director, who called the beginning of the century a "decade of irresponsibility." States did not save for the future and manage costs well, said Urahn. She also cautioned that the 8 percent return on investments most states typically expect may need to be lowered.

Plan Pushed on Lending to Students - (www.nytimes.com) The Obama administration on Wednesday sought to bolster support for its plan to overhaul student lending, attacking banks that oppose it for enjoying “a free ride from taxpayers for too long.” In a telephone conference with reporters, Secretary of Education Arne Duncan repeated the administration’s assertion that the direct offering of student loans by the federal government, and an end to subsidies to private lenders, would save taxpayers $87 billion over 10 years. The savings would be used to aid early-childhood education, community colleges and needy college students. The administration plan passed the House of Representatives last year but has stalled in the Senate. Mr. Duncan said he remained confident that the Senate would pass the measure, which President Obama has called a “no-brainer.”

Muni Threat: Cities Weigh Chapter 9 - (online.wsj.com) Just days after becoming controller of financially strapped Harrisburg, Pa., in January, Daniel Miller began uttering an obscure term that baffled most people who had never heard it and chilled those who had: Chapter 9. The seldom-used part of U.S. bankruptcy law gives municipalities protection from creditors while developing a plan to pay off debts. Created in the wake of the Great Depression, Chapter 9 is widely considered a last resort and filings under it are more taboo than other parts of bankruptcy code because of the resulting uncertainty for everyone from municipal employees to bondholders. The economic slump, however, is forcing debt-laden cities, towns and smaller taxing districts throughout the U.S. to consider using Chapter 9. As their revenue declines faster than expenses, some public entities are scrambling to keep making payments on municipal bonds. And that is causing experts to worry about the safety of securities traditionally considered low risk. Vallejo, Calif.: Mired in bankruptcy since 2008; is trying to scrap union contracts. "People believe that municipal debt is safe based on assumptions that are no longer true," says Kenneth Buckfire, managing director and chief executive of Miller Buckfire & Co., an investment bank that has worked with corporations on restructurings and now is advising municipalities. For example, it isn't safe to assume that governments can raise taxes to cover shortfalls, he says.

Fannie and Freddie face subprime clampdown - (www.ft.com) Fannie Mae and Freddie Mac will no longer be allowed to use subprime mortgages and second-lien loans to meet government-mandated goals for helping low-income Americans buy homes, according to proposals by their regulator. The new rules proposed on Wednesday by the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, are designed to discourage the risky behaviour that helped create the housing crisis. As home prices soared through much of the last decade, private label mortgage securities packaged by the big Wall Street banks flooded the market. Many of these securities were given triple A ratings by the ratings agencies, even though they contained high-risk, subprime debt. Fannie and Freddie loaded up on these private label securities to satisfy government rules that required them to buy a certain amount of mortgages from low-income borrowers, economically depressed neighbourhoods and other underprivileged groups. When the housing market collapsed, setting off a wave of delinquencies, the government sponsored entities, as Fannie and Freddie are called, were hit by billions of dollars in losses.

Recession takes uneven toll in Lincoln, Neb., and Merced, Calif. - (www.usatoday.com) Merced: 'Like a bomb went off': In Merced, a stroll down Main Street brings little visible evidence of the economic misery that grips the San Joaquin Valley city. Drive a few miles to the outskirts, though, and the pain comes into focus. At the big Bellevue Ranch subdivision, entire cul-de sacs look like eerie ghost towns, empty of people. Rows of homes stand unfinished, their bare wood frames darkened by rain and weather. An unopened roll of roofing paper rests atop one house, and the clutter of construction debris lies soaked from winter rains, untouched since buyers and workers walked away when the housing bubble burst. "It was like a bomb went off," says Tom Calton, a retired insurance executive who devotes his time to helping the newly poor through an outreach program at his church, Liberty Fellowship. "The workers walked away. It happened so quick it was scary. It put people in shock. ... It didn't slow down. It just collapsed." Today, the Merced metropolitan area (population 246,117) has the second-highest unemployment rate in the nation, 19.8%. Merced also has one of the highest foreclosure rates. According to widely published statistics from First American CoreLogic, one in five homes in Merced County was 90 days delinquent in payments as of November 2009. The impact on property values has been devastating. Home values have dropped 62% since 2006, city spokesman Mike Conway says. Median home prices dropped from a peak of $337,300 in 2006 to $94,300 at the end of 2009, according to zillow.com, which tracks real estate values. Cities here in California's fruit and vegetable basket are always dependent on the vagaries of agriculture and see unemployment soar in winter when there's little work in the fields. In this recession, however, the impact has been compounded by the collapse of construction after a frenzied speculative bubble. In 2005, the city issued 1,444 residential building permits, Conway notes. In 2009, the number was seven.

AIG drops derivatives portfolio sale plan - (www.ft.com) AIG has shelved plans to sell the whole of its derivatives portfolio, which nearly destroyed the insurer in 2008. It believes that keeping up to $500bn worth of complex positions could help it to survive as an independent entity and repay US taxpayers. The decision underlines the management’s confidence in AIG’s future but could prove controversial in Washington, where officials have baulked at the cost of the US government bail-out of the insurer and scrutinised its use of derivatives. Gerry Pasciucco, who joined AIG after it was rescued by the government in September 2008 to wind down AIG Financial Products, said the troubled unit would still be out of business by the end of this year. AIGFP caused a storm in Congress last year with plans to pay some of its 200-plus staff large bonuses.

U.S. state pension funds have $1 trillion shortfall: Pew - (www.reuters.com) Describing state pension funds as operating similarly to credit card holders who make minimal monthly payments on their debt but continue to charge, Urahn said the funds were making their problems worse by not preparing for impending retirements. "The growing bill coming due to states could have significant consequences for taxpayers -- higher taxes, less money for public services and lower state bond ratings," she said. A pension fund is considered healthy if it has a funding level equal to at least 80 percent of its liability. In fiscal 2008, 21 states were below that mark, compared to only 19 states in fiscal 2006. The rate of decline has been rapid, the center said. In fiscal 2000 half of the 50 states had fully funded their pension systems but by fiscal 2008 only four -- Florida, New York, Washington and Wisconsin -- could boast being able to cover their costs. Public employees often receive other retirement benefits such as health care, and states are struggling even more to meet those spending needs. Only 5 percent of the $587 billion total liability they have is funded, the center said. Alaska and Arizona are the sole states that have more than 50 percent of the assets needed to pay for other post-employment benefits, Pew said.