Each year, the Government Accountability Office outlines government programs that represent high levels of fiscal risk and each year the list is pretty much the same. Everyone knows about these problems, but nothing gets done about them. The three biggest “fiscal risks” are outlined below.
Pension Benefit Guaranty Corporation
The Pension Benefit Guaranty Corporation (“PBGC”) is an independent agency of the federal government that provides insurance for private sector defined benefit pension plans. It was established in 1974 and its assets exceeded its liabilities every year until 2001. Since then, there has been steady and accelerating deterioration.
At the end of fiscal year 2016, the PBGC’s liabilities exceeded its assets by $79 billion. The PBGC reported potential for further losses of $242 billion if plan terminations occur that are considered reasonably possible.
Not paying employees in the pension plans of bankrupt companies is not an option for the PBGC. In a “reasonably possible” downside scenario, the federal government could be looking at a $325 billion hole to fill.
Fannie Mae and Freddie Mac
The Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“ Freddie Mac”) are both independent agencies of the federal government set up to provide liquidity to the US mortgage market. They basically buy mortgage loans from banks and S&L’s and package them into securitizations that are then sold onto the bond market. All this keeps the money flowing into the mortgage market.
Prior to the 2008 housing crisis, both were independently financed operations with zero government support. Unfortunately, both went bust as a result of the housing crisis (sub-prime mortgage loans turned out to be a very bad idea). The federal government stepped in with a massive bailout and both Fannie Mae and Freddie Mac are well and truly on the mend today.
Can lightening strike twice? At the end of fiscal year 2016, the federal government reported that $109 billion was still invested in these two agencies (and that’s net of $86 billion of valuation losses). The government has a remaining contractual commitment of $258 billion that could still be funded in the future. So, here’s another giant hole the taxpayers may need to fund in the future.
The US Postal Service
E-mail, Fed Ex, UPS, DHL: delivering mail has become quite competitive.
The US Postal Service has $15 billion of debt plus $73.4 billion of unfunded employee pension and retiree benefit liabilities. In fiscal year 2016, it lost $5.6 billion. In fiscal year 2017, it generated $68.7 billion of revenues on $71.9 billion of expenses, resulting in a loss of $3.2 billion. It has been losing money for years.
The Postal Service faces many challenges. First and foremost, its core business is shrinking. Mail volume peaked in 2006 at 213 billion pieces. By 2017, volumes had declined 30% to 149 billion pieces.
Parcels are about 4% of the business, but here the post office faces competition for UPS, DHL and soon Amazon. UBER and drones are on the way.
While its revenues are declining, its expenses continue to grow. The Postal Service is staffed by federal union employees. Job protection measures and local political pressure make it very difficult to close any of the 30,000 post offices, even if they loose money. Efforts to reduce the number of service days from six to five have failed. An innovative program to put mail counters in Staples stores was shot down by the National Labor Relations Board so Staples employees couldn’t handle mail.
The Informed Vermonter recognizes that fixing the problems outlined above will be challenging, complex and politically difficult. However, tangible and realistic efforts to do so would be vastly superior to doing nothing or not enough. With hundreds of billions of taxpayer money at risk, kicking the can down the road doesn’t seem like the right solution.