You have heard me endlessly babble about the state of public pensions, mainly because it is a serious issue that is not effectively being addressed. It is a serious problem caused by politicians and union leaders looking only for votes and ignoring the negative impact on average citizens and even average union members.
But the harm could go further affecting individual investors large and small. Consider the following article.
From the New York Times July 27, 2015
Puerto Rico is drowning in $72 billion of debt it admittedly cannot pay back. Several states — Illinois, Pennsylvania, New Jersey and Kentucky among them — are facing mounting financial problems of their own, mainly because of pension promises that are not properly funded.
Those government travails come just two years after Detroit’s historic bankruptcy, the largest municipal default ever.
Since individuals hold most of the $3.7 trillion invested in municipal bonds — or about 70 percent, either directly or through mutual funds — it raises the question: Should investors be worried? After all, municipal bonds have traditionally been viewed as safe investments.
“There is more stress in the muni market today than there was 10 years ago because there are higher fixed costs like pensions and retiree health care costs, increased debt costs and more modest revenue increases,” said Lisa Washburn, a managing director for Municipal Market Analytics, a research firm based in Concord, Mass. “I am more worried about credit deterioration in states with significant pension issues, but I am not at this point concerned about any risk of default at the state level.”
Lisa Washburn, who researches municipal bonds, says she is not concerned about default risk at the state level.
CHANG W. LEE / THE NEW YORK TIMES
Overall default levels remain exceedingly low and are not expected to rise meaningfully. The default rate of the S&P Municipal Bond Index, which tracks 84,000 bonds from more than 22,000 issuers, was 0.17 percent in 2014, compared with about 0.11 in 2013.“We expect to see a small increase from the past in terms of bankruptcy or restructuring, but we have to put this in perspective,” said Christopher W. Alwine, head of Vanguard’s municipal bond group. “It’s a few isolated events in a very large market.”
Still, the pension problem isn’t going away anytime soon. Cities, counties and states will continue their struggle to find the most politically palatable and financially feasible ways to shore up their finances. In some cases, governments have issued more bonds to fill in the pension shortfall, which feels a bit like resorting to a credit card to cover the daily bills.
A recent analysis by the Pew Charitable Trusts found that state and local pensions had a funding gap of $1 trillion.The Illinois pension system, for example, was only 39 percent funded in 2013, according to the report, and the Kentucky system was just 44 percent funded.
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