A new look at public pension plans warns of widespread default among cities, counties and states. Time to revise your investment strategies?
Underfunded public pension plans could lead to widespread default among cities, counties and states across the country, according to a report released today by the non-profit, non-partisan State Budget Solutions.
That’s unsettling news for individual and institutional investors who own a piece of the roughly $3.7 trillion municipal bond market. (Muni bonds are among the investment strategies preferred by affluent investors seeking a tax-advantaged tool for preserving capital.)
State Budget Solutions takes a new look at unfunded liabilities in the nation’s public pension plans and concludes the shortfall is worse – much worse – than previously reported. The report estimates the average U.S. public employee pension plan is 41 percent funded and that total underfunded liabilities exceeded $4.6 trillion at the end of 2011. That’s more than five times larger a liability than reports of an $885 billion shortfall at the end of 2010, the non-profit said.
The latter estimate was calculated using current accounting guidelines from the Governmental Accounting Standards Board, but those standards aren’t strict enough, according to State Budget Solutions. GASB standards set to go into effect by 2015 will require municipalities to reconcile pension fund earnings estimates against guaranteed benefit payouts, but current rules allow for “politicians’ guesses about how much investments will earn and grow.”
“Failing to understand the scope of the pension crisis sets taxpayers up for a bigger catastrophe in the future,” Bob Williams, president of State Budget Solutions, said in a release. “Without government action, states, counties, cities and towns all over America will go bankrupt. It is vital to reform public pensions now. Real reform must be based on actual numbers instead of the optimistic outlook presented by using unrealistic assumptions.”
Unfunded pension liabilities prompted Moody’s Investor Services earlier this week to downgrade the creditworthiness of general obligation bonds issued by the Commonwealth of Pennsylvania. Investors considering muni bonds as part of their fixed-income investment strategies are advised to consider the financial condition of municipality and any entity backing the bond.