Municipal pensions are underfunded - now who would ever imagine that?
Fox News is reporting breathlessly a report that JP Morgan did not disclose to purchasers of municipal bonds that state and local governments had unfunded liabilities due to their pension funds to the tune of $4 trillion. Duh. I guess that the next breaking news is to warn buyers of US Treasurys that the US government has massive unfunded liabilities associated with social security. Maybe Fox assumes that buyers of government bonds are stupid. Tell me what fund managers do not know of the unfunded liabilities and I bet the number is zero and if it is positive then that fund manager needs to be fired. Fox’s Neil Cavuto who “broke” the story said that the alternatives were either that the state and local governments would have to dramatically raise taxes or cut back on services. Au contraire. What the governments will do is to cut back on pension and health benefits. Investors know this and investors also know that these unfunded liabilities are not very likely to force a default. This is different from issuing revenue bonds which are dependent upon the monies raised from the use of the project (such as a parking garage or a stadium). So I hate to disappoint Fox but JP Morgan disclosing the obvious would have virtually no impact on the market for municipals.
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com