Since States' Pension Cuts Have Barely Made A Dent In Unfunded Pension Liabilities, Muni Bond Due Diligence Grows Increasingly Important

Monday, September 24, 2012 06:25
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Since States' Pension Cuts Have Barely Made A Dent In Unfunded Pension Liabilities, Muni Bond Due Diligence Grows Increasingly Important

Tags: credit downgrade | defaults | municipal bonds

Five years after the 2008 crisis, efforts to cut pension benefits has only put a $100 billion dent in the $900 billion unfunded liability gap for states. They are battling politically powerful labor unions as they try to fill that liability gap.

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Pension assets experienced heavy losses during the crisis and unfunded liabilities reached critical levels in many states. The cuts that have been made primarily apply to new hires and are expected to reduce costs by 25% over the next 35 years.
 
But the most expensive retirement benefits apply to current retirees and those benefits have not been cut. Current worker and retiree benefits are protected by law in many states.
 
The cuts that have been put into place will save states about $55 billion over time but the savings from the cuts won’t kick in for decades. So there’s little help in the offing for currently unfunded liabilities.
 
As pension boards adjust their assumed investment returns downward, costs of pension benefits rise. The only choices are to cut benefits or to ask states and employees to contribute more money to the plans.
 
Ohio is one state that recently passed laws cutting benefits to current workers and retirees along with new hires. The public employee unions actually supported that move through the realization that the pensions might not be able to survive without such cuts.
 
Other unions are filing lawsuits in state courts challenging the cuts put into place last year by various states.
 
These are the developments you’ll want to watch when investing client assets in municipal bonds.
 
Whether Meredith Whitney’s predictions of hundreds of billions of dollars in defaults come true, the bankruptcies in California municipalities over the summer shows how critically important it is that you up your due diligence on muni bond issuers.
 

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