The next crisis is muni bonds — and guess what? That’s right, underfunded, defined-benefits pensions are largely to blame:
The scandal isn’t simply that most public officials are misleading the public about the enormity of the problem and what steps must be taken to address the matter. As the Morgan report notes, many of the real liabilities are located “off balance sheet,” hidden from the public’s eye, and lax accounting standards let cities and states minimize their enormity.
It’s also that JP Morgan itself kept the report’s findings a secret except for a few big clients, mostly hedge funds and large institutional investors, who got the inside tip on which states and cities are most likely to default on their debt as their pension liabilities fester.
Yes: Default is a very real possibility, because the solutions are far from easy.
Nationwide, the actual size of unfunded public pension liabilities is four times larger than the $900-plus billion that officials are ’fessing up to. That’s right, the bank sees a $3.9 trillion hole; to plug that, states and cities will need large tax hikes, massive budget cuts or both. Plus, public-sector unions will have to accept smaller retirement packages, and later retirement ages, to keep the pension systems going.
I got out of munis completely a couple years before the Great Recession, and haven’t regretted it one bit.