In "Safe...or Sorry?" I discussed some of the many risks municipal bond investors have been ignoring in their Quixotic quest for safety and high yields.
This week's Barron's details yet another financial time bomb ticking in the shadows of state and local government finances in a report by Jonathan R. Laing, entitled, "The $2 Trillion Hole":
Promised pensions benefits for public-sector employees represent a massive overhang that threatens the financial future of many cities and states.
LIKE A CALIFORNIA WILDFIRE, populist rage burns over bloated executive compensation and unrepentant avarice on Wall Street.
Deserving as these targets may or may not be, most Americans have ignored at their own peril a far bigger pocket of privilege -- the lush pensions that the 23 million active and retired state and local public employees, from cops and garbage collectors to city managers and teachers, have wangled from taxpayers.
Some 80% of these public employees are beneficiaries of defined-benefit plans under which monthly pension payments are guaranteed, no matter how stocks and other volatile assets backing the retirement plans perform. In contrast, most of the taxpayers footing the bill for these public-employee benefits (participants' contributions to these plans are typically modest) have been pushed by their employers into far less munificent defined-contribution plans and suffered the additional indignity of seeing their 401(k) accounts shrivel in the recent bear market in stocks.
And defined-contribution plans, unlike public pensions, have no protection against inflation. It's just too bad: Maybe some seniors will have to switch from filet mignon to dog food.
The article also includes a table detailing how the various states measure up in terms of the retirement-related promises made -- but not paid for.
Click here to read the rest of the article (subscription required).
