Financial Issues - Think Biblically about your finances.

Fri, 4/17/2015

Government Pensions

State Pension Crisis
The idea of issuing a bond - a debt - to fund the shortfalls in pensions is ludicrous.  



Government pensions. I've been speaking about them for a long time - local municipality pensions, state pensions, county pensions, and federal government pensions. For four years, I have often said that one of the next shoes to drop in our economy could be the unfunded liabilities of pensions across this country. Many states are in serious trouble with their pensions.


My predictions are coming to pass, and one of the "solutions" is pension obligation bonds. More and more pension obligation bonds are being issued, even in my home state of Pennsylvania.


The idea of the pension obligation bond is to fund the shortfalls. Yes, I said fund the shortfalls. That may be a good idea, but not when the shortfalls are being funded with more debt. The idea of issuing a bond - a debt - to fund the shortfalls in pensions is ludicrous. The shortfalls in the pensions across this country will be a major issue, primarily because of the fiscal irresponsibility of states over the last 20 years. Buying into the notion of calculating an 8 percent growth year in and year out to help fund their unfunded liabilities has not worked well.


The only states that seem to be getting serious about issuing more pension obligation bonds are those states in the most trouble. Pension obligation bonds were issued through the year 2005 and 2006 in Detroit. We need to ask Detroit, "How is that working for you?" Looking at the financial crisis and the problems Detroit is still experiencing makes it clear the process has not been working well. The idea of taking on more debt to shore up a failing system is not usually the best of policies-although it may be a last resort with the least resistance.


Many of you with managed portfolios may see some pension obligation bonds popping up in your portfolio and regard them as "safe and secure" to help you receive a little income. But keep this in mind: most of these pension obligation bills come from the states in the most trouble. Consistent mismanagement of the risks involved in managing pension funds compel me to warn you about these bonds. I would stay away from them. I think following this path is a risk you may not want to take.


Keep this in mind: the great strong states (as few as they are) don't need to be issuing pension obligation bonds. Most of these being issued - and perhaps showing up in your accounts - are from an overstressed, mismanaged state. A state that feels like getting into more debt to keep up with the payments on the debt they have already created. A state willing to issue these bonds to free up cash so they can pay their electric bill.




Financial Issues with Dan Celia

Fri, 4/17/2015
» Government Pensions
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