State and local pension plans throughout the United States are underfunded, which has some financial experts wondering whether the type of economic crisis that befell Greece could hit America sometime soon.
A survey by the Center for Retirement Research found that 150 state and local pension plans had an average ratio of assets to liabilities of 74%. In other words, for every dollar those funds owe their pensioners, they only have 74 cents in assets, RT reported.
According to MarketWatch: Chicago’s six pension plans are 40% funded; New Jersey’s are at 51.5%; and Puerto Rico, which is facing its own crisis moment, is grossly underfunded at 3%.
Many fear that elevated pension costs might push these public entities into insolvency. Detroit, as well as Vallejo, Stockton and San Bernardino in California, have already declared bankruptcy due to overwhelming pension costs.
In many states, public pensions are protected by state constitutions or statutory law, and Chapter 9 bankruptcy proceedings favor cities and other municipal governments. That has resulted in bond values being cut much more than pension benefits, which is bad news for bondholders.
Rather than raise taxes, many cities have turned to pension obligation bonds, which allow a city or state to borrow money to make its pension payments and issue bonds that will be repaid by future city revenues.
POBs Are Risky
But, POBs are risky. “When you buy POBs, you’re exposing yourself to the pension fund and essentially lending money to leverage its portfolio,” Kenneth Potts, of Samson Capital Advisors, was quoted as saying by MarketWatch.
In other words, there is neither a real asset backing these bonds, nor a specific revenue stream to guarantee repayment. Or, as Moody’s put it: “in essence, pension obligation bond is a misnomer because the bonds are simply a vehicle to fund pensions.”
That means when there are not enough funds to go around, a bankrupt city can choose to give the little money it has to its pension funds but not to its pension obligation bondholders, MarketWatch reported.
In the Caribbean, the US commonwealth of Puerto Rico is $73 billion in debt–an amount the government says it cannot pay back.
If the Puerto Rican government stops paying its bills, it will trickle down to Puerto Rican businesses, which in turn will be unable to pay their Florida suppliers–the largest provider of goods and services to Puerto Rico.
To avoid disaster, the US Congress may move to allow US territories like Puerto Rico to file for bankruptcy protection.
