Monday, February 21, 2011

Illinois's ponders bond sale to cover underfunded pension; it's an unsustainable example for other states; what happens to the muni bond market?

States may be getting deeper in the hole, as they try to issue bonds to cover costs of underfunded pensions, as is the case with Illinois. More recent stories say that Illinois may seek federal guarantees for its bonds, which might run into further budget cutting wrath from the GOP-controlled House.  The GOP wants to force states to use more conservative accounting methods, which may help governors and conservative state legislators (as in Ohio and Wisconsin, and soon more states) cut back on the collective bargaining power of public employee unions.

A more comprehensive recent story is in Global Pensions, link here.

The readers’ comments are interesting, such as the first one suggesting a “pension replenishment tax.”

At the same time, Assets International reported on Feb. 16 that Illinois had delayed its bond sale, link here

Much of the other media coverage is based on a “Dealbook” story in the New York Times Feb. 18, here

All of this relates to declines in prices in the tax-exempt bond market as investors fear defaults and laws allowing states and local governments to go bankrupt.  This could affect many retirees who hold many of these bonds (or shares in their funds) as “conservative” investments. 

Picture: Countryside near my father's one-room school in Iowa, around 1912. 

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