Municipal Debt is Worse Than You Think


David Reilly of the WSJ outlines a better way to account for unfunded liabilities:

Gaping holes at state and local-government pension plans are probably a lot deeper than municipal-bond investors already fear. To see why, look to the Netherlands or Canada.

Those countries use far-more conservative approaches to value pensions—under their approach deficits at U.S. plans, estimated at between $500 billion to $1 trillion, could triple or more. Needless to say, following their lead would make the current, contentious state budget process—replete with Wisconsin legislators going on the lam—even more painful.

And yet, an added dose of realism is what states need. It would force actions that would better insure plans’ long-term health and protect taxpayers. It would also give muni-bond investors comfort that states are really confronting their problems.

Consider Illinois, which is selling $3.7 billion in bonds to fund its fiscal 2010 pension contribution. The state’s retirement systems were only 45% funded as of June 30, 2010, according to a prospectus issued Thursday. But that’s a smoothed view. Illinois in fiscal 2009 stopped using the market value of assets. It switched to a method that smooths gains and losses over five years. Without the change, Illinois’s plans would be just 38.3% funded.

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