15 March 2010

Public Sector Pensions, Unfunded Liabilities, Sovereign Defaults, And You

Barron's: 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.

SOVEREIGN DEFAULT IS A hot topic these days. With Greece tottering and other European countries in fiscal distress, some have even voiced the possibility that a U.S. state -- also considered a sovereign entity -- could suffer a general-obligation debt default.

Says Todd Zywicki, a law professor at George Mason University: "In many ways, some of our states are like General Motors before its bankruptcy, suffering from falling revenue, borrowing money to cover operating expenses and operating under crushing legacy health and pension liabilities. It's entirely possible, given the gigantic size of the pension liabilities, that some states might do what was once the unthinkable at GM and default."

Such assessments might be alarmist. A rebound in the U.S. economy and a continued rally in stocks would do a world of good for ailing public pension funds. And only one state -- Arkansas in 1934 -- has defaulted on its GO bonds in the past century with their holders suffering losses. Arkansas, however, was a special case. In addition to the Great Depression, it was ailing from large local debts it had assumed as a result of catastrophic floods in the 1920s.

But what if the stock-market rally falters, the economy doesn't return to full health, jobs remain scarce and tax revenues remain depressed?

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