Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Massive Stock Market Price Reversion May Be Days or Weeks Away - 22nd Sep 19
How Russia Seized Control of the Uranium Market - 22nd Sep 19
Dow Stock Market Trend Forecast Update - 21st Sep 19
Is Stock Market Price Revaluation Event About To Happen? - 21st Sep 19
Gold Leads, Will the Rest Follow? - 21st Sep 19
Are Cowboys Really Dreaming of... Electric Trucks? - 21st Sep 19
Gold among Negative-Yielding Bonds - 20th Sep 19
Panicky Fed Flooding Overnight Markets with Cash - 20th Sep 19
Uber Stock Price Will Crash on November 6 - 20th Sep 19
Semiconductor Stocks Sector Market & Economic Leader - 20th Sep 19
Learning Artificial Intelligence - What is a Neural Network? - 20th Sep 19
Precious Metals Setting Up Another Momentum Base/Bottom - 20th Sep 19
Small Marketing Budget? No Problem! - 20th Sep 19
The Many Forex Trading Opportunities the Fed Day Has Dealt Us - 19th Sep 19
Fed Cuts Interest Rates and Gold Drops. Again - 19th Sep 19
Silver Still Cheap Relative to Gold, Trend Forecast Update Video - 19th Sep 19
Baby Boomers Are the Worst Investors in the World - 19th Sep 19
Your $1,229 FREE Tticket to Elliott Market Analysis & Trading Set-ups - 19th Sep 19
Is The Stock Market Other Shoe About To Drop With Fed News? - 19th Sep 19
Bitcoin Price 2019 Trend Current State - 18th Sep 19
No More Realtors… These Start-ups Will Buy Your House in Less than 20 Days - 18th Sep 19
Gold Bugs And Manipulation Theorists Unite – Another “Manipulation” Indictment - 18th Sep 19
Central Bankers' Desperate Grab for Power - 18th Sep 19
Oil Shock! Will War Drums, Inflation Fears Ignite Gold and Silver Markets? - 18th Sep 19
Importance Of Internal Rate Of Return For A Business - 18th Sep 19
Gold Bull Market Ultimate Upside Target - 17th Sep 19
Gold Spikes on the Saudi Oil Attacks: Can It Last? - 17th Sep 19
Stock Market VIX To Begin A New Uptrend and What it Means - 17th Sep 19
Philippines, China and US: Joint Exploration Vs Rearmament and Nuclear Weapons - 17th Sep 19
What Are The Real Upside Targets For Crude Oil Price Post Drone Attack? - 17th Sep 19
Curse of Technology Weapons - 17th Sep 19
Media Hypes Recession Whilst Trump Proposes a Tax on Savings - 17th Sep 19
Understanding Ways To Stretch Your Investments Further - 17th Sep 19
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

More Bankruptcy For Your Retirement Portfolio

Stock-Markets / Pensions & Retirement Feb 11, 2016 - 05:24 PM GMT

By: Rodney_Johnson

Stock-Markets

There’s an old saying that if you owe the bank $1 million, you have a problem. But if you owe the bank $100 million, then the bank has a problem.

That’s the situation we’re in today.

States around the country have racked up outrageous unpaid balances for their pensions. Few of them have any plan for digging out of the hole. Since they have no plan, they’re creating issues for everyone who might be called upon to help them make good on their obligations.


Even if you don’t live in one of these states, you might still have a problem. In effect, the states owe a lot of money, and all of us are the bank!

Some states, like Rhode Island, tried to deal with the issue. That state slashed benefits and jacked up contributions.

But in many states like Illinois, state pension benefits are constitutionally guaranteed, so benefits cannot be cut. This leaves taxpayers in the state to foot the bills as they come due, no matter what the cost. And in some cases, bondholders suffer as well.

That’s where you might have a problem.

In Illinois, the unfunded liability sits at $110 billion and is getting worse by the month. After years of mismanagement by the state, Illinois has about 48 cents of every dollar it needs to make good on its pension promises.

Across the country, smaller entities like cities, school systems, and counties are suffering from the same disease – official mismanagement.

The basic problem is that current politicians negotiate changes, while future politicians are left to clean up the mess when things blow up. These changes include benefit increases, fewer years of service needed to retire, and how much the entity will contribute each year to the pension.

Now, the politicians who created today’s problems in the 1990s and early 2000s aren’t around to answer for their sins.

Meanwhile, the workers who toiled for years with their pensions in mind want what is rightfully theirs.

This is all coming to a head in states like Illinois, and cities like Chicago. The money’s running out, and government officials refuse to raise taxes any higher on their constituents.

It’s about to get interesting, and not in a good way. As to what lies ahead, we have two prime examples. One has already played out, and the other is still unfolding.

Fool Me Once, Shame on Me

The city of Detroit’s bankruptcy was the largest municipal failing in U.S. history. It owed $18 billion that it could not pay. With falling tax rolls and declining population, Detroit begged, borrowed and stole for years to keep going. Eventually it reached the end of its rope.

Besides pensions, the city was also indebted to its bondholders. At the time, investors who bought bonds felt pretty secure. After all, they were backed by the full faith and credit of the City of Detroit. Later on, they realized their mistake.

The contract said that bondholders would be paid before anyone else. No one ever assumes the worst – like a bankruptcy – will come. But here’s a question: what city officials in their right mind will choose to pay bondholders over their police officers, firemen and teachers? Even though it is legally correct, any politician that did so would be run out of town on a rail!

It’s true that some of those boldholders are regular guys like you and me just trying to fund their own retirement. Even so, the town had no intention of paying them with every last dime available. Instead, they diverted money to payroll and city services. They kept their city running.

That might seem like a humane decision, but it defied the contract the city signed when it took the money from bond investors.

The worst offender is the Detroit pension system itself. Detroit borrowed money specifically to top off its ailing pension plan, but then fell behind anyway. When the city went bust, it claimed this bond issue was unauthorized, and therefore they didn’t owe the bond investors anything.

They wanted to have it both ways: get the money, and owe nothing.

And that’s what happened. The bondholders that funded the pension received about 15 cents on the dollar. Meanwhile, the retirees got almost everything they were owed.

Fool Me Twice…

Now Puerto Rico is doing the same dance. The island Commonwealth owes roughly $72 billion among several issuers, including their power authority, general obligation bonds, local development authority, and “moral obligation” bonds.

I put the last one in quotes because these bonds were anything but moral.

When the island reached its maximum borrowing capacity, it wanted to borrow more. So instead of issuing general obligation or some other traditional bond, it issued what are called “moral obligation” bonds. These bondholders couldn’t sue for payment. Government officials were only morally, not technically, obligated to pay them.

That didn’t last too long. Puerto Rico has already quit paying on these bonds. Now island officials are negotiating with the other bondholders on how big of a discount they will get, even as the officials illegally move money from one pot to another.

Since this is a Commonwealth and not a city or county, it doesn’t have access to federal bankruptcy law. The government of Puerto Rico is supposed to pay its debts, period. And it can. The island has enough assets that it could sell to meet its obligations. It can also cut benefits and reduce payrolls.

But it won’t. Instead, it will lay the problem at the feet of bondholders.

This is where you become the bank.

If you own a tax free bond fund, chances are you own Puerto Rico bonds, and your fund will take a hit.

Unfortunately, most bond fund buyers don’t look beyond the rating and the yield on the fund. These metrics won’t help. Investors need to do a much deeper dive on what they own to make sure they aren’t holding the bag when things blow up. This is one time when it doesn’t pay to be the bank.

Rodney

Follow me on Twitter ;@RJHSDent

By Rodney Johnson, Senior Editor of Economy & Markets

http://economyandmarkets.com

Copyright © 2016 Rodney Johnson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Rodney Johnson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules