In today’s world, the “Big Trouble” is massive unfunded State and Municipal fiscal deficit spending…plus enormous underfunded public pension fund payout obligations…for retirement and healthcare benefits. They have outstripped State and Municipal tax revenues.
Some of these deficits are a result of the prolonged recession that began in 2008. Yet, much more is “endemic” in the financial business models of State and Municipal governments. These entities, via their politicians, have granted huge growth in spending for education, infrastructure, non-essential public employment, early retirement pension at age 50, retirement healthcare benefits from age-50 to age 65…until Medicare steps in and so one…over the past 10 years and longer.
These spending initiatives are completely out of step with today’s economics at State and Municipal governments. Tax collections from retail sales, real estate tax assessments, income taxes can’t keep up with the growth in current budget spending, and hardly scratch the surface of the funding needed to cover the public employee retirement and healthcare packages.
This “time bomb” is ticking louder by the month, and the “Wake Up” call from the clock is ready to ring, according the Governor Chris Christie and Meredith Whitney.
I invite you to listen to the 15 minute video that aired on 60 Minutes last Sunday night. It is an amazing “right out of the box” reality discussion of the problems in public finance that are largely being ignored by the general populace, and the offending governments themselves.
http://www.senseoncents.com/tag/meredith-whitney-60-minutes-december-19-2010/
Wall Street is ignoring the impending financial crisis in state finances….for good self-interest reasons to themselves…”They syndicate all the new muni bond issuance that gives them fee income”…again self-serving, like the past binge in sub-prime mortgage issuance.
State and Municipal new bond issuance is booming across the country. The Fed’s Zero interest rate policy “QE” is encouraging the average investor to “reach for yield”. That means there is a ready appetite for public debt if the interest rate and tax exemption is attractive…never mind the default risk factor.
Build America Bonds (BAB) represent a cheaper alternative for state and local governments to tap the capital markets through long-term bond borrowing. As part of the 2009 American Recovery & Reinvestment Act, these entities were allowed to sell the taxable debt for infrastructure purposes, receiving a 35% federal interest cost subsidy. Yet, even though the BAB looks to be a “healthy choice” to cover some state spending bills, it does nothing to cure the core problem of state financial infidelity of pursuing chronic deficit budget spending and growth in public employee entitlement benefits.
Yes Sir….“There is Big Trouble in River City”, and we believe it wise to listen a bit to Professor Harold Hill (aka Chris Christie and Meredith Whitney). Christmas benefit presents to public employees across the country are going to be a lot smaller in the years ahead, if not ending, if bond defaults begin to emerge.
Public pension fund Trustees have an obligation to help cure the unfunded pension deficits. Their role is that of “pension fund investment management oversight”. Most states are using a very outdated annual investment return assumption of 7.5% to 8%. These annual returns have not been consistently attained for more than 10 years. Trustees must revise their investing strategies to utilize high dividend yield common stocks, and cease their focus on “growth stock investing”. See: www.CMAHighDividends.com for portfolio strategy in high dividend common stocks.
Chuck Dushek, President
Capital Management Associates Inc.
801 Warrenville Road
Suite 195
Lisle, IL 60532
Phone: 630-963-4235 Ext 1
Fax: 630-963-4236
Email: ChuckDushek@CMAAdvisors.com
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