Sunday, July 21, 2013

Municipal pension crisis

As should have been obvious a long time ago, the issues surrounding Detroit's bankruptcy filing are not limited to Detroit. has provided a list and a map of all 36 of the municipal bankruptcies in the United States snice 2010. A major factor in these bankruptcies has been unfunded pension obligations. This problem exists in municipalities throughout the country. This crisis was predicted more than 30 years ago:
As for state and local pensions, they are in shambles. . . . . A 1975 survey of 44 Pennsylvania cities revealed that over 75% of them had pension programs that were not adequately funded. . . . Pension fund debt literally threatens the future survival of state and local finances.
Gary North, How You Can Profit From the Coming Price Controls, pp. 6-7 (1980).

While the 1975 data may be old, it wasn't old in 1980 when North wrote his book (yet the whole issue has been ignored until circumstances forced it into the headlines). In the last 30+ years, the problem has only grown worse. Those pension programs did not somehow get more solvent since the 1970's. Municipal spending has increased and hiring has increased (until very recently). Tax bases have declined - both in terms of population and property values (especially in the past 5 years).

As the pension crisis spreads and worsens, real estate values in the affected municipalities will reflect that crisis.

Click here for previous commentary on municipal default.

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