Change (read: reform) Can Be Good
The question we hear from investors in the municipal market is to what extent the pension burden will weigh down state and local finances to the point of distress or, as in the case of Detroit, bankruptcy.
We do not believe pension liabilities will be the financial demise of municipalities. In fact, we’re more optimistic on this front than we have been in some time given greater awareness of the problem and a step-up in reform.
Since 2009, 45 states have imposed some type of pension reform, according to Pew Center data. Recent events in some high profile cases (Detroit, Illinois and a few cities in California) evidence the growing recognition of the problem and inclination among legislators to adopt change. And that’s good news for states’ long-term fiscal health, and for those who invest in munis.
Bottom line: There has been a greater recognition among state and local legislators, rating agencies and municipal market participants that long-term pension liabilities can be a more imminent financial strain if left unaddressed.
Stay tuned for a related post, in which I’ll outline three signs of outsized pension pain — a potential warning that a state’s or city’s pension burden is so heavy as to impair its ability to meet current expenses and debt repayment.
Peter Hayes, Managing Director, is head of BlackRock’s Municipal Bonds Group and a regular contributor to The Blog. You can find more of his posts here.