The WSJ has an article in today’s edition that frankly is pretty scary, but has gotten little press. According to Municipal Market Analytics Data, ten municipal borrowers defaulted in May and another 10 in June, the most for these months since 2012, as municipalities and states deal with the dramatic impact on revenues from the loss of income, sales, and hotel taxes, lotteries, airports, and other sources like tool roads, etc.

As these municipalities and states bootstrap their budgets, where do pension contributions fall within the pecking order? In some states there is no wiggle-room as the required annual pension contribution must be paid in full, but other states, such as NJ, don’t have such a mandate, and have rarely made the full contribution even under the best of economic environments. Just how bad can this situation get? New Jersey is forecasting a $10 billion shortfall for the next two years. The state’s annual budget is only $38.5 billion.

“The many U.S. towns that thrive on local or regional tourism are in particular distress, and nearly 90% of cities are projecting budget shortfalls, according to April surveys by the National League of Cities and the U.S. Conference of Mayors. More than a third reported they were having to make cuts to capital improvements, infrastructure maintenance and other critical public works services.” WSJ

Given that there are still more than 19 million continuing unemployment claims and the promise of more furloughs and cuts in public employees – NYC is forecasting that 22,000 furloughs/cuts are likely in the fall – it seems unlikely that full pension contributions will be forthcoming in the near future. Couple this development with asset value losses and rising liabilities, and you have a formula for disaster. As a result, these pension systems need to buy time. Implementing a CDI program allows for ample time (10-years) to see asset values once again rise, full contributions restored, and hopefully rising interest rates that will reduce the present value of the plan’s liabilities. RyanALM.com has a terrific research piece on buying time. Check it out!

We wish for you and your family a Happy Fourth or July!