11 May 2016

Puerto Rico And A Coda on Municipal Bankruptcy

I posted often during the course of the chapter 9 bankruptcies of Stockton and Detroit. You can read one on each here and here. I have not posted about Puerto Rico's extraordinary financial distress for two reasons: Puerto Rico is not eligible for any bankruptcy relief and others have been writing seriously and posting frequently about what can be done.

Today, however, I am breaking my Puerto Rico silence because this piece at the New York Times DealBook is spot on: Puerto Rico is the canary in the mine shaft.

Across America, dozens of cities, counties and states may be heading down the same financial rabbit hole. Illinois, New Jersey, Philadelphia, St. Louis and Jacksonville, Florida., to name just a few, are all facing their own slowly unspooling financial disasters.
Generous pension promises made decades ago, without enough funding, are now coming due as baby boomers retire. Bonds issued in the distant past to build bridges, highways and other projects also must be paid — even as the projects themselves could by now use expensive makeovers.

Exactly right. As I described at length in Municipal Bankruptcy: When Doing Less Is Doing Best (download here), American cities (and States) have promised their public-sector employees pensions and health benefits in amounts that are actuarially unsustainable, especially given current demographic trends. In addition, to try to reduce such benefits, once accrued, would violate the U.S. Constitution. Only if Congress permits cities (and States) to seek bankruptcy relief can anything be done.

Currently exceptionally low interest rates and the "flight to safety" that causes international investors to buy American debt securities are masking this problem. In not so many years, however, perhaps during the next presidential administration and certainly, in my opinion, by 2024, the time bombs hiding in state and local balance sheets will begin exploding. Were it not for the dysfunction endemic to our current political system, one might expect our elected leaders to begin planning for the inevitable. Reality being what it is, however, we'll find ourselves hanging on for dear life hoping for some means of redress.

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