Today Moody’s downgraded the ENTIRE US Municipal Bond market. That’s right, every single municipality and state in is now on credit downgrade watch. Holy smokes!
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5127023/Shock-warning-on-US-municipal-bonds.html
Maybe this the buy signal… Maybe news has gotten so bad that it can get no worse. Maybe tonight, Cramer will get on CNBC and tell you how you have to buy muni bonds…lol
The issue for municipalities is that tax revenues are way down and the promised pensions to public employees are massively under-funded.
The average Pension was down 38% last year and is now at approximately 50% of the asset level needed to pay for all of their promised pension obligations. Sounds like Social Security to me.
The key is what just occurred in Vallejo, CA. Vallejo filed for Chapter 9 bankruptcy to all them to go to court and have the judge break their old pension contracts and renegotiate them to a more realistic level.
Since 1937, more that 564 municipalities have filed for Chapter 9 protection, and a judge in California just declared it to be a legal procedure for breaking and renegotiating pension obligations.
So I have to think that many municipalities are looking at this option, because at some point you have to determine who to rescue – the taxpayer, their kids or the public employees. You know at some point there is a tax revolt and the public employee gets thrown under the bus. So they will have to either cut their benefits or contribute a lot more of their current income to future pension obligation.
It should be an interesting summer as 2011 budgets are debated. With the Vallejo ruling as a precedent, municipalities will be able to force concession from labor or they will go Chapter 9. That will put a tremendous amount of stress on the Muni Bond Market.
People will be retiring a lot later and a lot poorer than they thought they would.
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