By Jon Miltimore — A leading global investment firm is claiming public pensions represent a “significant and growing threat” to the $2.8 trillion municipal bond market.
DWS Investments, an affiliate of Deutsche Bank Group, released a white paper on Friday stating many states and municipalities are on a trajectory toward “fiscal ruin,” citing unrealistic actuarial assumptions, poor asset performance and insufficient funding of pensions.
The study found that the estimated five-year return on systems with more than $5 billion in assets was about 3 percent, well below the 8 percent return pension systems generally assume in their portfolios, and that 14 states paid out at least 10 percent of their pension assets last year in the form of benefits.
“At that rate, they will burn through the bulk of their pension assets in a few years,” the authors say.
Absent fundamental changes, states and municipalities will experience higher interest rates on capital loans, the study says, which will inhibit their ability to issue and repay debt.
“Importantly, the solution for states’ pension problems is generally NOT for municipalities to default on their debt,” the authors say. “Defaulting would almost certainly handicap their access to the capital markets — something they need to fund their ongoing operations.”
The paper comes on the heels of a National Bureau of Economic Research study released earlier this week, which claimed cities face unfunded pension obligations of $574 billion and six major cities — Philadelphia, Boston, Chicago, Cincinnati, Jacksonville and St. Paul — are set to run out of assets to cover pension costs in the next decade.
