While it’s interesting to read about the pension crises of many well-known states and municipalities, including Detroit, Illinois, Chicago and Stockton, and how they might affect current and former workers, it’s important to understand that the results of unfunded pensions may harm investors. Muni bonds seem safe because the issuer is a political entity, but, according to an article by New York Times columnist Gretchen Morgenson, disclosure rules and oversight may be less stringent than with other investments, making muni bonds more risky.
Lax disclosure rules and the reluctance of the SEC to issue fines — fearing that it would only make the situation worse — are cause for concern for investors, whether they are individuals or fund companies caught up in the Stockton bankruptcy proceedings, like Franklin Templeton. Until the Detroit bankruptcy ruling last week, it was thought that pensioners could not be treated like other creditors, which put the entire burden on investors.
Not disclosing unfunded pensions by muni bond issuers is common, according to Morgenson; many entities fail to make annual required contributions and fail to disclose that when issuing bonds. So it seems that, along with funding their pensions, government entities need to come clean about their liabilities or face higher interest rates when issuing investments.
