Municipal Bonds and the Democratic Takeover of Congress
Posted By John Schroy On 15th November 2006 @ 09:26 In Municipals | No Comments
On November 15, 2006, in the back pages of the Wall Street Journal, an article, “San Diego Settles SEC Charges Over Pension Funds”, starts out:
San Diego agreed to settle Securities and Exchange Commission charges that it failed to tell municipal bond investors about the city’s mounting pension-fund obligations and its increasing inability to pay for those benefits.
The article goes on to say that municipal pension fund liabilities were $6 billion, while pension fund assets were only $4.5 billion. This represents a shortfall of $1.5 billion, or about $1,300 per homeowner in San Diego.
Municipal pension fund problems are primarily the fruit of unionization of public employees. Over the last generation, trade unions have turned from their traditional base of industrial workers (eroded by factory closings due to excessive labor demands) and have fixed on the juicy target of tax-supported government workers.
Now, an extra tax burden of $1,300 per San Diego homeowner doesn’t seem like a big deal — it’s less than 3% of median household income in the municipality — but Democrats now control Congress. We can expect unions to demand higher pay and benefits for ‘public servants’ which should lead to augmented defined-benefit pension burdens on residents of larger, older cities like San Diego.
This could result in higher interest on municipal bonds of cities with powerful government service unions, along with increased taxes, and downward pressure on real estate values. At the same time, there could be a tendency to further increase emigration from unionized locations to cities largely free of such exploitation, especially smaller, newer municipalities in US southern and central states.
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[1] defined benefits: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=defined-benefits
[2] Municipals: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=municipals
[3] pension plans: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=pension-plans
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