Will Pensions Prompt More City Bankruptcies?

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July 22 (Bloomberg) -- Bloomberg Government analyst Nela Richardson examines the pension commitments of U.S. municipalities and whether they will cause situations similar to Detroit's bankruptcy. She speaks on Bloomberg Television's "Market Makers."

Are we going to see detroit- style city bankruptcy's across the country?

I do not think we will see detroit-style bankruptcy's, but we do see similar problems across the cities and countries.

Unfunded pension liabilities.

Currently, local governments can support 40% of their liabilities to the city workers.

The gap between what cities and states are promising their workers and what they are actually setting aside funds to pay for it is growing over time.

And it is growing for a variety of reasons but basically, there are no funds available to fulfil the promise of retirement income for many city workers.

We know that a lot of pensions and institutional money is going into riskier outfits, alternative assets, but what is the time line?

How long do these municipalities have before the clock runs out?

The clock is ticking.

I cannot tell you how long that you have a show that focuses on alternative assets.

Because of the financial crisis, many of these funds went out of stocks and bonds into more alternative assets like real estate, a private equity, and hedge funds, in order to get a higher rate of return.

The whole system is based on the fact that most pension funds will average 8% annual returns, but during the financial crisis, very few were able to achieve that number, forcing them into riskier assets in order to meet those returns and keep the payments low for the city.

Is this worse than the private pension promises?

The difference that is key is that private pension funds are regulated by the federal government.

City and state pension funds are self-regulated, so this 8% expected return -- which historically is accurate and conservative -- is not riskless.

Cities and states are structuring their payment structure on something that has a lot of risk, and that is the problem.

If these were figure -- federally regulated, the problem of mismanagement, in terms of the expected returns and financing, would probably be mitigated somewhat.

Thank you so much, nela richardson.

This text has been automatically generated. It may not be 100% accurate.


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