The Dallas Pension Fiasco Is Just the Beginning

The recent blow-up of the Dallas Police and Fire Pension System, an event which is preordained and a mathematical certainty, is just an opening act of what is to come for dozens of US local and state government pension plans in this coming decade.

Key contributing factors: overpriced financial markets, inadequate contributions and overly generous pension promises.

The article depicts how the scenario will unfold as states and municipalities enter the debt and pension death spiral:

  • States and municipalities raise taxes to alleviate the funding gaps, making themselves less attractive for businesses and workers. The best taxpayers (businesses, wealthy individuals and mobile, skilled professionals) are first to leave.
  • Property values suffer from declining population and increasing property taxes, further driving down tax revenue.
  • The playbook from the Detroit bankruptcy is likely to be repeatedly used in the coming decade: (1) Services will be maintained but likely cut, lest there is a voter revolt, (2) pensions will be cut to match fiscal reality, (3) bondholders and lenders (non-voters) will bear the brunt of the haircut.
  • The next financial crisis, which will take down property prices when it happens (and property tax revenue), will likely trigger an awakening and a reassessment of risk. Those states and municipalities with a history of increasing indebtedness and no realistic plan for reducing their debts may become unable to borrow at any price. Bankruptcy becomes the only viable option at that point.
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