Concerned over Municipal Bond Market

I wrote back in October of 2008 a warning about Municipal bonds, and here it is 12 years later repeating the message.   The key difference between the federal government and states is the feds can print money at will.   Critically, municipal governments cannot.

The feds promise social security, medical, and all sorts of benefits to those not working, and can pay it simply by issuing currency.   Before 2020 the bonds must be purchased by the open market, but now the Federal Reserve is buying bonds, in effect monetizing the debt.  This has effect of keeping rates low, as the fed will buy at any rate.

Municipalities have made many promises, of working for decades with great retirement payments for more time than you worked!  The issue is the cash comes from someplace, and politicians have allowed kicking the can fund the pensions.   I live in NJ, and we had a well funded pension system until Christine Whitman, a republican, decided to stop funding pensions properly.  Then every governor since then republican or democrat kept the tradition alive.  So far, I haven't read doom is around the corner for NJ.

I can't say the same for Illinois.  For over promising and under-funding pensions Illinois is the best at the nation!   So the next action is going to be one of the following.

1) Tell retirees payments will end or cut dramatically. (75%+?)
2) Raise taxes in the state that already has highest taxes in the nation.
     And keep business and rich mobile people in the state.
3) Go bankrupt
4) Trump looks at Illinois and decides to bail them out, with Republican support, for Police, Fire, Teacher, and municipal pensions.


Any one or combination or all are in play.  Since I expect the market to get cut 40% from current levels of valuation, I think the can is nearing the end of kicking.  Illinois has 8 years of funding right now.  If they see assets cut 50%, I doubt they can make 3 years (since there isn't time for ROI).   Municipalities could see bond interest spike much sooner, as people understand the magnitude of whats is ahead. If I am right, people already invested in Municipal bonds will get their values cut.  Option 4 above will be a HUGE can kick that makes my fears go away for a few years.

To get an idea of how bad Illinois is, they have 10 pensions (made up of police, fire, ERS, Forest, Teachers, University, State, General Assembly) all funded with LESS than 14% of funds needed.

Great picture below and link to article here:

Message: Stay out of municipal bonds.