Stockton bankruptcy to become a trend?

(MoneyWatch) Stockton, Calif., is likely to become the largest city ever to seek bankruptcy protection. But this may be the beginning of a trend, especially if the stock market doesn't provide great returns over the next decade.

In an article I wrote in this month's issue of Financial Planning Magazine, there are storm clouds on the horizon for municipal bonds. Unlike corporations, cities and states kept defined benefit pension plans with fixed obligations to retirees.

Joshua Rauh of the Kellogg School at Northwestern University estimates there are total pension liabilities between $3.2 to $4.4 trillion. Only about $1.94 trillion has been set aside for these obligations. The money set aside is invested fairly aggressively and if stocks don't have a terrific next decade, systemic defaults could happen.

Stockton official: Mediation with creditors fails
Economists say Stockton, Calif. won't be last U.S. city to go bankrupt

Rauh estimates pension funding will run out in 10 to 20 years if nothing is done. He is also not optimistic that they can raise taxes enough to to solve the crises. Unlike the U.S. government, states and municipalities cannot print money.

Each state or municipality may or may not have the ability to renegotiate those retirement liabilities.

  • Allan Roth On Twitter»

    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

Comments

CBSN Live

pop-out
Live Video

Market Data

Watch CBSN Live

Watch CBS News anytime, anywhere with the new 24/7 digital news network. Stream CBSN live or on demand for FREE on your TV, computer, tablet, or smartphone.

Market News

Stock Watchlist