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Hot off the press and courtesy of the American Bankruptcy Institute, “Muni Bonds, Pension Liabilities and Investment Due Diligence” by Dr. Susan Mangiero, Dr. Israel Shaked and Mr. Brad Orelowitz, CPA covers a litany of headline-ripping issues. The quality of financial disclosures, legal uncertainty about the treatment of pension benefit contracts with state and city employees, regulatory mandates and the presence of hedge funds as buyers of deep discount bonds are a few subjects covered by the authors in this educational piece.

They emphasize that decisions rendered by the courts could assist future investors. “One positive aspect is that the legal, economic and political skirmishes associated with municipal bond distress now being played out are helping to set the stage for future clarity. For example, if prospective investors are comfortable in their belief that large unfunded post-employment obligations can be compromised as part of a distressed-debt workout because they see that tact as succeeding now, they might be willing to nevertheless allocate monies to pension-plagued cities and states, albeit at a higher yield. In turn, that fresh capital can be a lifeline for a municipality that has fallen on hard times, even if it comes with a higher service cost.”

Another section of this July 2014 article looks at recent litigation activity, with a prediction of further lawsuits being filed against “bank underwriters, rating agencies, financial advisory firms and asset managers with deep pockets.” One reason for this has to do with a spotlight on public financing that is unlikely to dim any time soon. Questions about the scope of due diligence carried out on potential and existing issuers are currently being asked by the U.S. Securities and Exchange Commission (“SEC”). Earlier this year, LeeAnn Ghazil Gaunt, SEC head of the enforcement division unit that covers municipal securities and public pensions talked about the importance of ongoing disclosures as “a critical source of information for investors.” See “SEC Launches Enforcement Cooperation Initiative for Municipal Issuers and Underwriters” (March 10, 2014). In September of this year, the Government Accounting Standards Board (“GASB”) will hold public hearings about its rules for reporting Other Post-Employment Retirement Benefits (“OPEB”). Click here to learn more.

In case you missed it, the U.S. Treasury has created a new office to examine public pension issues. Its Director of the State and Local Finance Office, Mr. Kent Hiteshew, recently told those who attended a meeting of the Council of State Governments that Q1-2014 liabilities of $5.03 trillion are the largest ever since 1945 and the collective “funding gap has widened since the 2007-2009 recession.” See “U.S. Treasury to put public pensions under scrutiny” (Business Insurance, August 5, 2014) and “Treasury Creating Office of State and Local Finance” by Kyle Glazier and Naomi Jagoda (The Bond Buyer, April 17, 2014).

Further focus on municipal benefit arrangements is no surprise. As I’ve long maintained, government-sponsored retirement plan funding problems can lead to higher taxes and may lose votes for incumbents. Lawmakers no doubt want to avoid any kind of costly bailout, especially given the recent warning that “Neither Medicare nor Social Security can sustain projected long-run program costs in full under currently scheduled financing, and legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers.” Click here to read more from the Social Security and Medicare Boards of Trustees.