Professor Elam

Monday March 15 2010

We have labored mightily to catalog the troubles of states and cities funding their pensions, and their muni debt, which to pay?  The lead article in this week's Barrons is $2 Trillion Hole, detailing this dilemma. 

We study the liability side of the balance sheet in Intermed II. A municipality, Vallejo CA, state CA or nation Greece, has both debt to the bond holders and a promise to pay pension liabilities in the future. 

But many of them cannot do both, just ask GM. Vallejo's solution was Chapter 9 bankruptcy. Barrons reports that the bond holders will not get paid but the pension obligation is still there. We link to Mish on our sidebar, as he says, there is really no option other than BK court to invalidate the pension promise, or default to the bond holder or both, which would you choose. 

While the acct books have these nice neat formulas for the obligation, they never discuss the possibility that hey, what if we promised more than we can deliver, that is the $2 T hole.