"Houston, we have a problem."

| April 13, 2018
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On this day in 1970 those words were spoken from Apollo 13.

“New Jersey, we have a problem.”

If our current politicians have any say, those words will never be uttered by them. It will be kicked to someone else to deal with.

Consider the facts:

Standard & Poor’s has estimated that the state’s pension is funded at just 30% of what will be needed.

“New Jersey’s pension system may have already reached an unfixable tipping point,” noted a report issued last month by the right-leaning Manhattan Institute.

“The system is now missing so much money that even when it achieves its investment goals, it falls far short of the money it needs to remain solvent over time.”

New Jersey’s new 7% return assumption is better than the old 7.9%—but still higher than the consensus forecast of well below 5%. The state will probably come up short and will either need to pour in more from tax revenues, take on more debt—or default. The latter is not a palatable option.

None of those outcomes is good for bondholders. If borrowing costs increase, the relative value of existing munis will fall and hurt investors hoping to trade their bonds, and muni-fund shares will most likely take a hit. In the event of a default, as in Detroit, bondholders could find themselves with far less than they were promised.

 

Stay Tuned, Disciplined & Patient! {TJM}

The Investor & Character Equation (ICE) | S + R = O

 

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