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I'm pondering whether or not to hold Municipal Bonds in my portfolio. My concern is that Municipalities seem to be stressed because unfunded pension liabilities keep growing and this seems alarming.

I would like to know how large this problem is to better price Munis and understand their risk. Unfunded pension liabilities (around $3.8 trillion using the market based discount rate) are growing but is this a very large burden or not? This number is based on a discount rate that maturity matches pensions liabilities with today's yield curve.

To answer this I would like to know what is the total liabilities of state and local governments but can't find it anywhere.

PS: The $3.8 Trillion uses the market based discount rate which is based on a discount rate that maturity matches pensions liabilities with today's yield curve. Multiple sources use such discount rates because pension liabilities are like a bond in the sense that they are contractual. So the inflated discount rates pensions use assume they will get stock like returns without the risk. One source where you can find this is papers by Rauh at Stanfords Hoover institution. He has dug deep into this puzzle. hoover.org/research/hidden-debt-hidden-deficits-2017-edition

  • You could always buy revenue bonds, which are funded independently from general obligation bonds. – RonJohn Sep 26 at 15:57
  • Here is Florida as an example on page 186: myfloridacfo.com/Division/AA/Reports/documents/… – S Spring Sep 26 at 16:16
  • IMHO, you are facing something called Equity Premium Puzzle when assessing municipal bonds as part of your portfolio. nber.org/papers/w4369 – mootmoot Oct 1 at 9:03
  • I think you might be referring to the "Muni Puzzle". There's many attempts at explaining it related to liquidity risk, default risk, tax risk, call option risk, advance refunding risk, market segmentation and so on. My question is trying to get into the specifics of to what extent is the market pricing the default risk of Municipal Bonds and to what extent it might still not be pricing it because the full picture and risk has not been identified well enough. – JorgeT Oct 1 at 14:22

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