This is a good time to help clients review exposures to credit risks in municipal bonds. An ongoing debate in the muni market centers on how state and local governments report unfunded pension liabilities. If changes proposed by the Government Accounting Standards Board (GASB) are implemented, some public entities may need to report far larger shortfalls in pension funding.

According to Bloomberg, U.S. public pensions collectively have 75% of the assets they need to fulfill future obligations, and the dollar value of the shortfall is estimated at $3.6 trillion. But this is calculated using more favorable methods than are available to private pensions. Public pensions can use an investment return assumption (often 6-7%) to discount future liabilities. Private pensions are required to use a blend of Treasury yields (now about 2%).