Who Rescues the Rescuer?

I asked myself this question when I saw this headline in the Financial Times this morning: “US state steps in to meet city’s debt cost.”

The state of Pennsylvania has had to bail out Harrisburg, its capital city.  The dollar amount is a modest $3.3 million–for now.  Harrisburg has already defaulted on $282 million of its debt, however, and it remains to be seen how or if this will be paid.  The city may eventually have to file for municipal bankruptcy.

The state’s actions raise an important question: who bails out Pennsylvania? The Quaker State is about to get hit with a pension crisis that will resemble a fiscal earthquake.  According to the Pittsburgh Tribute Review, the state’s annual contribution to the public pension funds will rise to $3.15 billion in two years–up from “only” $776 million this year.

Of course, Pennsylvania’s woes cannot compare to those of California.  Who will bail out the Golden State if or when the time comes?

The answer, alas, will likely be YOU, the U.S. taxpayer. Bondholders too are likely to be left holding the bag in certain cases.  If you invest in municipal bonds, you should pick and choose them carefully. Choose states with balance sheets that are at least relatively healthy, and if you can get bonds that are insured, all the better.

Read the original story at H. S. Dent