Buffett: Municipal Debt Meltdown Will Hit US
By: Dan Weil
Add investment legend Warren Buffett to the list of those who warn of a municipal debt meltdown.
Many municipalities have promised overly generous retirement and health benefits to public workers without any viable plans to bring in the money necessary to pay for those benefits.
They have assumed unrealistic returns in their pension fund investments and unrealistic revenue from taxes.
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The Pew Center on the States recently estimated that as of the end of 2008 budget years, states had $1 trillion less than needed to pay for future pensions and medical benefits. And that number doesn't even reflect much of the losses suffered by pension fund investments in the second half of 2008.
"There will be a terrible problem, and then the question becomes will the federal government help," Buffett said at a hearing of the U.S. Financial Crisis Inquiry Commission in New York, Bloomberg reports.
"I don't know how I would rate them myself. It's a bet on how the federal government will act over time."
In May, Buffett said the feds may end up having to bail out some states from their extreme financial woes.
"It would be hard in the end for the federal government to turn away a state having extreme financial difficulty when they've gone to General Motors and other entities and saved them," Buffett said at Berkshire's annual meeting, Bloomberg reports.
"I don't know how you would tell a state you're going to stiff-arm them with all the bailouts of corporations."
The Oracle of Omaha has been cutting municipal bond holdings in his company Berkshire Hathaway. Berkshire's portfolio of munis has dropped 17 percent since the end of 2008, to $3.9 billion as of March 31 from $4.7 billion.
The company's 2009 annual report showed $16 billion at risk in derivatives tied to municipal debt, Bloomberg reports.
Buffett has made clear his bearishness toward municipal bonds by warning of the dangers of insuring those bonds.
In his 2009 letter to shareholders, the world's second most wealthy man said local governments may be tempted to default on bonds whose payments are guaranteed by insurance companies rather than implement politically difficult tax hikes.
Insuring muni bonds "has the look today of a dangerous business," Buffett wrote.
About $14.5 billion of municipal bonds defaulted in 2008 and 2009, according to Income Securities Advisor Inc., which studies distressed debt.
Editor's Note: Warren Buffett is taking steps now to protect himself and his shareholders from the coming financial disaster he predicts will hit the U.S. Learn the secret to his inflation strategy.
Los Angeles is one of the cities whose finances are in desperate straits.
"Los Angeles is facing a terminal fiscal crisis: between now and 2014 the city will likely declare bankruptcy," former mayor Richard Riordan wrote in a Wall Street Journal opinion piece.
"Yet Mayor Antonio Villaraigosa and the City Council have been either unable or unwilling to face this fact."
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