Bret Schundler, a former Wall Streeter and mayor of Jersey City, is hardly the first to predict that “very obvious, huge financial problems” are in store for state and local governments. But he is speaking out from a position where he is observing those struggles firsthand – as commissioner of education under New Jersey’s Republican governor, Chris Christie – and urging bond investors to promote fiscal responsibility by shunning issuers that aren’t facing reality.
Making the situation worse, says Schundler, is a de facto “collusion” between politicians up for re-election in the near term and public employee union leaders, who also are subject to election. “The imbalance between the promises politicians and unions have made and the resources to deliver on them is huge and cannot be covered by taxpayers,” warns Schundler. As a result, states and municipalities will take the line of least resistance, taking on more bond debt rather than suffering pain at the polls.
Schundler does not expect credit rating agencies, which have the power to influence the market, to wake up to the situation too quickly. “As exemplified by what has happened in Greece and Spain, credit agencies will be very slow to downgrade,” he says. “It’s more a matter of a slow, silent decline. Then suddenly, investors see that ‘there are not enough people on my side of this argument.’ And that’s when the implosion takes place.”
Schundler believes it is up to investors to identify governments taking hard decisions to cut back on benefits for early retirees, institute benefit and pension co-payments, reduce operating budgets and renegotiate contracts to lower lifetime benefits. Governments can’t sustain lifetime benefits for people who retire at 45 and live to be 90, Schundler asserts.
“My boss [Gov. Christie] is harshly criticized by public unions for the things he’s doing to make our pension funds solvent and increase the creditworthiness of the state, but it’s that kind of toughness that investors have to look for in the head of a government if they want to have confidence that they’ll get their money back,” adds Schundler.
His advice for bond buyers: “Investors holding bonds under leaders concerned with getting public sector union endorsements should sell them, and buy where officials are serious about solving financial problems.”
