The Municipal Market Advisors research shop says today that the recent court decisions in Minnesota and Colorado upholding states' rights to reduce cost-of-living pension increases for current retirees could affect municipal credit quality.
Also likely to help [municipal bonds] is news of favorable court rulings in CO and MN, where judges threw out retiree lawsuits contesting those state pension plans' reductions to [cost of living allowance] payments. While still subject to appeal, and of limited precedent outside of those states, these developments are highly constructive for long term credit quality: COLAs present a huge share of total unfunded future liabilities for state pension systems.
COLAs are important, because they cut off, or at least curtail, inflation as an avenue through which state and local governments can pare down their liabilities. Without COLAs, future pension obligations look more like fixed-rate bond obligations. Inflation could nibble -- or chomp -- away at them.
So, good news in that state and local governments may have a bit more flexibility -- and that could be true, someday, too, for states like New York, with supposedly ironclad constitutional guarantees against any reduction in pension value (the state constitution is not made of money).
But, bad in that Washington now has one more incentive to tolerate inflation, the debtor nation's pernicious problem solver.
It is not a COLA sweetner, it is simply a promise , if I promise you 3 bags of flour by next week, imagine me only giving you only 1/2 a bag, better yet, what if what you paid for food doubled in a year,
without an inflation protection, a pension could be worthless, a gold standard or hard money solves this, simply pay the person a fixed income worth of gold, a pension would not be a fixed rate since there is no rate , just a dollar amount every year, if there was little or no inflation it would do nothing, if there was deflation, costs would increase , of course inflation is caused by many factors, we share the pain but if the dollar is going down to economic expansion or bad monetary policy , your pension should just be a promise , no more or no less.
If governments do not have enough money , then maybe something is suspect and they are cooking the books , under a gold standard since money is only based on its worth, the only reason governments would not be able to pay is because they didn't have enough gold or silver they stored in the vault, its true public pension were too generous in many cases, but its too late for a promise and not all pensioners are lavish, average middle class pensions may only be $2,000 a month, instead other options should be explored, more risk taking and perhaps a cola but a lesser one,
taxation of public pensions could be an option as well as reducing subsidies to those with very generous pensions. We could also reduce benefits and tax breaks for those with lavish pensions, of course even if a pension is not lavish, it may still be unaffordable and very unfair to private sector employees, the public sector demands on private employees not the other way around, imagine if everyone left private sector and went into public, who would pay the pensions? Taxpayers may get fed up and leave.