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ILLUSTRATION BY GEORGE WYLESOLBloomberg Businessweek(USPS 080 900) August 5, 2019 (ISSN 0007-7135) S Issue no. 4624 Published weekly, except one week in February, April, June, July, September, and two weeks in December by Bloomberg L.P. Periodicalspostage paid at New York, N.Y., and at additional mailing offices. Executive, Editorial, Circulation, and Advertising Offices: Bloomberg Businessweek, 731 Lexington Avenue, New York, NY 10022. POSTMASTER: Send addresschanges to Bloomberg Businessweek, P.O. Box 37528, Boone, IA 50037-0528. Canada Post Publication Mail Agreement Number 41989020. Return undeliverable Canadian addresses to DHL Global Mail, 355 Admiral Blvd., Unit 4,Mississauga, ON L5T 2N1. Email: [email protected]. QST#1008327064. Registered for GST as Bloomberg L.P. GST #12829 9898 RT0001. Copyright 2019 Bloomberg L.P. All rights reserved. Title registered in the U.S. Patent Office. Single Copy Sales: Call 800 298-9867 or email: [email protected]. Educational Permissions: Copyright Clearance Center at [email protected]. Printed in the U.S.A. CPPAP NUMBER 0414N68830It’s no secret that U.S. infrastructure is in
dire need of an overhaul. The American
Society of Civil Engineers estimates
a lack of investment will cost almost
$4 trillion in gross domestic product by- Measured per household, that’s a
loss of $3,400 a year thanks to congested
roads, overworked electric grids, and
other deficiencies.
With that in mind, the global trend
of debt yields falling below zero seems
like a massive windfall for U.S. states
and cities. After all, they borrow for
public works projects in the $3.8 trillion municipal bond
market, where rates are within spitting distance of all-time
lows. Just about every state can borrow at less than 2% for
10 years—a better rate than the federal government can
get. If U.S. Treasury yields drop to zero, as some prognos-
ticators expect, it stands to reason that those for Florida,
Maryland, and Texas will go down, too.
But this is hardly a free lunch. With $3 trillion in pen-
sion assets, states also face a cumulative unfunded lia-
bility of more than $1trillion, even after the longest
economic expansion in U.S. history. What’s worse, that
shortfall likely underestimates the problem, as most plans
assume annual returns of 7% to 8%. Were the U.S. to enter
a recession, with bonds already yielding next to nothing,
it would become virtually impossible to meet that target.
Indeed, the two largest U.S. pension funds, represent-
ing California’s public employees and teachers, respec-
tively, each reported in July that they came up short in
◼ LAST THING
With Bloomberg OpinionBy Brian Chappatta
Low Rates Bring Opportunity
And Danger to States
2018, when the S&P 500 was down for
the year.
By keeping interest rates at rock-
bottom levels, central banks have
made it ultra cheap for governments
and companies to borrow, but they’ve
eradicated any semblance of safe
returns. This has major implications
for defined-benefit pension managers,
who are supposed to purchase assets
to match long-term liabilities. In the
1990s, that was easy enough to do with
30-year Treasury bonds. The average
yield throughout the decade was exactly 7%—mix in a little
exposure to equities, real estate, and hedge funds, and it
was a virtual lock to beat targets. But those higher-yielding
bonds will mature soon, and reinvesting at less than half
that rate will be painful. As with individuals saving for
retirement, the only two choices are to contribute more
money now or take on additional risk. With many states
already cash-strapped and allergic to raising taxes, it’s not
hard to guess which option is politically more palatable.
Unless the risk-asset rally lasts forever, though, loading
up on equities and alternatives won’t be a long-term solu-
tion. More likely, states and cities will eventually divert a
larger share of their budgets to supporting pensions. That
means less funding for infrastructure.
For those who need to borrow and save simultaneously,
the drift toward negative yields is very much a double-
edged sword. <BW> �Chappatta is a markets columnist for
Bloomberg Opinion