I came across these two pieces of information recently and though I would share it with the group. Without taking a position on the matter myself, I felt they offered a counter argument to the endless suicide-inducing stress fest we are fed daily on this subject from both the main stream media and econoblogosphere.

Misunderstandings Regarding State Debt, Pensions, and Retiree Health Costs Create Unnecessary Alarm

Summary

A spate of recent articles regarding the fiscal situation of states and localities have lumped together their current fiscal problems, stemming largely from the recession, with longer-term issues relating to debt, pension obligations, and retiree health costs, to create the mistaken impression that drastic and immediate measures are needed to avoid an imminent fiscal meltdown.

The large operating deficits that most states are projecting for the 2012 fiscal year, which they have to close before the fiscal year begins (on July 1 in most states), are caused largely by the weak economy. State revenues have stabilized after record losses but remain 12 percent below pre-recession levels, and localities also are experiencing diminished revenues. At the same time that revenues have declined, the need for public services has increased due to the rise in poverty and unemployment. Over the past three years, states and localities have used a combination of reserve funds and federal stimulus funds, along with budget cuts and tax increases, to close these recession-induced deficits. While these deficits have caused severe problems and states and localities are struggling to maintain needed services, this is a cyclical problem that ultimately will ease as the economy recovers.

Unlike the projected operating deficits for fiscal year 2012, which require near-term solutions to meet states’ and localities’ balanced-budget requirements, longer-term issues related to bond indebtedness, pension obligations, and retiree health insurance — discussed more fully below — can be addressed over the next several decades. It is not appropriate to add these longer-term costs to projected operating deficits. Nor should the size and implications of these longer-term costs be exaggerated, as some recent discussions have done. Such mistakes can lead to inappropriate policy prescriptions.

Pension Obligations

Some observers claim that states and localities have $3 trillion in unfunded pension liabilities and that pension obligations are unmanageable, may cause localities to declare bankruptcy, and are a reason to enact a federal law allowing states to declare bankruptcy. Some also are calling for a federal law to force states and localities to change the way they calculate their pension liabilities (and possibly to change the way they fund those liabilities as well). Such claims overstate the fiscal problem, fail to acknowledge that severe problems are concentrated in a small number of states, and often promote extreme actions rather than more appropriate solutions.

A debate has begun over what assumptions public pension plans should use for the “discount rate,” which is the interest rate used to translate future benefit obligations into today’s dollars. The discount rate assumption affects the stated future liabilities and may affect the required annual contributions. The oft-cited $3 trillion estimate of unfunded liabilities calculates liabilities using what is known as the “riskless rate,” because the pension obligations themselves are guaranteed and virtually riskless to the recipients. In contrast, standard analyses based on accepted state and local accounting rules, which calculate liabilities using the historical return on plans’ assets, put the unfunded liability at about a quarter of that amount, a more manageable (although still troubling) $700 billion.

Muni Bonds: Default Fears May Be Overblown

As investors flee, some analysts say predictions of widespread defaults, spurred by big state deficits and lost tax revenues, are lacking in evidence

Tom Kozlik, a municipal bond analyst for Philadelphia brokerage Janney Montgomery Scott, sent clients a note on Jan. 14 reminding them of Warren Buffett's advice for navigating market turmoil: Be greedy when others are fearful. There's been plenty of fear in the $2.9 trillion U.S. state and local government bond market, typically a safe haven for individuals seeking tax-free returns and little risk of default. With states facing budget deficits estimated at as much as $140 billion and cities reeling from tax revenue lost during the housing market bust, some are calling that safety into doubt.

Meredith Whitney, the banking analyst who won fame for predicting that Citigroup (C) would be forced to cut its dividend in 2008, says she expects as many as 100 municipal defaults this year, adding up to "hundreds of billions" in debt. On Jan. 11, Edmund F. Kelly, chief executive officer of insurer Liberty Mutual, said his firm has cut its holdings of municipal debt in Connecticut, California, and Illinois, three states that are heavily indebted and strapped for cash, saying the market was being propped up by the belief that Washington will bail out local governments. JPMorgan Chase (JPM) CEO Jamie Dimon, speaking at a health-care conference on Jan. 11, warned of municipal bankruptcies on the horizon, cautioning investors in the market to be "very, very careful."

Again, I present this information to you without taking a position on this issue myself.