Many US municipalities and states are currently facing severe financial pressure. They have huge unfunded pension commitments, and recent forecasts of widespread defaults have resulted in a large sell-off of their bonds. This is not new. Financial history is full of instructive defaults by governments on their debt. Can these past crises teach us about what to do now?

Some states have maintained balanced or near-balanced budgets through the financial crisis, while others have run significant deficits. Some have responsibly funded their pensions even during difficult times, while others have fallen back on borrowing and accounting tricks. The differences arise from how hard different states were hit by the recession and how hard their elected officials worked to address their budget problems.

Lessons from the Big Apple merit keeping in mind today.

Public pension accounting standards encourage state and local governments to promise too much, fund too little and take too much risk with their investments.

The massive underfunded pension funds of states and municipalities and the precarious status of the budgets of these entities have received wide publicity recently.

Jefferson County, Alabama, was led to the verge of bankruptcy by relying on risky instruments in a subprime housing economy.