“A growing number of U.S. cities are choosing to fund essential services like public safety and garbage collection over making payments on their outstanding debt, as rising costs and falling revenue deplete their budgets.”
Municipal bonds or muni bonds as they’re commonly called, are bonds issued by issued by an American city or other local government, or their agencies to raise capital for public projects like building a highway, sewer, and so on. These bonds are not backed by the Federal government.
The crisis is in developing:
California, again, led all states in total debt weighing in at $617 billion in unfunded liabilities. On a per capita basis, each Californian faces $16,386 in state debt compared to just $11,117 owed by each Texan. The top five states in total debt burden where California, New York ($300 billion), Texas ($286 billion), New Jersey ($282 billion), and New Jersey ($271 billion). The same five states led the ranking last year.
Unfunded public pension liabilities are the main drivers of state fiscal woes, accounting for $2.8 trillion of the shortfall. Other post employment benefits, including health care, account for another $627 billion in debt. California faces $398 billion in unfunded pension liabilities and alone.
“But the next series of major cities and counties in danger of defaulting on their debt can hardly point to one single decision for their malaise. Whether it be Detroit, Miami or Providence, Rhode Island, their problems have a lot more to do with financial policies that put them on course to live well beyond their means.
Municipal defaults have shot up since 2007 and are on pace for another high year in 2012, according to Richard Lehmann, publisher of the Distressed Securities Newsletter.”
Warren Buffett’s Berkshire Hathaway ended its five-year bullish bet on the municipal bond market,The Wall Street Journal reports. The Omaha, Neb., company noted in a recent quarterly filing that it had canceled credit-default swaps insuring its $8.25 billion muni-bond market wager. The Journal said it was unclear whether Buffett’s decision resulted in a profit or a loss and the 81-year-old Buffett declined to comment about the early termination of the contracts.
Does Warren Buffett’s exit from the municipal bond market portend more financial hardships for struggling U.S. states and cities?
The Daily Ticker’s Aaron Task and Henry Blodget say Buffett’s move may very well signal his fear that more cash-strapped cities, states and municipalities will default on their debt. Local authorities have been making severe budget cuts (affecting both personnel and services) over the past two years to stave off bankruptcy but many are still short on funds.
There have been six Chapter 9 municipal bankruptcy filings this year compared to 13 in 2011. Muni bankruptcies have totaled 268 since 1980, according to Reuters, with cities, villages and counties accounting for 49 of the filings.
Cities in California, where three have declared bankruptcy in the past seven weeks, may get credit-rating downgrades from Moody’s Investors Service.
The situation is worsened by the state’s boom-bust real- estate economy and “hands-off” policy on the finances of local governments, Moody’s said today in a report.
“The risk of default on municipal bonds in California is rising,” Managing Director Robert Kurtter, lead author of the report, said in a statement. “Across-the-board rating revisions are possible.”
Governor Jerry Brown last year balanced the state budget partly by killing redevelopment programs that helped finance decaying city neighborhoods. Localities also face rising pension costs, growing unemployment and drops in property- and sales-tax revenue. Stockton, San Bernardino and Mammoth Lakes all filed for bankruptcy protection.
Fed Warns That Municipal Bonds are Risky (August 20, 2012)
Last week we first reported that California Sales Tax Revenue Nose Dives by 33.5% for the month of July, and then Moody’s Warns of Mass California Municipal Bankruptcies. During the “Great Recession” of the last four years, the California private sector was forced to slash employment and infrastructure spending, but the public sector made only modest cut backs. Much of this state and local spending was funded by selling municipal bonds to elderly investor who were told the “muni market” was safe, because the default rate is very low. But a new Federal Reserve study: “The Untold Story of Municipal Bond Defaults”, debunks that municipal bonds are safe investments and blames the Moody’s and S&P credit rating agencies for deceiving the public. This is sure to fan the flames of the growing panic among holders of California municipal debt.
Municipal Bonds Default More Than Advertised
The Fed calculated that there were a total of 2,527 municipal bonds that defaulted from the late 1950s through 2011 — confirming that the real rate of municipal bond defaults was 36 times higher than Moody’s and S&P reported to the public.
The first major wave of municipal defaults is coming as growing number of cash-strapped cities prefer avoiding paying bondholders over cutting spending
Moody’s warns of mass Calif. municipal bankruptcies (Aug. 18, 2012)
The klaxon horn went off Friday evening for California municipal bondholders when Moody’s Investors Services issued a report stating that the plummeting financial condition of many California counties, cities, school districts and other government agencies will soon result in a large numbers of municipal bankruptcy filings. Concerned about their own potential liability for providing high ratings that encouraged conservative elderly Americans to invest in risky bonds, Moody’s announced they will undertake a wide-ranging review of municipal finances because of the growing insolvencies.
The Moody’s report comes just two days after we reported, “California sales tax revenue nosedives 33.5%.” Stock brokers have often recommended California municipal bonds as very safe investments, due to historically low default rates and relatively stable finances. But Moody’s said that outlook is changing after the Chapter 9 Bankruptcy filings of Stockton, San Bernardino and Mammoth Lakes.
Moody’s is especially concerned with the growing attitude among many cash-strapped cities that filing bankruptcy to avoid paying bondholders is politically more advantageous than cutting spending. As a result, Moody’s will reassess the financial condition of all California cities, which issue about 20 percent of the municipal bond volume nationwide, “to reflect the new fiscal realities and the governmental practices.”
There have been 21 municipal defaults so far in 2012. The grand total of those defaults comes to 978 million dollars. (Mar 20, 2012)
“So far in 2012, there have been 21 muni defaults totaling $978 million, versus 28 defaults totaling $522 million for the same period in 2011, said Lehmann, who sees the number rising. A breakdown of defaults on insured munis was not available.”
Banks Oversold, Muni Defaults Still Coming: Whitney
A horrifying municipal debt crisis is starting to unfold right in front of our eyes. It just did not happen as soon as she thought that it would. When most Americans think of our “debt problem”, they think of the federal government. But the truth is that we have hundreds and hundreds of smaller “debt problems” all across the country. In 2012, cities such as Stockton, California and Harrisburg, Pennsylvania have already defaulted and a whole bunch of other cities and towns are headed down the exact same path. Once we see the first major wave of municipal defaults, creditors will become much tighter with their money and that will cause even more municipalities to get into financial trouble. This crisis could start spinning out of control at any time.
#1 Moody’s has downgraded Detroit’s debt again. The following is from the Detroit News….
The city received a downgrade to B2 from Ba3 for its $553.1 million in outstanding general obligation unlimited tax debt and also a downgrade to B3 from B1 for the $486.4 million in outstanding general obligation limited tax debt. Both ratings fell two points.
#2 The city of Indianapolis is facing an unprecedented 75 million dollar budget deficit in 2012. City officials are warning that there may soon not be enough money to keep the streetlights on.
#3 Suffolk County in New York has declared a “fiscal emergency” after discovering that it is projected to take on a total of more than 500 million dollars of additional debt by the end of 2013.
#4 The city of Trenton, New Jersey is so broke that it has put off buying more toilet paper for city buildings. At last report, there were a total of 15 rolls remaining and after that those that use city restrooms will be on their own.
#5 Some cities are slashing expenses dramatically in an attempt to stay afloat. The following is one example from California….
Costa Mesa, a city of 110,000 south of Los Angeles, has slashed its payroll from 611 to 450. It is selling its police helicopters and has hired a neighboring city for air patrols. It’s also pursuing a controversial effort to convert to a charter city from a general law city, which would give City Hall more power to outsource more work, said councilman Jim Righeimer.
#6 In New York, state officials are deeply concerned that city and local governments are paying their pension obligations by borrowing from the state pension fund. This is essentially like making your minimum monthly payment on a credit card by borrowing more money on that same credit card….
And now, their fears are being realized: cities throughout the state, wealthy towns such as Southampton and East Hampton, counties like Nassau and Suffolk, and other public employers like the Westchester Medical Center and the New York Public Library are all managing their rising pension bills by borrowing from the very same $140 billion pension fund to which they owe money.
Across New York, state and local governments are borrowing $750 million this year to finance their contributions to the state pension system, and are likely to borrow at least $1 billion more over the next year. The number of municipalities and public institutions using this new borrowing mechanism to pay off their annual pension bills has tripled in a year.
#7 Pension problems are catching up with a lot of cities all over the nation. For example, CBS News reported recently that the city of Central Falls, Rh0de Island has been forced to declare bankruptcy because of pension woes….
For years, city officials promised robust union contracts and pensions without raising revenue to pay for them. Last August, the math caught up with them. Central Falls was broke, its pension fund short $46 million. It declared bankruptcy.
“My daughters grew up here, went to school here. It’s all gone,” said Mike Geoffroy, a retired firefighter.
He said he could not make the payments on his house after his pension was cut by $1,100 a month.
#8 Last November, Jefferson County, Alabama filed for the largest municipal bankruptcy in U.S. history. At the time, they had accumulated a total of approximately 4.2 billion dollars of debt.
#9 Several other U.S. large cities have defaulted on their debts in early 2012 as a Bloomberg article recently reported….
The California cities of Stockton and Hercules, as well as Pennsylvania’s capital, Harrisburg, have opted to default on some of their insured debt in recent months.
#10 In all, there have been 21 municipal defaults so far in 2012. The grand total of those defaults comes to 978 million dollars.
Of course a lot of state governments are experiencing massive budget problems right now as well.
For example, in California state government revenues for February 2012 were down by about 22 percent compared to February 2011. The state government is quickly running out of money once again, and nobody is quite sure how to fix California’s rapidly deteriorating financial situation.