This is an extremely important topic well researched and presented. And what a fertile field of data! It seems that the fates of General Motors, states and municipalities, and the federal government are all linked by this addiction to debt, the most lethal of which concerns staggering obligations for pensions and entitlements. Addictions are not easily conquered, and usually follow us to the grave.
I have been really interested in pension payments for the last few years. Your article brings up an interesting question: would pensions have been affordable had the munis not issued pension obligation bonds?
Er, Charlotte's not a "regional banking center." Not unless every city in the US except New York is as well. It is (or was at the time of the crash) the #2 banking center in the US.
SIR: ANOTHER SUPERB PIECE OF WRITING AND ANALYSIS. I APPLAUD YOU. BEST OF LUCK WITH YOUR BOOK; I IMAGINE IT SHOULD BE REQUIRED READING FOR EVERY CONCERNED AMERICAN COGNIZANT OF THIS UNFURLING FINANCIAL IMPLOSION:
IF THE MUNI-BOND DEBT BOMB ISN'T BAD ENOUGH, TAKE A LOOK AT THIS HORRIFYING GRAPH:
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California has issued California Certificates of Participation to get around the prop 13 requirements that debt be approved by 2/3 of voters. I have never understood why this wasn't blatantly illegal.
One solution is to ban general revenue bonds with terms longer than 5 years. And no long-term rental contracts backed by general revenues.
If the pols want a new stadium, they have to find bond buyers who are willing to accept the stadium (or the hole in the ground if it is never finished) as collateral.
Yes, the same applies to public school facilities.
I fully respect the philosophy behind this article, but I think that it is in error. What we ought to be doing is extending tax exempt status - a status government enjoys - to every provider whose output is competitive with what government provides, for example, health insurers, turnpike roads, etc. So long as we tax private providers of what are understood to be goods that are supplied classically by government, we will see a greater demand for government. What is wrong with muni bonds for private industry is that local government picks winners and losers, instead of proceeding by rule. United Haulage needs to be reversed in the Supreme Court of the US with Alito A.J's dissent to represent the law.
Because html was disabled: http://www.bondview.com
Muni bonds remain in a solid state for the time being, despite what the Warren Buffets of the world would have you believe. It's rare to see a high grade bond default right now. Still, it's important to do your own research and now rely solely on ratings. I use sites like BondView to analyze muni bond pricing and yields.
Here's an idea, that would surely make local politicians and burearocrats more careful: Put their pensions in a debt position inferior to bonds issued. In a bankruptcy higher debt positions are paid off first, in general before lower positions get anything.
Exceptions can be made (like the GM and Chrysler bondholder rip-off), but at least this would put their pension funds in front of a judge, who would be less sympathetic in cases of egregious malfeasance.
Excellent piece and I agree with your conclusions. I do have one thing to add, which is that the federal government is probably constitutionally prohibited from outlawing all tax-exempt debt, under the concept of intergovernmental immunity. The federal government can't tax the states, and taxing states bonds interest is considered a tax on the states. This immunity doesn't apply to private tax-exempt borrowers such as hospitals, universities (private), power generation or most anything else that is financed by an independent "authority" or "agency" of the state or political sub-division.
Impressive article. Thank you for being a real journalist. I didnt even see one mention of political parties. As to the meat of your article, I really really want to find out about my city now. How can I do that?
Thanks for arming me with this information.
To Frank, claiming this article is some sort of "right-wing hysteria" . . . There are three types of people: those who are good at math, and those who aren't.
We need Sarbox for politicians. Those who perpetrated this malfeasance should face criminal charges, even if they are no longer in office.
This is not "right wing hysteria" -- this is the ugly truth. We can't go on borrowing forever, financing projects of dubious worth.
Excellent article on a subject that needs greater attention.
Many of these items you relate I knew about, some I did not. But having a reference of our history using munis is most helpful. I already try to watch my muni investments more closely, but I'll intensify my efforts. Thanks.
More right wing hysteria from right wing "think tanks" like Manhattan Institute
What is needed is a constitutional admendment preventing government from exempting itself from its own legislation. The politicians love boasting about putting the Enron people in prison but Enron's off balance crimes were minor compared to the politicians government accounting. Lets make government accountable under Sarbennes Oxley et al and see the politicians cringe.
The first simple, clear, direct explanation of the emerging crisis. Even easy enough for a career politician to understand. I hope Mr. Malanga's book, "The New New Left," and his forthcoming release, "Shakedown," will receive enough publicity to make the impact on the public that both should!
Send copies to Limbaugh! He reaches the largest audience.
Fantastic article, a real eye opener. As someone who has invested in municipal bonds for their relative "safety and security", this piece really gives you pause for thought. If this bomb goes off there won't be any bailouts
Interesting read, of course the other aspect that is threatening to Muni's is the DOJ investigation that has accused CDR Financial Products along with numerous financial houses with bid rigging in the muni-bond market:
By the way, Europe has some
I don't think most people have a clue how bad the situation really is.
Great article Steve. Free markets tend to do a better job than the government on allocating resources.
There is a relative simple solution to the municipal bond and other public financial disasters, perpetrated by a-full-of-itself minority of crooks and robbers. Round up all the crooks i.e.: politicians, advisers, consultants etc., all who had any thing to do with the original financing of boondoggle projects, the ones that continued to criminally refinancing them, the accountant firms who told the municipal dolts the financing is possible, is solid and any other lies. Then empty the crooks personal bank accounts, sell off their businesses, their houses, cars, boats and any other belongings 'those' families have. Use the proceeds of all that gain to help retire the bonds and other debts these crooks are responsible for. Then build work camps where they are all put in and do any kind of community service (work!) that needs, emphasis is on NEEDS, to be done until their natural death. Those camps will be self supporting so as to not be a burden on the rest of the honest folks.
President Roosevelt set the example during WWII and showed us how it's done. He rounded up all the undesirables: Japanese, Germans and Italians like all the other regular criminals and had them work, work and work some more under conditions, well we best don't talk about it at this time.
Do this across the country and America will become overnight a honest and respected country again where bills are paid and loans are paid back, where people can do business without fear of being cheated, robbed and lawyer-ed out of house and home, where lawyers almost become a thing of the past, because they will hardly be needed anymore and politicians will become people one can almost like, well I don't want to think that far ahead, yet.
Hey, one can still dream....or?
In California our legislators drain money from the Gas tax Fund to finance pet social programs. The money that was supposed to keep the hiways in repair is replaced by bond issues. But for every dollar of bond money, there will be a dollar of interest to be paid on top. The citizens of California are whip sawed by the crooks they put in office. When all the chickens in all the cities and states finally come home to roost, there won't be any room for the nests in which they were expected to lay the golden eggs. Never mind eggs not being counted before they hatch; there won't be any in the nest.
The Obama administration is concerned about private enterprise taking on too much risk but not one word is said about municipal governments, and the federal government itself, engaging in such debt fueled risky ventures.
"Another unaccountable independent agency is the Massachusetts Bay Transportation Authority (MBTA), which runs Boston-area mass transit. In 2000, Massachusetts moved to make the MBTA financially independent. As part of the plan, the authority was supposed to reduce costs and gradually pay down some $5.6 billion in debt; instead, it continued to spend liberally, deferred the debt payments, and borrowed even more money—again, without voter approval. Today, the authority owes $8.5 billion and is paying a staggering $500 million yearly in debt service, which has forced it to neglect maintenance, shelve expansion plans, and cut service. It also needed a $160 million bailout from taxpayers to close a budget deficit last year."
Reminds of the song about the man "who never returned" but will "ride forever neath the streets of Boston."