Municipal Crisis Is Spreading, Updates on Distressed Munis | February, 2010

ALERT FROM DVpf (Distressed Volatility Public Finance)

I've been writing about the public finance crisis since 2008. The craziest story so far has been out of Jefferson County, Alabama.  Bankers at JP Morgan bilked Jefferson County, AL ("county paid banks $120 million in fees, six times the prevailing rate") into buying $2.7 billion interest rate swaps that turned out to be viral when the recession hit, debt was downgraded, auction-rates skyrocketed and swaps violated covenants which put them on the brink of bankruptcy (read the Bloomberg story:  JPMorgan Swap Deals Spur Probe as Default Stalks Alabama County).

Municipalities feed on their tax base, so when their underlying economy is booming they can lever up against tax revenues and throw cash at projects/developments to improve the area and create jobs. It's great until the economy crashes, tax revenues slow and they're left servicing debt and unprofitable operations, in GASB terms. So just like a company they have to cut projects, lay off workers and try to kill or lower debt payments. During the past few years I've been watching this unfold all across the Country.

Distressed Detroit.. (Analysis of Detroit Economy in 2008) (7/12/2008)
Jefferson County, AL - Possibility of Biggest Municipal Bankruptcy In History (8/13/2008)
The Municipal Meltdown. Current Health of U.S Municipalities (Videos / Links) (10/19/2008)
Oakland, California Denies Bankruptcy Rumors, General Fund Drying Up (6/9/2009)
California Issues IOUs, California GO Bond Bets (7/1/2009)
Jefferson County Volatility, Interest Rate Swaps to National Guard (8/5/2009)
Moody's Downgrades Detroit $781M GO Debt Further Into Junk (8/30/2009) 
Illinois Insolvency, Chicago Commercial Real Estate Outlook, Warehouse Vacancies Hit 12.1% (1/22/2010)
Chicago CTA Volatility, $95M Budget Hole, Service Cuts, 1100 Laid Off (Video) (2/6/2010)

So munis are distressed and it's just getting worse..

Union Cannibalization: Laid-off CTA workers upset with unions, management (MishGEA)
States Facing $150 Billion in Red Ink (Zandi of Moody's (BondBuyer)
Muni Defaults May Rise Amid ‘Unprecedented Stress’ on Finances (BusinessWeek)
How about this risk.. Bankruptcy Bloodbath May Hit Muni Bond Owners Next: Joe Mysak (BusinessWeek)
Bell considers receivership a last-ditch option (ToledoFreePress)
California One Step Closer To Insolvency After State Cancels $2 Billion General Obligation Bond Sale (ZeroHedge)
Quinn details $2 billion in spending cuts, schools hardest hit (ChicagoTribune)
California Teachers Pension Fund $42.6 Billion Short (Update2) (BusinessWeek)
Read this report:  Pew Study Finds States Face $1 Trillion Shortfall in Retiree Benefits (
"$1 trillion. That’s the gap at the end of fiscal year 2008 between the $2.35 trillion states had set aside to pay for employees’ retirement benefits and the $3.35 trillion price tag of those promises.
Why does it matter? Because every dollar spent to reduce the unfunded retirement liability cannot be used for education, public safety and other needs. Ultimately, taxpayers could face higher taxes or cuts in essential public services.
A new report from the Pew Center on the States, The Trillion Dollar Gap: Underfunded State Retirement Systems and the Road to Reform, shows why states must take strong action now—or taxpayers will suffer later."

So will "Build America Bonds" bail out all distressed municipalities on the brink? There could be implications: Market Shakes Head Over Muni-Killer Bill (BondBuyer). Or will the American people with cash on hand soak up new munis.  OR will they raise taxes on distressed households.  I remember I heard John Lekas of Leader Capital say there would be municpal mergers, that was interesting.  Debt deflation is live and well but now it's on public financial balance sheets (or so we know).  I'm sure the consumer has more de-levering to go, I haven't looked at that data.  Lets just hope there are enough taxes coming in to cover water and sewage revenue bonds.  I don't want sh* coming out of my shower head because of a JPM interest-rate swap blow up.

Off topic, read this:  Banks Bet Greece Defaults on Debt They Helped Hide (NYT)

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