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CBO Recommendation to Munis – Default!
You hear a lot about the states that are facing a financial wall.
California, NY and Il are on top of the list. But that is a 2010 story.
The 2011 story will shift toward the nations municipalities. There are
36,000 cities, towns, villages and boroughs across the land. They all
are facing problems. This chart from the CBO (pdf LINK) describes the problem:
As you can see the local munis get the lions share of their revenue from
three sources; direct payments from the State (30%), local property
taxes (26%) and other revenues (22%). A total of nearly 80% of the muni
revenue stream is now suspect.
If you are living in a hard up municipal area (who isn’t?) you know that
the fees you pay for everything has increased in the last year or so.
Building permits, licensing fees, transportation fees, library cards,
speeding and parking tickets, you name it have all doubled. There is a
limit to this. I think it has already passed. Nickel and diming
residents and having the cops turned into a revenue source is just not
going to fly much longer. We are at the point where if some town wants
to raise the price for garbage collection they are going to run into a
wall. Don’t look for this source of revenue to bail out the munis in
2011.
Property tax revenue is also a risk. At the end of the day there is a
relationship between the value of a property and the taxes that the
property pays. With housing in the dumps now for two years (and with no
prospect for any improvement) the tax base is falling apart.
Where I live price are down about 40% from the 06 levels. One after
another neighbors are petitioning the local authorities for relief based
on lower values. RE agents who represent sellers tell their customers
to go forward with the process before the house is listed. If the
listing price is less than the value on the books, tax relief is
granted. This process will accelerate. This is what the CBO had to say
on the prospects of property taxes actually falling:
The
decline in house prices implies that (tax) collections will probably
fall in the coming years as local governments gradually update property
tax assessments to reflect lower market values. On average, collections
of property tax revenues lag behind changes in house prices by three
years. Even small declines in collections could cause fiscal stress when the cost of providing public services is growing.
The largest contributor to Muni budgets is the states themselves. We
know that the states are broke and have to cut costs, so this source of
revenue has to be reduced.
Here is a (surprising to me) chart of both state and municipal revenue
for the past few years. Of no surprise is the sharp drop off of revenue
at the state level. But the municipal revenue has continued to increase.
Given the foregoing discussion on the sources of muni revenue it would
seem certain that their income is going to decline in 2011.
A few factoids on local munis tells the importance they play in our economic picture.
-90% of all cities have cut backs in spending scheduled for 2011.
-Approximately 14 million people are employed by local munis (not state
workers). That is 11% of the entire work force. Do the math. A 15% drop
in employment translates to 2.2mm jobs. That would come to 175,000 per
month. By itself this would add 1.7% to the unemployment rate. We would
be pushing 12% UE as a result.-Muni spending is 9% of total GDP. A 10% cutback translates into a drag
on top line GDP by 1%. The estimates for growth range from 2-3%. If
local governments are forced into cuts (they will) a better estimate for
GDP is 1-2%.-When looking for places to cut, munis always go to capital projects
first. Roads, sewer, water hospitals, schools are not going to get built.
What does this do for the private sector construction industry?
What are the options for a cash strapped muni? Unlike state borrowers,
munis can go bankrupt. (more than half have laws on the books permitting
a chapter filing - including key ones). The CBO report provided an
excellent set of reasons for munis to default:
Benefits of Bankruptcy
-One
key advantage of bankruptcy is the “automatic stay,” which is issued by a
court and prevents creditors from taking action against the
municipality and its officials without approval from the court.
-Another
important advantage of bankruptcy is that courts can implement a
restructuring plan without the consent of every creditor.
-The
bankruptcy process may also allow a municipal government to reduce its
labor costs by facilitating the con- sent of employee unions to changes
in labor contracts.
-While a stay is in place, bondholders cannot force municipal officials to raise taxes in order to make debt-service payments.
Over the past 30 years of the 18,400 muni borrowers only 54 have
defaulted on their debt. An admirable track record. One that is unlikely
to be continued over the next few years. Not a pretty picture for a
muni investor. To top it off BABs (the last pillar of support for munis)
is gone. I wouldn’t be at all surprised if some big Muni became the
Greece of America in the near future.
Disclosure: Very “underweight” in long term munis.
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TIS. I think I have this story straight.In Ca. the San Diego area is known for opulent pensions for municipal workers. There was a librarian who retired with a 227,000$ pension. I think I paid about 1,550 in state taxes last year. So the way I look at it is that the day she retires the taxes of over 200 worker's must be allocated to pay the cost of her retirement. Also it's possible that she live 30 years. The unkindest cut of all is the possiblity of her moving to Lake Chapala(Mex.). And the creme de le creme nightmare scenario is for her to hook up with a sancho down in Mexico-when she dies would he get the money?
A $578,000,000 Los Angeles High School was built earlier this year.
http://www.syracuse.com/news/index.ssf/2010/08/los_angeles_unveils_new_5...
My wife and I marveled at a new high school recently finished where we live in Florida. Just driving by it the the facilities look first class. The football and baseball fields would make Division 2 colleges jealous.
Half a billion dollars...for a school. How long before they install the temporary classrooms? Let's hope it turns out better than Belmont at $240 Million (initial price tag.)
Actually Belmont ran over 700 million and still isn't finished (they just stopped tabulating the costs) I believe they still have an ongoing gas remediation program going too, they also changed the name to the Roybal leaning center.
Actually Belmont ran over 700 million and still isn't finished (they just stopped tabulating the costs) I believe they still have an ongoing gas remediation program going too, they also changed the name to the Roybal leaning center.
Fed gov't employs ~2M
State's gov't employs ~19M!
Fed gov't workers make more though TTBOMK, they average around $123k annual salary.
dnarb,
Big difference at least for the most part state employees produce/perform labor.The Fed gv't employees produce nothing, and add nothing to the system of value,redundancy is all.And are by far the most overpaid, and parasitic.
And they have great pensions.
Look for a big round of "early retirement offers" which is just another version of extend & pretend as many of these pensions are seriously underfunded.
Where I live (a blue state), local government employees literally receive 90% to 130% of their highest salary in pensions (they can rig their hours worked of overtime to bid the pension number up above their highest salary with help from co-workers - usually right before they retire), they can retire with a full pension at somewhere around 50, they get medical insurance for life w/their spouse, and they can go work another full time job - even at another city or unit of government!
And Pennsylvania is a red state, though businesses will howl until they are hoarse about the endless injustices suffered in this Red state. In PA, it takes state workers FORTY years to earn a 100% pension and it doesn't cover healthcare. When I (a non-union at-will employee), with the 4-year B.S. everybody "forgets" in their retire-at-50 talking point, am elligible to retire, I'll be 64 (I worked in the private sector for a year). 64, mind you, is a year past partial SS and a year or two shy of full SS. If life-expectancy statistics and my grandparents are any indication, I'll be lucky to collect for 5 years. It's not the walk-in-the-park luxury yacht picnic billionaire bonanza that everyone in the private sector seems to think it is.
The overwhelming majority of private sector workers don't even have pensions anymore. Just a 401-k plan that is 75-80% employee funded - if they are lucky - and in many cases 100% employee funded.
Sounds wonderful, doesn't it?
Here's what's going on in my neck of the woods...
http://www.chicagotribune.com/news/local/ct-met-padded-pension-0917-20100917,0,4986362.story
...fuckers!
Holes big enough to drive oil tankers through. Let those be the first "casualties" of bankruptcy reorganizations.
BTW, the way they increase their income for those final three years that typically determine retirement benefit is by working overtime, true . . . and union rules guarantee that they have "right of first refusal" for any overtime work done, by virtue of their seniority. Not the same as faking a need for overtime work per se, but just as disastrous (if not more so) in its financial impact.
The moral case for unions—protecting working families from exploitation—does not apply to public employment.
http://online.wsj.com/article/SB10001424052748703766704576009350303578410.html?mod=WSJ_Opinion_LEADTop
If you want to focus upon lines of division, how about the one between labor and financial capital?
I'd like to rail against working people who have the unmitigated gall to not get screwed as much as me . . . but what about the mother fuckers who own and operate the screw?
Do you find no irony in that august Champion of all that is fair and right, The Wall Street Journal, sounding the trumpets on this one?
Did you even read the article, Bob? "They work for government..."
Yes, I read it. And I do understand that it can be exploited as a springboard for damning indictments of both government and unions.
Just like molehills can be mistaken for mountains. But everybody has their pet evil, I guess.
Mine's Wall Street. Take care of them and maybe we'll have a future worth quarrelling about.
We can dream.
The government would certainly have less of a scapegoat for its expansionary prowess if WS was removed from the equation...
Indeed. Unions are so beneficial, than only 7% of the private workforce participates in them. What is the percentage of govt employees participation? I would surmise that it is far greater. Once again, government demonstrates its disconnect from reality.
It couldn't have anything to do with employer "union discouragement" programs, could it?
Nobody can be further removed from reality than this. Congrats on not being part of the lunch pail crowd, buddy.
Hey, only 1% of the population makes $1M per year, say. I suppose that, like your union example, this proves that being rich is regarded as non-beneficial.
Buy shares of the screw. What else can you do?
That's a moral problem that I see. It's like "investing" in food commodities . . . to catch the rise. In spite of the fact that in that act you are doing your part to bid up prices and hoping to profit from skyrocketing prices that will result in millions starving.
What does one say to that? "If I don't do it, somebody else will"? Maybe, but still.
If Thailand set up an exchange for futures on the services of child sex slaves, would you buy?
Where do you draw the line? Or not?
It would depend on their healthcare liabilities, and how is that different than investing CA bonds?
We have more stripmall immigrant sex parlors than we do Starbucks and every last one of them has 3,4 or 5 different tax certs on the wall.
Quite the moral conundrum, isn't it? Is it possible to be moral and ethical, and still profit? There may be no fraud to prosecute, or no crime commited per se.
I vaguely recall Beta losing to VHS primarily because of the refusal to license Beta to the adult industry, while VHS embraced it. During the .B0mb days, the only business plan making money...porn websites. Compare and contrast with the present disposition of thousands of e-whatever.com's. Not quite the same as child slavery, but you get the idea.
Where are the lines drawn indeed? Is it only possible to profit on the misfortune of others? It certainly seems to be the case IMO, but it is the only thing I know, as it is the world in which I have always lived. Is this just human nature? Perhaps we have we lost sight of our moral compass. I like to think we have yet do even discover it.
you are doing your part to bid up prices and hoping to profit from skyrocketing prices that will result in millions starving. Umm, and causing producers to produce more food? Got any more like that one Bob?
Not if you couldn't comprehend that one.
And look for compromised state legislatures and local politicians to do what they can to slow down or prevent what looks to be a deluge in labor cost "renegotiations".
And of course, there's Mish - http://globaleconomicanalysis.blogspot.com/2010/12/minnesota-governor-ti... & http://globaleconomicanalysis.blogspot.com/2010/12/detroit-mayor-plans-t...
Holy Sheeee-it. Good thing Detroit elected a businessman this time. /s
Yes, Bing is TRYING to do the right thing, and yet the imbecelic unions are trying to sabotage him at every turn, including the Teachers' Union, whose motto should be "more kids asses in our classes means mo' money for us."
Ain't it?
They wish.
Kind of the same way we like to think that our worst case is a Japan scenario. Unfortunately, I think we lack the necessary social cohesiveness of the Japanese--Detroit will be America's future, book it. Munies will be but another wonderful tool. The Oligarchy will always have a "better neighborhood" gated community to move to.
They WISH for a Japanese scenario.
When the Japanese disaster started, they had a much younger population, and a national savings rate of near 25%.
Well, WE have neither.
Just the opposite in fact.
Now, going to geriatric city, and savings rate is near zero.
And a society where no income disparity is too great--hell, that very idea is socialist evil!--makes for ever-increasing concentrations of financiers who just don't give a shit about people. Claims of doing "God's work" notwithstanding.
The riots will be interesting. Watch for the Marxists in the union hierarchy expose their true agenda. "Workers of the World unite". A fight to the finish between the unions and the TBTFs would kill 2 birds with one stone; I'd pay to see that one.
Oh, but you will.
+1
Based on quotes from friends/clients in the public safety sector, of their union leaders (something to the affect of - if they won't pay, let it burn), I find it amusing that we may end up paying them to NOT do their jobs at a time when they might be needed the most.
Then again, the task is absolutely impossible. Will be interesting to see where the lines are drawn, and by whom. Not all the employees agree with their union leadership in this matter.
Wait until the insurance companies get a whiff of that.
Oh wait, could that be the mother of all class-action lawsuits?
Paging Col. Kurtz.
CBO is a little biased, If they dont default the Fed Reserve will bail them out.
Having the private Fed buy your debt is no different than hocking your debt to a loan shark. They then own your property (future tax revenues) and your chattels (local slaves). Government then becomes redundant.
I agree with you. Most muni bond holders have insurance. If they allow the default the FED/congress will have to bail out the insurance companies again. I am of the mind that the Fed would prefer direct involvement to own all munies for later liquidation to their friends. They will never allow a break down in garbage collections , water, sewage, police, fire etc. You will have riots if a break down occurs.
Privatisation of city services is an option where unions don't rule.
As to the sicker statist tactic of threatening to let tens of thousands of criminals out of jail, in the absence of police and jails there are old, default, standby solutions: Guns, and the old fashioned form of gun control centered around hitting one's target.
Ah good old extortion. We robbed you once, now let us rob you again or we'll unleash criminals to rob you.
"muni bond insurance"
Tower to Swiss Re - Mayday, Mayday, Your ass is on fire!
Great post! Was totally unaware that local revenue had moved up, had assumed it would track state.
Would like your opinion on the way out for states. Local debt can default, but it looks like states don't have that luxury. The Federal Government has the printing press, the locals have bankruptcy, but it looks like the states are stuck with few options.
So, what we really need is state currencies. Employees of the state are paid in state currency, which is legal tender within the state. Businesses must pay their state taxes in the state currency. The state can then print as much money as they need.
Problem solved.
California calls it an IOU.. more to come.
Local revenue growth was primarily based upon riding the housing wave, with property tax increases, building permits and fees directly adding to revenue, while a sizable increase in overall sales occurred taxes as house-flipping generated a wealth effect, spurring consumption overall. Then of course, there was the near decade long 0% loans for new cars.
Epicenter of next crisis - BABS, state budget losses and funding via guess who ?