Center On Budget And Policy Priorities Issues Report On Muni Crisis, Blasts "Misunderstandings That Create Unnecessary Alarm"

Tyler Durden's picture

There is no quite formal a confirmation of a problem than some petrified think tank or government center issuing a formal rebuttal. In this case, the muni crisis just hit code red. While we have only perused the 21 page report just issued by the Center On Budget And Policy Priorities titled "Misunderstanding regarding state debt, pensions, and retiree health costs create unnecessary alarm", this report's simplistic arguments and assumptions will merely stoke numerous far more erudite refutations, which will only make matters far worse, as the bogey has now been set. Among the pearls immediately sticking out in the report is the following: "Some who claim there is a state debt crisis have likened states’ problems to those in Greece or other European countries. There is no way directly to compare the state debt situation with a national government’s debt situation, but Greece’s situation was clearly far worse than the situation in the U.S. today." First of all, "some who claim", would mean the entire market: last we checked, muni bonds, ETFs and other derivatives are all trading at multi-year lows. Second, we haven't checked but we are confident that either this center or one of its just as worthless comparables, likely issued a report a year ago refuting "rumors" that Greece is insolvent. Look how that ended up. We will have more to say on this report soon, but for now we present it for our readers' amusement.

And another example of crusty bureaucratic thought:

The city of Vallejo, California, did declare bankruptcy in May 2008, citing unsustainable labor contracts and dwindling tax revenue. Caught in the housing crisis, its median real estate prices fell 67 percent between 2006 and 2008, and revenues plummeted. While the city plans to suspend debt service payments for three years, the debt does not appear to be the precipitating cause of the bankruptcy.

But of course not: in fact, Vallejo should immediately issue another couple billion in debt right now, and do all it can to contribute to the $100 trillion in incremental debt that has to be issued by the world over the next 9 years in order to make sure global GDP stays flat... or else.

And if you thought we were kidding, hang on to your hats. These people in fact advocate the issuance of more debt by an insolvent municipal system:

In sum, there is no bubble in state and local bonds. States and localities in aggregate have not overextended themselves with respect to their debt-financed capital spending. Indeed, many analysts decry the deteriorating state of infrastructure in this country and its negative effect on economic development. For this reason, and to shore up the economy in the short run, the manageable uptick in outstanding state and local capital debt is entirely appropriate.

The only point worth highlighting is that the entire report is based on the following assumption:

While economists generally support use of a riskless rate in valuing state and local pension liabilities, they do not generally argue that the investment practices of state and local pension funds should change. State and local pension funds historically have invested in a market basket of private securities and have received rates of return much higher than the riskless rate. As Figure 4 shows, the 8 percent discount rate that most funds now use reflects actual returns over the past 20 years.

So there it is: if you believe 8% rates of return for pension funds are infinitely sustainable, then yes, all shall be well. In other news, CPBB is most certainly not rumored to be launching a muni bond exchange where every single bond will be par bid. 

In conclusion, another government report which is so worthless it could have only come from, well, the government... Or maybe Paul Krugman.


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TheGreatPonzi's picture

The same 20-pages reports were dismissing rumors of a real estate bubble back in 2005-2006... I have a very funny BNP Paribas report on the subject, by the way. You read things like: "The US consumer has very well adapted to the rise in housing prices", "There is far more demand than supply", "Everything is healthy"...

When you wrap chicken shit in a nice paper, most people will eat it...

random shots's picture

Only if you call it "organic." All Hail, Chipotle and its $225 price per share.

Sophist Economicus's picture

Maybe in France, but I can assure you I ain't eating no chicken shit no matter what the paper! Now, them there big macs is another story...

ZackAttack's picture

Even bacteria, given 24 years, won't eat McDonald's hamburgers:

bigelkhorn's picture

This is amazing. I am scared right now about an economic collapse as my house is about to foreclose. I am nearly in tears, and stressed. My friend and I subscribe to the FFT newsletter the guy over at He predicted the stock market crash, and the US collapse ages ago, and many other things, it is spooky how accurate he is. and what he says coming next is intresting, he is well worth a look. Time to prepare was yesterday people!!

Xibalba's picture

Benny don't care!

dick cheneys ghost's picture

never heard of this outfit. must be banking lobbyists.

Monkey Craig's picture

Soon they (the PTB) will call Meredith Whitney a financial terrorist. This is similar to late 2008 when it became illegal to short. I also feel that those who own gold may want another country to practice this ownership. You heard it here, the US government will eventually make gold ownership illegal. These new financial terrorists will be shipped to Abu Gharab or Gitmo.

And please remember, during the war in Iraq, the US government decided that the Geneva Convention was too easy on terrorists. Therefore, extraordinary rendition (read "torture") became the rule of law.

Idiot Savant's picture

Soon they (the PTB) will call Meredith Whitney a financial terrorist.

No, they don't need to when the usual suspects are discrediting her. Jesus, even Rosenberg is saying she's wrong. Time will tell.

Irrational Exuberance's picture

Oh!  I feel so much better now after reading this!   I'm going right out and buying some munis!   I think I'll get some California and Illinois (especially since Rham will by Chicago mayor soon)!

serotonindumptruck's picture

Still reading the report, but it appears to be a desperate attempt at damage control. Good stuff!

Rainman's picture

There are attempts to emphasize that the Center is an independent group supported by foundations, etc. Plus there are others gangbanging on Whitney, too, so I gotta' agree she sure got the crocs stirred up a lot.  

serotonindumptruck's picture

Yes, I'm certain that the donors and benefactors to these "foundations" have completely noble and altruistic intentions. They couldn't possibly have vested and conflicting interests vis-a-vis the bond and/or hedge funds that they manage.


muniguy's picture

Missing the big picture here...damage control not because they care about Munis but because they don't want "draconian" cuts to public-employee union member benefits. You have to know who the group is publishing an opinion, who supports the group and why those who support the group may benefit from conclusions reached in an "independent" report. It's all rubbish.

EscapeKey's picture

Then the public sector employees should be forced to invest their own pension funds in their own precious muni bonds, with no implicit/explicit backstop by the US gov't.

But amusingly, I doubt they'll accept this.

serotonindumptruck's picture

I agree that it is important to know precisely which organizations or persons are funding this type of research. It would not be overly cynical to question the motivations of the parties who stand to gain or profit from such research, should the findings and conclusions be somehow skewed in favor of one financial position over another.

Apostate's picture

Baghdad Bob has found a new job as a public relations professional in the public finance industry.

Just a clue: the very fact that there even could be "misunderstandings" about the financial condition of these entities is a sign that they're doomed.

Hell, why shouldn't these clowns be throwing knives at Buffet? He started the concerns six months ago in his testimony to Congress about the bond ratings.

EscapeKey's picture

Holy shit, all the attack dogs are sent in the direction of Meredith Whitney.

muniguy's picture

It's their keen sense of smell

New_Meat's picture

I wonder if there will be anything like a market when she's proven right and gains another chunk of reputation.

Gutsy public position to take, but then again she's done it before.

- Ned

max2205's picture

No opposition allowed. ABC NBC CBS owned by Feds.

for a world news I watch 15 min of cover fluff and 4 brief headline clips.

Where the he'll is the news anymore. Even getting hard to find a central site on the Internet. World control of the news is tightening it's grip.

Take care TD / ZH

goldfish1's picture

Talk about no opposition:


Joan Rivers cancelled from "Fox" due to this blurb:

"I think she represents everything strong a woman can be, and I think she should go someplace – to another planet – to show them, and get out of our face," she said.


"They're right to blame Sarah for the shootings. Go look at her website. This woman is encouraging sandbaggers to reload ... this woman is just stupid and a threat," she said.

XRAYD's picture

They obviously see no difference between the city of Athens and the Country - Greece. The crisis in Athens was not about bonds; it was rioting, murder, and death because of Greece's efforts to deal with its financial situation as dictated by its German masters.

Roscoe's picture

They have an agenda to ensure that deficit spending continues, but it seems their stance here could perpetuate, rather than alleviate, poverty.

Here's what they focus on, from the 'about' tab on their website:

"The Center conducts research and analysis to help shape public debates over proposed budget and tax policies and to help ensure that policymakers consider the needs of low-income families and individuals in these debates.  We also develop policy options to alleviate poverty."

If you read the whole 'about' section you'll see they're basically socialists trying to broaden and deepen the trough. First time I've seen the use of the term 'devolution' in this context.

"Most notably, the Center initiated extensive work on budget priorities and low-income programs at the state level during the 1990s in response to the devolution of responsibility over many areas of low-income policy from Washington to the states.  State work, which we conduct in part through the Center’s State Fiscal Project, now comprises about half of the Center’s activities.  We provide information and technical assistance to state non-profit organizations and government officials on issues ranging from state budget priorities and revenue structures to the design and implementation of low-income programs."

Reese Bobby's picture

The crappy Republican Party will support a new BAB program in return for something for their Masters from the shitty Democratic Party.  There will be no other support for Munis because the real Rulers of our Government and Federal Reserve, BANKS, don't give a shit about them.  Nothing to see here...move along...

nmewn's picture

"...both claims are greatly exaggerated..."

I love that phrase.

"There is no bubble in state and local bonds, nor are there exotic securities that hide the underlying value of the asset against which bonds are being issued..."

I hardly know where to begin...are they really saying the creditor (in a muni default) will take ownership of Bumfuzzel Hwy or Yeehaw Junctions public sewer & water works?

The reality of which is, taxpayers would then begin sending checks to Vinny, Vito & Sons LLC of New York?...LOL.

mphre's picture

The organization appears to be dedicated to continuing the feeding at the government trough and the lead author a government employee union shill:

Lav currently also teaches state and local finance at Johns Hopkins University School of Government......Prior to joining the Center, she was associate director of public policy for the American Federation of State, County, and Municipal Employees and a senior associate at a consulting firm.

And check out the resumes of the rest of their critters -- not sure how they can label themselves a non partisan bunch.

Bodmas's picture

"Shortfalls in pensions have gradually emerged because of two recessions"? Unbelievable. Shortfalls have emerged because the math doesn't work - actuaries are incompetent, and often someone retires in their 50s and collects for nearly as long as they've actually worked, or they 'spiked' hours in the last years of work to artificially boost entitlements, or they're 'double-dipping' by retiring, collecting a (too generous given the work performed to date) pension and then were re-hired to do the same job -  or some other abuses not available in the private sector - these are the real reasons public sector pensions have ballooned, are immoral and are unsustainable.

The solution? 401(k)'s for all, including current employees. If the law forbids it, CHANGE THE LAW. I will NOT work for decades to fund the unearned retirement comfort of today's public sector.

Cheesy Bastard's picture

I also found that hysterical.  Not only is the money only gone because of the two last recessions, which are over by the way, but then you simply adjust the accounting so that it is based on historical returns instead of riskless returns.  Historical returns.  I think they almost said that with a straight face.  That is gonna work out swimmingly, I'm sure.

New_Meat's picture

fromage, do you really think that the last recession is "over", what with funky U-6 accounting and '99ers and all?

- Ned

Cheesy Bastard's picture

Well, my viande de porc, I was simply pointing out that they mention that the recession is over in the part of the report where they discuss pension liabilities.  I was poking fun at them.  Of course it is not over, never even got out of the first dip.  :)

Cdad's picture

First of all, "some who claim", would mean the entire market: last we checked, muni bonds, ETFs and other derivatives are all trading at multi-year lows.


Spot on.  I would elaborate...but how?  Nothing else really be said.


Seasmoke's picture

when the dust settles after the pension ponzi collapses, we will be told, WE DIDNT SEE IT COMING !

Roscoe's picture

Here's all you need to know about these folks: A glowing endorsement from their website:

“The invaluable Center on Budget and Policy Priorities … [has] been the go-to resource for consistently reliable analysis on matters of budgets and fiscal policy at every level of government.”
- Vice President Biden



quasimodo's picture

Yes, from the mouth of "this is going to be fucking great" Biden. That's credibility for you

muniguy's picture

CBPP is part of the Democracy George Soros,, let me get this straight, a report released by the CBPP purports that "a spate (didn't Ms Whitney use the same terminology?) of recent articles has created the mistaken impression that drastic and immediate measures are needed to avoid an imminent fiscal meltdown...such mistakes can lead to inappropriate policy prescriptions."

Such as...cuts to future, current and retired public-employee union member's pension and health benefits? Inappropriate or appropriate prescription?

The CBPP report is simple propoganda used to support the interests of their "constituents" please don't get too wrapped up in the reports "conclusions."


New_Meat's picture

muniguy: I bet you do know munis--

"CBPP is part of the Democracy George Soros, SEIU..."

but there are other useful terms to bring to bear, like "useful idiot" and "fellow traveler".

I'm with the second category, myself.

- Ned

Poor Grogman's picture

The plan is that the sheeple will eventually protest and "Call for the localities finances to be taken over by the FED". Thus there will  be more central control all in order to "help all those poor pensioners".

You see it all makes perfect sense (from a certain point of veiw)


XRAYD's picture

Exactly, its a call for a bail out.


Of course, Ben has said he will not do anything for what that is worth.


I guess that will come down to how many big banks own some muni bonds.


 In 1975New York was on the brink of bankruptcy. They went to the Feds for aid; at the time Gerald Ford was president. There's a famous New York City headline: "Ford to New YorkDrop Dead." 


Bastiat's picture

(1)States and localities in aggregate have not overextended themselves with respect to their debt-financed capital spending. (2)Indeed, many analysts decry the deteriorating state of infrastructure in this country and its negative effect on economic development. (3)For this reason, and to shore up the economy in the short run, the manageable uptick in outstanding state and local capital debt is entirely appropriate.

(1) Does anyone on own "aggregate" bonds? Also in determining whether they have overextended themselves, did the writer taking into account contingen derviatives exposure.  ie. cascading acceleration/termination clauses that are triggered by downgrades? 

(2) So maybe analysts are really "decrying" the reckless mis-use of debt capacity? Or the consumption of available revenues to fund pension and health benefit liabilities?  The fact that the essential infrastructure maintenance hasn't been done does not prove or demonstrate that local governments are not over-leveraged. 

(3)  Long term debt to shore up the economy short-term: fucking brilliant!  It can be a good thing for a entity which has carefully reserved its debt capacity to use it during recessions (or depressions) for essential infrastructure when the real cost of construction is lower.  It's a real bad thing for a entity that is already over extended.


Rainman's picture

Muni weakness typically begins to show a couple years following a "normal" recessionary event. This time it was delayed a bit by stimulus and the reliable and obscure accounting of the pension funds and the municipalities* (*owing same pension funds gazillions in underfunded liability).

Othern' that, things are fine.

Element's picture

"...unnecessary alarm?"

ha! This has been coming for years.

Fred Sheehan was all over this (in fine historical detail) years before these recent Johny-come-lately hand-wavers.

This summed it up best for me;

Fred Sheehan, "Dark Vision - The coming collapse of the Municipal Bond Market" - Sept 2009

Well worth reading, for the dose of some REAL reality, at how this will go from how it went last time.

The only difference this time is the Fed intends to step it up a notch and QE the dollar to death, to privatize the bk asset-base of all your home towns.

And thus appear to be your ‘savior’ whilst channeling the resulting economic tithe you will pay directly into their pockets. And let’s be clear, they will ‘tax’ you to death. If you think the IRS is ruthless, that’s nothing.

There is an alternative to this outcome, physically destroy the Fed and the TBTF lieutenants zero-out the bk debts, print a debt-free nationalized dollar, based on real national physical assets that are nationalized, instead of the privatized debt-dollars now in use, that always must seek to ‘privatize’ everything of yours (and into extra-national hands) simply to maintain its functioning and asset-base 'credibility'.

Thus the more debt they print, the more that they MUST enlarge their asset bases, just to keep the Ponzi going a bit longer. Munis are simply the next necessary burnt offering to the Dollar God (asset appropriation) ... to back the Fed’s fucked balance sheet … due to the damage of printing these dollars … in order to steal these assets ... to take control.

And the potential economic ‘tithe’ these assets (eventually) will produce, means the owners of these assets will always be your Feudal Masters.

So yeah, no need for any, "...unnecessary alarm?"

You know exactly what to do.

Bob Sacamano's picture

CBPP is reportedly an advocate for low income groups -- which are the main beneficiaries of the government beast and are those who pay NO federal income taxes.  So you can see why they don't want folks to "over react" and start cutting government spending when everything is really just fine.  

Terminus C's picture

Yep, it's the extreme poor that are running this charade... man, nothin gets by you does it?

franzpick's picture

Wonder who the brainiacs are who contributed the annual $16 Mil to CBPP to produce such manipulative disinformation as this and other cr*p , and whether they reported their under-the-counter kickback income ?

Frederic Bastiat's picture

"Interest payments on state and local bonds generally absorb just 4 to 5 percent of current expenditures"

"State and local governments devote an average of 3.8 percent of their operating budgets to pension funding"

Using an average here is misleading because it groups all the responsible governments in with those that are in trouble.  More interesting would be the proportion of governments for which interest payments are 20%+ of revenue.