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.