Mapping The Mounting Muni Meltdown

Tyler Durden's picture

Many local governments across the US face steep budget deficits as they struggle to pay off debts accumulated over years. Increasingly, as a last resort, some have filed for bankruptcy. There have been 26 municipal bankruptcy filings since 2010 and the pace is clustering, as is keeping track. As Citi's George Friedlander noted (and we discussed here), technicals (net flows) are still dominant and dragging yields lower and spreads tighter; in spite of contagion fears from cities with clear economic problems (specifically those in CA with severe housing price collapses) and also general fund debt that is not secured by a G.O. pledge. However, with the August 'cliff' in redemptions clearly not priced in yet - as fear has driven momentum into bonds recently - we fear more than a few will be wrong-footed when the net flow shifts.

Municipal Bankruptcies Map
The map below shows all municipalities filing for Chapter 9 bankruptcy protection since 2010, along with local governments voting to approve a bankruptcy filing. Cities, towns and counties are shown in red. Utility authorities and other municipalities are displayed in gray.



Via Citigroup:

This week, the city of Compton, CA (population approx 92K) reported a budgetary squeeze that could lead to bankruptcy. Officials announced during a city council meeting that Compton could run out of funds by Sept. 1, 2012. Compton currently has a deficit of $43 million and has depleted a $22 million reserve. While allegations of fraud and improper use of public monies loom over city officials, the fact that the city has witnessed a sharp decline in property taxes (and foreclosures) in recent times has only exacerbated its budgetary crises. As for impact on the yield levels on other credits within the state, there appear to be two types of "contagion," and little impact elsewhere:

  • Bonds issued by cities with clear economic problems and, in particular, a severe housing price collapse are trading less well than before. This includes, in particular, communities in the "Inland Empire" that were at the far edges of growth when the housing bubble began to burst, including those that have been in the headlines recently: Stockton, San Bernardino, Fresno, and the smaller community of Mammoth Lakes.
  • Debt that is unlikely to be affected by a Chapter 9 filing but is secured by a city with severe budgetary pressures is being pulled down to a degree that may, in many cases, is disproportionate to the actual risk. We stress that the debt most at risk in most cases is general fund debt that is not secured by a general obligation pledge, including leases and certificates of participation. Bonds secured by what are considered to be “special revenues" under the bankruptcy code are likely to be outside the scope of the bankruptcy. Nevertheless, this type of debt suffers from "guilt by association," but also from the possibility that ratings could be cut substantially while the bankruptcy of a given city is worked through. The bottom line is that there are likely to be some attractive offerings among issues that are subject to this type of contagion, but are likely to be dollar good. Trading in this type of paper tends to be thin and erratic, however, and attractive offerings may be difficult to find.

It is important to stress that aside from bond issues suffering from these two types of contagion (as well as redevelopment agencies, which have another set of problems entirely), local debt in California continues to elicit strong demand and trade at reasonable yield spreads to the triple-A market.

And Yet, Spreads Continue to Tighten

The state of New York is on track to beat California for the largest issuer’s title for the second year in a row (Figure 5), an event which has occurred only twice before since 1991 (1998 and 2011).

As we mentioned even last week, despite the recent negative developments for these local California credits, yields on Cal GO paper have yet to reflect any impact from these events . Spreads vs. AAA MMD for 10YR and 20YR Cal GOs have actually tightened 7bp on an average  over the ten business days.

Thus, we do believe that technical factors remain the predominant factor, and we expect Cal paper will remain well bid in the face of a lack of new issue supply.

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SgtShaftoe's picture

Marketwatch headline: "Gold moves higher on euro optimism"  HAAHAHHAHAHAH!!! The bullshit narrative has reached a level of unprecedented insanity. 

veyron's picture

I'm sure its automatically generated by now:


(asset class) moves (up/down/sideways) on (euro optimism/euro pessimism/risk aversion/risk on rally/general retardedness/...)

AldousHuxley's picture

there are over 35000 cities and towns.


Let us know when 1%...350 cities go bankrupt. otherwise false alarm. more likely your real estate taxes and local fees are going up.


truth is that government can TAX the shit out of you before they go BK.



FreedomGuy's picture

But not before the productive class leaves and then the remaining nonproductive and government unions begin burning down the courthouse.

engineertheeconomy's picture

I noticed all the cops have new buildings, new cars, new uniforms, new boots, new military hardware (and software) etc.

If we fired all of the sons of bitches we wouldn't be in debt, we would have a surplus

FreedomGuy's picture

You make a good point. I like cops of the Andy Griffith type but I have noticed all the police gear and vehicles are looking more militarized year by year. Now they want drones, too.

Rainman's picture

Small town police chiefs now wear 4 stars on their uniform collars.....soon to be 5 stars with a chestful of battle ribbons for good measure !

FreedomGuy's picture

To further emphasize, socialists must always capture populations to make them pay for their master plan. At the extreme, the economic units (comrades) must not escape. That's why all the biggest most dangerous walls were built by collectivist countries.

RockyRacoon's picture

If they were all the same size and governed alike, you would have a point.

battle axe's picture

Calif say hello to insolvency, and let me introduce you to your new masters, Washington DC....Now work you lazy bastards...

Umh's picture

The only thing DC wants out of them is their votes. DC could care less if we are all on welfare.

General Decline's picture

....and why do they need their votes? It's not about votes. Hasn't been for a while.

A Nanny Moose's picture

Its not that we don't work. It's that those who do work are leaving and working elsewhere.

SmittyinLA's picture

LOL, you can buy medical marijuana with the federally funded EBT card in CA, the Feds ain't gonna cut nutin, if anything CA will get more freeshit, like a $200,000,000,000.00 bullet train plan (no actual train).

4shzl's picture

The Ponzi never sleeps.

Arnold Ziffel's picture
[Cali] State deficit estimate hits $16 billion Surge from $9.2 billion in January means deeper, more painful cuts, Brown says.


"The Orange County Employees Retirement System – which has assets valued at some $10 billion — also happens to be about $10 billion shy of what it needs to fulfill its pension promises to workers, according to a study of California’s largest independent pension systems by researchers at Stanford University."

dark pools of soros's picture

Can't Newport Beach and Irvine just slap a vanity tax and fill this 10bil hole quick?

Abiotic Oil's picture

Toll booths every 5 miles on the freeways.

TrainWreck1's picture

 Real-time GPS tolling EVERYWHERE you drive.


AldousHuxley's picture

in Europe, tolls and taxes > daily cost of car rental fees


they already have tax on EVERYWHERE YOU is called tax on gasoline....

Bob's picture

Bingo.  Privatize.  Purchases financed by . . . who else . . . the financial industry. 

Raking profits coming and going. 

It's a good thing all the interest is tax deductable as expense or we might take a minute to rethink this thing. 

divide_by_zero's picture

And still Brown signs a budget that is 5% higher than last year and signs the high-speed rail to nowhere bill (the so-called Conjugal Visit Express first leg between 2 cities with rather large prison populations) authorizing sales of $B in bonds. Insanity!

Blankenstein's picture

Don't forget the Water Tunnel Project.

A Nanny Moose's picture

/sigh. CA already uses 25% of its energy moving water from one place to another.

otto skorzeny's picture

these cities will be up sh*t creek if the Feds cut off funding to the deadbeats in the police and fire depts that Slick Willie threw $ at back in the 90s. not to mention all of the DHS $ that was doled out to turn police depts into paramilitary goon squads. alot of gas stations here in IL won't let state cops fill up at their pumps beacuse IL doesn't pay back them for the fuel

RobotTrader's picture

CXA has risen from $20 to $25 in 18 months, with a 3% tax free dividend yield to boot.


Even the guys at Jim Puplava's shop are clamoring for new muni-bonds, they are all buying them for their kids' college funds.

Rob Bernard simply salivates over them every week on FSO.

Hilarious how the "experts" who were pumping up "hard assets" 5 years ago are now chasing muni-bond paper assets into a bubble zone.

fonzannoon's picture

Jim Puplava and Rob Bernard?

SgtShaftoe's picture

Puplava has a bond guy because foundations, and some funds are required to buy them.  They've talked extensively how many municipalities are disasters, and how to avoid them.  He also has bonds because not everybody wants to be all in in gold - volatility.  Puplava's outlook hasn't changed:

derek_vineyard's picture

meltdown =  bailout

bailout     =  spx rally

if a=b and b=c, then a=c

why do i keep think a = spx crash ??????????

gofigure's picture

cause bailout season is over, now it's rabbit season...

spine001's picture

Please forgive me, but for the mathematicians in ZH I'm going to dare correct the symbols you used since the math is perfect, just the symbols are incorrect and I don't want the to argue.

IF {meltdown =>  bailout} AND {bailout  =>  spx rally}

THEN meltdown => spx rally

if a=>b and b=>c, then a=>c

why do i keep think a => spx crash ??????????

=> means implies

The key here that explains why you think spx crash is that spx is really crashing but only in REAL value, lets say measured in SOY, but measured in fiat currency (remember that now they don't even have the limitations created by the need to physically create currency) it creates the appearance or DELLUSION of a rally when in reality its real value is going down. Of course you won't know what the real value is until people try to use the "STORED" money to  buy something and realize the there are just not enough of that something for the amount of money available.

The meaures of inflation they use don't catch this because they only reflect current behavioral patterns with respect to the use of that supposed value stored in the fiat money that people think they have. As soon as people start using that money (like for instance the baby boomers that saved for ever to retire about NOW), then the inflation measured will only reflect the relative ratio of the speed of increase in the usage of money to buy stuff, versus the speed at which that stuff can be created. Since there will be no limit to the velocity of usage of fiat money (everybody will be millonaires, according to your equation, which is correct), and there will be a limit to the velocity of goods creation, you will have a situation of hyperinflation. Since QEs don't resolve the structural problems that got us here, then you will end up with the infamous STAGFLATION, that Argentineans are experts in.

I really hope this clarifies your equations that are completely correct.

Until next time,


Defiant1968's picture

I am impressed! thats some of that math shit we learned back in college - Damn looks good A=C then spx crash

LULZBank's picture

Ewww... this is so boring compared to Europe.

Dont they have Mario like characters in US?

suz's picture

As the Chinese would say--the Emperor is over the mountains, and far far away....If the US Empire chooses to have the small minions go bankrupt, so be it. Let it fall.....people will go on. We don't need the Big Brother. Let it fall....

I know of a time in life, where city council men and women didn't get paid the big bucks, and fire men were volunteer, and people contributed to their town and country.

The Empire wants you to think that they are invincible. I say NO! It wasn't too long ago that our society ran on a work ethic of volunteerism--and community responsibility.

But, like the addict, they have to hit bottom before anything real will occur in terms of change. It's not that the average American is pathetic, or not caring-- they know that the system is too big, and feel the larger pathos.

Besides, once you get involved, and the empire smells your strength, they try to eat you alive. We may have total mayhem, and carnage, but it's not every man for himself. 

Small really is beautiful, and that will be the net effect.

SgtShaftoe's picture

I agree, Volunteer Fire departments are the way to go.  Additionally cops should have the same model, come when called only.

divide_by_zero's picture

It's crazy, whenever there's a medical emergency around here ( north county San Diego) they bring at least a hook and ladder plus the EMT rig and the 2-4 Sheriff cars. We contract with Sheriff's for police service but the Fire guys are city owned and those guys scam the pension system like no other.

ParkAveFlasher's picture

Ditto in most urban areas.  Problem is, they are usually very intimately involved with dangerous criminal elements (if not criminal themselves) and it's all largely a pay-for-protection scheme. 

There are no such thing as "civil servants", not anymore, I couldn't agree more.

The original Constitution addresses this all very simply and clearly.

Redhotfill's picture

Oceanside, Vista, or the most corrupt San Marcos?

foodstampbarry's picture

mmmm hook and ladder, firehouse subs....Arrrrgggggggh.

HungrySeagull's picture

There is a standard protocol in place drawn from hard experience.

I don't know about the west coast but on the east, that hook and ladder would do very well to reach places. There was once a Steeple fire from a lighting strike and generated the tallest ladder with cannon call. 67 miles away. Believed at the time to be the farthest roll by miles to a fire.

Had a brake fire once, they rolled two fire departments to it.

Here in the south, everybody pitches in. Even the bush trucks.

Jena's picture

In addition to that, the fire crew generally gets to the scene before the ambulance crew does.  They tend to know the neighborhood better, have more crews stationed around, etc.  Complaints aren't always what they are reported to be per the 911 calls.  There is a reason why you DO need to have extra people on the scene of medical calls, and you don't always know that you won't need them when you arrive on the scene.

As for having too many people around, it's hard to do CPR and run a full code on someone on by yourself.  The ambulance crew has two people and one of them must drive.  Most fire personnel are trained in Basic Life Support.

As for the police, neighborhoods aren't always secure and there are a lot of places that fire and ambulances aren't allowed to go if they don't have police escorts (per protocol).  I'd expect that won't change anytime soon, and instead it will become standard in a lot of places.


Edit: Yeah, I edited.  It's that kind of night.

respect the cock's picture

Thank you for being a voice of reason and explaining things as they actually are.


rambo1028's picture

What the poster forgot to mention, is that only a fraction of the calls they go on are actually emergencies that actually require extra people. They also forgot to mention the completely ridiculous amount of paid time off that union firefighters and EMTs recieve. They typically work 24 hours on 48 hours off. In my experience, they got from 30-45 paid days do the math there. Also, in my experience, you are paying a bunch of people for 24 hours of work when in reality they maybe only do 4 hours worth of actual work....and in some cities 4 hours is being very generous.

In case you were wondering, my experience is as a former firefighter/medic for 10 years. So I know if what I speak....

rambo1028's picture

Before anyone gets their panties in a bunch....find out how many union vs. Non union firefighters staff your fire dept. Those non union firefighters do EXACTLY the same job for less than half the pay, none of the benefits, and the same responsibility level as the union guys. I am not sure how much the landscape has changed since I left the fire service but 10 years ago, there were 3 union guys to 5-6 non union guys on each shift. Back then I thought these cities were nuts for paying some people so much when clearly there were plenty of people willing to do the job at the non union rates.

I used to think.... gee I wish instead of paying a few people so much and giving a few people all the benefits.... I wish they would spead things out to all of us a little more evenly. (I am not advocating wealth redistribution here and you will see) I was making $10/hr and had no health insurance while the guy working right beside me had insurance, vacation time, and could afford to live in the town we were protecting whereas I could not. We had the SAME job...took the same risks but were a different class of citizens in our own little microcosm of the world. I guess my point to this is, don't think every firefighter you see is some union guy.

Gringo Viejo's picture

In California, I attribute it to: 1) 30 years of goverment services for illegals and 2) Public Sector Unions, a contradiction in terms and the greatest scam foisted on Americans since the idea of selling people apartments, calling them CONdomniums and charging them HOA fees for the honor of owning one. What A Country!

Gringo Viejo's picture

Just to add, the PSU cops out here are as arrogant and lazy as any transit worker you could hope to meet. We must have 1 out of every 5 guys that ever served as a cop on permanent disability. Do the math!

Redhotfill's picture

Its closer to 50 years of buying illegal alien's illegal votes   Jesus H Kriste and I remember when that state atcually built cars as in the Bitchen Camero!