Municipal Default Crisis On The Horizon

Municipal Default Crisis On The Horizon

Dec 23

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MUNICIPAL DEFAULT CRISIS ON THE HORIZON
ANALYST SAYS LOOMING PROBLEM IS BEING IGNORED

By Fred Yager
Consumer Affairs
December 22, 2010

Original Link

One of the few analysts to predict the credit freeze and the financial catastrophe says the next big threat to our economy is a growing meltdown of state and local governments — and no one seems to be doing anything about it.

Meredith Whitney says there is a lack of transparency within the state disclosure process that is the worst she has ever seen. She says that ultimately we have to use what data is publicly available, and points out that a lot of it is more than two years old.

Economists say state and local governments have been getting by on the billions of dollars handed out by various federal stimulus programs, but the debt, estimated to be around $2 trillion, is starting to make some people nervous about another big bailout.

In an interview this week with CBS 60 Minutes, Whitney said this has tentacles as wide as anything she’s ever seen. “I think next to housing this is the single most important issue in the United States, and certainly the largest threat to the U.S. economy,” she said.

Whitney predicted as many as 50 to a 100 municipal bond defaults, adding up to hundreds of billions worth of damage to the financial system.

Localities in trouble

Meanwhile cities like Detroit and Newark, New Jersey, are cutting police, lighting, road repairs and cleaning services affecting as much as 20 percent of the population. Some are saying Detroit has been on the skids for almost two decades with the decline of the auto industry and simply does not generate enough wealth to maintain services for its 900,000 residents.

Nearby Illinois has reportedly spent twice as much money as it collected and is about six months behind on creditor payments. The University of Illinois owed $400 million and the state has a one in five chance of defaulting.

In order to raise money, California has hiked tuition fees at state universities 32 percent. And Arizona has sold its state capitol and supreme court buildings to investors, and then leases them back.

Overblown?

Municipal bond traders think this is all overblown. One called Whitney an alarmist. And some investors say they believe the default of a major city is unlikely, arguing that states would probably bail them out. States are not legally permitted to file for bankruptcy, but municipalities are.

But the municipal and state debt problem real, and not even the richest counties are immune. Earlier this month, The New York Times reported on affluent Nassau County, New York, where a Republican county executive came into office and promptly cut taxes without trimming public benefits or services.

Nassau county’s deficit now approaches nearly $350 million even though property taxes there are the second highest in the nation. Some say this is what happens when anti-tax fervor meets the realities of disappearing revenues and a punch-drunk economy.

Earlier this year, New York state announced it would borrow from the state’s pension fund to make current payments to the fund — a maneuver the New York Times called a “sleight of hand.”

Bank involvement

In settling charges that it defrauded the municipal bond market in a bid-rigging scheme, Bank of America said earlier this month that it would pay over $137 million in restitution to schools, hospitals, counties, state attorneys and the Internal Revenue Service, among others. In an email to Bloomberg, Howard University law professor Andrew Gavil called Bank of America’s settlement “likely the tip of the iceberg” and said its conspirators were likely to face even larger fees.

Bank of America had been assisting the government’s probe of the bond markets after self-reporting the alleged fraud. More than a dozen other firms including JPMorgan Chase & Co., UBS AG, and Societe Generale were also noted as unindicted co-conspirators.

To underscore the whole problem, the city of Vista, California, which is near San Diego, plans to shut off half the residential street lights in March in order to trim $9 million from their budget. Vista officials say they’ll be forced to take that action unless property owners agree to pay higher lighting fees.

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RELATED LINK:

16 U.S. Cities That Could Face Bankruptcy In 2011
By Gus Lubin and Leah Goldman
Yahoo! Finance
December 21, 2010

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