Monday, December 13, 2010

Congressional Budget Office advises U.S. municipalities to go bankrupt

I strongly advise all to read the original Article;

CBO recommendations to Muni's--Default!!

The charts found there are a very disturbing graphic, as if the information here isn't enough already.

So, the US is going to die a death of a thousand cuts?

Sounds more like a death of 36,000 cuts.



from the Article;

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.

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.
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.
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.

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