Scranton Mayor Cuts All Municipal Employees Down to Minimum Wage

[BadJuju]

Re: Scranton Mayor Cuts All Municipal Employees Down to Minimum Wage

One of the things that contributed most to the growth of my city was the development of higher education downtown. Before this, people from my city of around 50,000 people had to travel 15-20 miles to go to college. Now people can get associate's degrees and half of a bachelor's degree in the city. And by developing the higher education centers in the downtown area, the whole of downtown has experienced a boom. Businesses are popping up all over the place. Another great thing about the new education center is that it caters to low cost education with a focus on technological, manufacturing, and medical careers. Not really a surprise when one considers that those three areas form the largest sectors of employment around here. So aside from the immediate benefit of bringing higher education here that drives local business growth, long-term growth is being created by endowing the local populace with education that will be pertinent in the years to come. More cities should do things like this.

[c1ue]

Re: Scranton Mayor Cuts All Municipal Employees Down to Minimum Wage

Before this, people from my city of around 50,000 people had to travel 15-20 miles to go to college. Now people can get associate's degrees and half of a bachelor's degree in the city.

Hopefully this is not due to the rise of for profit institutions like University of Phoenix. Because if so, then a significant part of the change is the 'E' in the new FIRE.

[BadJuju]

Re: Scranton Mayor Cuts All Municipal Employees Down to Minimum Wage

Hopefully this is not due to the rise of for profit institutions like University of Phoenix. Because if so, then a significant part of the change is the 'E' in the new FIRE.

Nope! These are all local institutions that are non-profit. It actually resulted from the cooperation of the city and local industries to create an educated workforce. The industries donated land and buildings. They also provided scholarships, such as the ones they gave me. Between the three scholarships I received, my entire education was funded by them. From first-hand experience, I can say the facilities are excellent and they have good teachers. In fact, the teachers are better than the ones they have at the main campuses located 15-20 miles away. Without this, I don't know if I would have been able to attend college. It was just too costly to travel all the way to the other city to do it. Now I am about to graduate with two degrees. And I just finished a class for a local unionized industrial place that could land me a job with them! I am willing to be many others share my sentiments about being extremely grateful for this.

[flintlock]

Re: Scranton Mayor Cuts All Municipal Employees Down to Minimum Wage

Frugal is what my grandparents were. My parents are the very definition of anti-frugal. I am the new generation of frugal that tries to rein the old generation in.

Im an old fart, sorry. I meant MY parents.

[BadJuju]

Re: Scranton Mayor Cuts All Municipal Employees Down to Minimum Wage

Im an old fart, sorry. I meant MY parents.

Ha!

[WDCRob]

Re: Scranton Mayor Cuts All Municipal Employees Down to Minimum Wage

DISCLAIMER: Sorry for the long post. But some of you may find it worthwhile, so I won't cut it down. Don't say I didn't warn you.

Great post DC

[charliebrown]

Re: Scranton Mayor Cuts All Municipal Employees Down to Minimum Wage

would you mind telling us what metro area this is. I'm from illinois. If the opportunity arrises, I would like to pull up stakes and start a new life somewhere else. Some of the things you are describing sound good. I could also get out of the chicago winter.

[BadJuju]

Re: Scranton Mayor Cuts All Municipal Employees Down to Minimum Wage

would you mind telling us what metro area this is. I'm from illinois. If the opportunity arrises, I would like to pull up stakes and start a new life somewhere else. Some of the things you are describing sound good. I could also get out of the chicago winter.

I'll PM you, sir But hear me out, while many positive changes have been made, this town sucks. I plan on moving away when I have the chance. There are definitely places out there that are much better. It is just that this place isn't so bad compared to many others and is doing better than others that got caught up in FIRE.

edit: your box is full, so please delete a message.

[c1ue]

Re: Scranton Mayor Cuts All Municipal Employees Down to Minimum Wage

Maybe Whitney should have said 2012 for the muni failures:

http://www.sfgate.com/news/article/R...gs-3707978.php

San Bernardino's stunning news last week that it was broke and needed to file for bankruptcy protection has some observers wondering who's next.
San Bernardino is the third California city, after Stockton and Mammoth Lakes (Mono County), to declare bankruptcy within the past three weeks. And while Stockton's June 28 filing wasn't surprising - city officials had talked publicly about the problem for months - the moves by San Bernardino and Mammoth Lakes were.
Part of the reason, finance experts say, is that it's not in a city's best interest, financially, to bring up the possibility of bankruptcy: Talk of bankruptcy alarms credit rating agencies, which can use the public discussion as a reason to downgrade a city's rating, leading to increased borrowing costs for the city.
"It's in the public interest for them to be very, very careful about it," said Chris McKenzie, executive director of the League of California Cities.
While city bankruptcies are rare, California cities are increasingly struggling with the slow economic recovery, smaller budgets, state budget cuts and the dissolution of redevelopment agencies.
This year, officials in the city of Hercules said they averted pursuing bankruptcy protection by settling a $4.1 million lawsuit from a bond insurer who filed suit after the city defaulted on a bond interest payment. The Contra Costa County city's financial troubles were exacerbated by the loss of redevelopment funding, and it continues to struggle.
Warnings from 8 cities

An additional eight California cities, including Fairfield, which declared a fiscal emergency in April, have officially notified the municipal bond market this year that they are facing significant financial hardship, according to Matt Fabian, managing director of Municipal Market Advisors, which conducts independent research on the municipal bond industry.
The notifications don't necessarily mean these cities are headed for bankruptcy court, but they do signal real adversity.
Along with Fairfield, the other cities include Arvin (Kern County), El Monte (Los Angeles County), Grover Beach (San Luis Obispo County), Lancaster (Los Angeles County), Monrovia (Los Angeles County), Riverbank (Stanislaus County) and Tehachapi (Kern County).
"I think people in our market are certainly getting more concerned," Fabian said. "San Bernardino came out of nowhere, which makes you worry that there are others in a similar situation that you don't know about."
In Fairfield, officials said the city is not in danger of declaring bankruptcy but that it faces a deficit of almost $8 million in the 2013-14 fiscal year, which they said is because of the state swiping local dollars for its budget and the elimination of redevelopment agencies.
David White, director of finance and assistant city manager for Fairfield, said that after years of cutting back on services, the declaration of a fiscal emergency was necessary to place a sales tax increase on the November ballot.
"We are at the point now where we cannot cut any more from our budget without severely impacting services and the quality of this community," White said. "I've never worried about going down the bankruptcy road."
Tax revenue plummets

The unusual occurrence of three bankruptcy actions in such a short amount of time has raised red flags, though.
In Stockton, which filed for Chapter 9 bankruptcy protection, tax revenue plummeted with the national mortgage crisis, which hit the city particularly hard. Bad financial practices, overspending on civic structures and generous retiree benefits also brought the city to fiscal distress.
Mammoth Lakes filed for bankruptcy July 3 entirely because of a $43 million judgment against the city in favor of a developer who sued and won for a breach of contract for a hotel development near the airport. The action has been viewed as an outlier compared with the other two cities, whose financial problems are systemic and long term.
In San Bernardino, which faces a $45 million deficit for the current year, the situation is similar to Stockton. The city, home to 212,000 people, also was hard hit by the mortgage crisis and saw tax revenue plummet. Current officials say past city leaders mismanaged and misstated finances, perhaps intentionally, and that the city is overextended on employee costs. The elimination of redevelopment agencies by state leaders also blasted a hole in the budget.
"This city is in a dire financial situation. While many measures have been instituted over the last four years to balance the city's budget, our financial situation has continued to decline, and that has brought us to a critical point," said Andrea Travis-Miller, interim city manager.
Cities' common traits

Stockton and San Bernardino share three characteristics that could help people better forecast which cities might be in danger of heading to bankruptcy, said McKenzie of the League of California Cities.
Those include cities with tax revenue severely affected by the mortgage crisis, cities that are older and have a significant amount of deferred maintenance, and cities that are unable to persuade public employee unions to agree to deep cuts in salaries and benefits.
McKenzie said he does not think the recent spate of bankruptcy actions makes other cities see it as a less stigmatized and more palatable action. He pointed to Vallejo, which entered bankruptcy in 2008 and emerged in 2011 with fewer firefighters, police officers and public services. Officials there have cautioned that bankruptcy is a last-resort solution that's not only about numbers, but also about people and their jobs, quality of life and morale.
"Everybody remembers Vallejo. Everybody remembers sometimes the medicine is worse than the disease," he said.

Wyatt Buchanan is a San Francisco Chronicle staff writer. E-mail: wbuchanan@sfchronicle.com

[dcarrigg]

Re: Scranton Mayor Cuts All Municipal Employees Down to Minimum Wage

Maybe Whitney should have said 2012 for the muni failures:

http://www.sfgate.com/news/article/R...gs-3707978.php

I took a quick look at their budget. It's police heavy (police are almost half the budget), but nothing looks too out of order, except that they lease their city hall and have blown some money towards a new one that may never occur now.

It's probably police heavy because it's one of the poorest and most crime-ridden cities in America. They still only have a cop for every 450 people or so, which is far fewer than the US average at 1 in 233.

So that's about $61,000,000 for police. Let's break that down:

About $38,000,000 for 479 personnel. That's an average salary + benefit amount of about $79k/year including overtime, which probably brings take-home to about $50k per year for an average cop, which seems about right for the LA area.

Then About $10,000,000 to cover retirees.

The rest is for equipment, operating, training, incidentals etc.

And total pension costs, while high, are not beyond the realm of normal or completely crippling for a low income city (between 10 and 14 percent of the budget depending on how you count it). Those benefits will have to be cut over time. ZIRP makes sure of that everywhere. But how could that send you flying off the rails right here.

Where's the debt bomb?

Something doesn't add up here.

San Bernadino city officials are being investigated for falsifying financial records over the past 10 years.

By Jim ChristieFri Jul 13, 2012 8:38am EDT



(Reuters) - Authorities are investigating financially troubled San Bernardino, California, where the city council voted this week to approve a bankruptcy filing amid a claim by the city attorney that fraudulent accounting may have contributed to the city's problems.


"Several months ago at the request of San Bernardino City officials, the San Bernardino County Sheriff's Department, along with the San Bernardino Police Department and the district attorney's office began an investigation related to allegations of possible criminal activity within departments of the San Bernardino city government," the sheriff's department said in a statement on Thursday.


"The investigation is continuing and details will not be released at this time," the statement said. "Updates will be provided as new information becomes available."


San Bernardino City Attorney James Penman on Tuesday told the city council that financial documents had been falsified for years.


On Wednesday Penman told reporters that "evidence of suggested wrongdoing" had been turned over to unnamed government agencies but declined to give details or elaborate on his comments to the city council.


A city spokeswoman could not be reached for comment on the investigation.


San Bernardino marks the third time in recent weeks that a city in the most populous U.S. state has opted to seek protection from its creditors.


Former city manager Charles McNeely said he had not been contacted by authorities. McNeely, who had warned the city council nearly two years ago that San Bernardino could be headed for bankruptcy unless drastic changes were made to its finances, submitted his resignation in March.


"It makes me wonder if it has anything to do with this latest issue," said McNeely, noting that he requested probes while in office into some of the city's operations.


The investigation will add to the municipal debt market's confusion about San Bernardino's unexpected vote to proceed toward Chapter 9 bankruptcy, said Dick Larkin, director of credit analysis at municipal bond broker-dealer HJ Sims: "It raises more questions than it answers."


Larkin noted municipal debt analysts believed San Bernardino had a handle on its financial problems until Tuesday. Now they're trying to piece together how the city's finances fell apart so abruptly, Larkin said.


The city council's vote followed a report by city staff that said the city exhausted its reserves and projected spending would exceed revenue by $45 million in the current fiscal year, which started on July 1.


"There's something strange about the whole situation," Larkin said. "Something just doesn't hang right."


CITY WEIGHS OPTIONS


The council will consider next week whether the city, which has a population of about 210,000 and sits about 65 miles east of Los Angeles, will enter into mediation with its creditors or file directly for bankruptcy protection.


A California law requires financially distressed municipalities to open talks with creditors as a way to avert a Chapter 9 bankruptcy filing, but negotiations may be skipped by declaring a fiscal emergency.


On Monday, the city council will receive an opinion from its legal staff on whether San Bernardino needs to enter into pre-bankruptcy mediation with its creditors, according to a statement from the city's spokeswoman.


City staff members are also preparing a plan to balance San Bernardino's budget that would be presented to a bankruptcy judge in the event of a Chapter 9 filing within the next 30 days, the statement said.


"While many measures have been instituted over the last four years to balance the city's budget, our financial situation has continued to decline and that has brought us to a critical point," interim City Manager Andrea Travis-Miller said in the statement.


She also said that a Chapter 9 filing would allow San Bernardino to provide essential services and restructure its finances.


San Bernardino could join the California communities of Stockton and Mammoth Lakes in bankruptcy court.


Stockton, a city of nearly 300,000 in the state's Central Valley, last month became the most populous U.S. city to file for bankruptcy. It failed after three months of talks with its creditors to obtain concessions to close its $26 million budget gap.


Mammoth Lakes, a ski resort town of about 8,000 residents, filed for bankruptcy last week due to a nearly $43 million legal judgment against it.


(Reporting by Jim Christie in San Francisco; Editing by Andre Grenon, Leslie Adler and Lisa Shumaker)

[don]

Re: Scranton Mayor Cuts All Municipal Employees Down to Minimum Wage

Warren, always available to aid the cause . . .

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc. (BRK/A), said municipal bankruptcies are set to rise as there’s less stigma attached after three California cities opted to seek protection just weeks apart.

The City Council of San Bernardino, California, a community of about 210,000 east of Los Angeles, decided July 10 to seek court protection from its creditors. The move came just weeks after Stockton, a community of 292,000 east of San Francisco, became the biggest U.S. city to enter bankruptcy. Mammoth Lakes, California, also sought the shelter this month.

“The stigma has probably been reduced when you get very sizeable cities like Stockton or San Bernardino to do it,” Buffett, 81, said in an interview today on “In the Loop with Betty Liu” on Bloomberg Television. “The very fact they do it makes it more likely.”

Cities and towns across the U.S. have been strained by rising costs for labor, including pensions and retiree health benefits, while the longest recession since the 1930s crimped sales- and property-tax revenue.

“Once people find that the city works the next day, it makes it easier for the city council next time they have a problem with pensions -- or whatever it is -- just to say, ‘well, we’ll declare bankruptcy,’” said Buffett, whose company is based in Omaha, Nebraska.

He said the nation isn’t on the brink of hundreds of billions of dollars in defaults, as banking analyst Meredith Whitney predicted in 2010.

“I don’t think we’re at the precipice,” Buffett said. “People will use the threat of bankruptcy to try and negotiate, particularly pension contracts, with their employees.”

Berkshire held municipal bonds valued at about $3 billion as of March 31, or about 9 percent of the fixed-maturity portfolio, according to a regulatory filing. That’s down from about $3.6 billion at the end of 2010. The company also had as much as $16 billion at risk in derivatives tied to such debt at the end of the first quarter, the filing shows.

http://www.bloomberg.com/news/2012-0...ce=Patrick.net

[EJ]

Re: Scranton Mayor Cuts All Municipal Employees Down to Minimum Wage

It has been my position -- before, during, and after the American Financial Crisis and the recession it caused, and so far through the output gap left by the recession -- that Municipal Bonds will continue to make good investments because default rates will remain near the default rates of high quality corporate bonds, despite the stresses of declining tax revenue. I expected default rates on munis to remain low even as the nation went through a major recession and incomes and tax revenues declined because elected local politicians can survive decisions to downsize the government workforce, cut salaries and pensions, and cut services and so forth as needed to free up tax receipts to make bond payments but they cannot survive the loss of their municipality's ability to borrow in the future. So far this has proved to be the case.

Local politicians needed to resist the temptation to vote for new bond offerings of every sort to pay for opulent new schools and sewage treatment facilities and so forth because these are politically irrevocable decisions that depend on good economic conditions. The investment bank that sold the idea of the bond offerings of course painted a rosy picture of the future at the time, and a few did worse. Those politicians that gave in to the temptation to finance too many projects with muni debt during the credit boom are the ones that are struggling today.

Overall, I have not changed my view on this but the latest report by Moody's on muni bond default rates presents an argument that makes continued muni bond default and recovery performance conditional on the US government avoiding a depression and sovereign debt crisis in the future.

In summary, with relevant points underlined and numbered for later notation:

U.S. Municipal Bond Defaults and Recoveries, 1970-2011

This special comment presents historical default, transition, recovery and ratings performance statistics for Moody’s-rated issuers in the U.S. municipal long-term bond market. Our findings include:

• As expected, the number of municipal defaults increased since the recession, with 11 defaults on long-term bonds rated by Moody’s in 2010 and 2011, averaging 5.5 defaults per year compared with an average of 1.5 annual defaults over the period 1970-2009. Default rates for rated municipal bonds remain very low, with only 71 defaults over the period 1970-2011.

• The majority of municipal defaults (73%) occurred in the healthcare and housing sectors. Only five general obligation (GO) bond issuers, including cities, counties and other districts, defaulted on GO bonds in the 41-year study period (7% of defaults); only one GO issuer, out of approximately 9,700 rated by Moody’s at the end of 2011, defaulted on GO bonds in the last three years. (1)

• Municipal downgrades exceeded upgrades for 27 consecutive months to the end of 2011. For most of 2011 downgrades surpassed upgrades by a multiple of between three and four. The prevalence of downgrades reflects a sluggish U.S. economy burdened by persistently high unemployment, depressed real estate prices and low income growth, all of which put pressure on municipal issuers.

• Historical ultimate recovery rates on defaulted U.S. municipal bonds are higher, on average, than those on senior unsecured bonds of corporate issuers. The average ultimate recovery for municipal bonds was 65% for the period 1970-2011, compared to 49% on corporate senior unsecured bonds over 1987-2010. That said, municipal recovery rates are highly dispersed across individual bonds, with some recovering 100 cents on the dollar and others receiving five cents on the dollar.

• The burdens of non-debt obligations and the effect of the recession on revenues are now the dominant pressures facing municipal governments. (2)

• The U.S. economy has avoided a major depression and the U.S. government has avoided a debt crisis. If either of these events were to occur, a substantially higher rate of default incidents would be expected in the municipal sector. (3)

• Our base case assumption is that the vast majority of municipal issuers will continue to pay their debts, but we also expect a growing number of general government issuers—albeit still a very small share of total rated issuers—to default on their bonded debts. (4)

• Moody’s municipal ratings have been as powerful historically as corporate ratings in differentiating defaulters from non-defaulters. The historical five-year rolling average defaulter position is 0.89 for municipals, very similar to the 0.86 average defaulter position for corporates.

1) With only one exception, since the depression lite began, (recession + 7% GDP output gap = depression lite) only those muni bonds that were directly tied to projects that became uneconomical during the recession were defaulted on. In all other cases, local politicians chose to reduce the cost of (2) "non-debt obligations" aka services to free up funds to pay GO muni bonds. However, if (3) the US economy goes into a full scale depression and the US government suffers a bond crisis then all bets are off. It is interesting that Moody's correctly ties these two potential events together. Moody's understands that if a second recession occurs that opens the output gap further (depression lite + new recession = 10%+ GDP output gap = depression heavy) then a threshold will be surpassed and the citizens of municipalities will change their view on the relative importance of making muni bond payments versus financing services with dwindling tax revenues. At the absurd extreme is more tax revenues going to bond principle and interest payments than operating expenses. Consider this slide from a presentation on the municipal budget for Westfield, New Jersey:

A review of several dozen such budgets picked at random conveys a pattern of declining revenues and bond payments emerging as cost centers.

As for the bonds themselves, they were in 2010 for example split more or less one third into GO; one third into education, sewer and water, and healthcare; and one third Other. It is the second category that is getting municipalities into trouble. As the Moody's report notes. "The majority of municipal defaults (73%) occurred in the healthcare and housing sectors."

Finally, the report notes (4) that even if the US does not fall back into recession and depression lite does not become a full blown depression, "a growing number of general government issuers—albeit still a very small share of total rated issuers—to default on their bonded debts." However, these will likely continue to be special purpose rather than GO bonds. The trend toward reduction in salaries, pensions, and services will continue as long as the output gap remains. In my estimation since 2009, it will remain until the next recession, probably in 2013.

[dcarrigg]

Re: Scranton Mayor Cuts All Municipal Employees Down to Minimum Wage

It has been my position -- before, during, and after the American Financial Crisis and the recession it caused, and so far through the output gap left by the recession -- that Municipal Bonds will continue to make good investments because default rates will remain near the default rates of high quality corporate bonds, despite the stresses of declining tax revenue. I expected default rates on munis to remain low even as the nation went through a major recession and incomes and tax revenues declined because elected local politicians can survive decisions to downsize the government workforce, cut salaries and pensions, and cut services and so forth as needed to free up tax receipts to make bond payments but they cannot survive the loss of their municipality's ability to borrow in the future. So far this has proved to be the case.

Local politicians needed to resist the temptation to vote for new bond offerings of every sort to pay for opulent new schools and sewage treatment facilities and so forth because these are politically irrevocable decisions that depend on good economic conditions. The investment bank that sold the idea of the bond offerings of course painted a rosy picture of the future at the time, and a few did worse. Those politicians that gave in to the temptation to finance too many projects with muni debt during the credit boom are the ones that are struggling today.

Overall, I have not changed my view on this but the latest report by Moody's on muni bond default rates presents an argument that makes continued muni bond default and recovery performance conditional on the US government avoiding a depression and sovereign debt crisis in the future.

In summary, with relevant points underlined and numbered for later notation:

U.S. Municipal Bond Defaults and Recoveries, 1970-2011

This special comment presents historical default, transition, recovery and ratings performance statistics for Moody’s-rated issuers in the U.S. municipal long-term bond market. Our findings include:

• As expected, the number of municipal defaults increased since the recession, with 11 defaults on long-term bonds rated by Moody’s in 2010 and 2011, averaging 5.5 defaults per year compared with an average of 1.5 annual defaults over the period 1970-2009. Default rates for rated municipal bonds remain very low, with only 71 defaults over the period 1970-2011.

• The majority of municipal defaults (73%) occurred in the healthcare and housing sectors. Only five general obligation (GO) bond issuers, including cities, counties and other districts, defaulted on GO bonds in the 41-year study period (7% of defaults); only one GO issuer, out of approximately 9,700 rated by Moody’s at the end of 2011, defaulted on GO bonds in the last three years. (1)

• Municipal downgrades exceeded upgrades for 27 consecutive months to the end of 2011. For most of 2011 downgrades surpassed upgrades by a multiple of between three and four. The prevalence of downgrades reflects a sluggish U.S. economy burdened by persistently high unemployment, depressed real estate prices and low income growth, all of which put pressure on municipal issuers.

• Historical ultimate recovery rates on defaulted U.S. municipal bonds are higher, on average, than those on senior unsecured bonds of corporate issuers. The average ultimate recovery for municipal bonds was 65% for the period 1970-2011, compared to 49% on corporate senior unsecured bonds over 1987-2010. That said, municipal recovery rates are highly dispersed across individual bonds, with some recovering 100 cents on the dollar and others receiving five cents on the dollar.

• The burdens of non-debt obligations and the effect of the recession on revenues are now the dominant pressures facing municipal governments. (2)

• The U.S. economy has avoided a major depression and the U.S. government has avoided a debt crisis. If either of these events were to occur, a substantially higher rate of default incidents would be expected in the municipal sector. (3)

• Our base case assumption is that the vast majority of municipal issuers will continue to pay their debts, but we also expect a growing number of general government issuers—albeit still a very small share of total rated issuers—to default on their bonded debts. (4)

• Moody’s municipal ratings have been as powerful historically as corporate ratings in differentiating defaulters from non-defaulters. The historical five-year rolling average defaulter position is 0.89 for municipals, very similar to the 0.86 average defaulter position for corporates.

1) With only one exception, since the depression lite began, (recession + 7% GDP output gap = depression lite) only those muni bonds that were directly tied to projects that became uneconomical during the recession were defaulted on. In all other cases, local politicians chose to reduce the cost of (2) "non-debt obligations" aka services to free up funds to pay GO muni bonds. However, if (3) the US economy goes into a full scale depression and the US government suffers a bond crisis then all bets are off. It is interesting that Moody's correctly ties these two potential events together. Moody's understands that if a second recession occurs that opens the output gap further (depression lite + new recession = 10%+ GDP output gap = depression heavy) then a threshold will be surpassed and the citizens of municipalities will change their view on the relative importance of making muni bond payments versus financing services with dwindling tax revenues. At the absurd extreme is more tax revenues going to bond principle and interest payments than operating expenses. Consider this slide from a presentation on the municipal budget for Westfield, New Jersey:

A review of several dozen such budgets picked at random conveys a pattern of declining revenues and bond payments emerging as cost centers.

As for the bonds themselves, they were in 2010 for example split more or less one third into GO; one third into education, sewer and water, and healthcare; and one third Other. It is the second category that is getting municipalities into trouble. As the Moody's report notes. "The majority of municipal defaults (73%) occurred in the healthcare and housing sectors."

Finally, the report notes (4) that even if the US does not fall back into recession and depression lite does not become a full blown depression, "a growing number of general government issuers—albeit still a very small share of total rated issuers—to default on their bonded debts." However, these will likely continue to be special purpose rather than GO bonds. The trend toward reduction in salaries, pensions, and services will continue as long as the output gap remains. In my estimation since 2009, it will remain until the next recession, probably in 2013.

EJ, Thank you. You brought us back into the larger context, from the small-scale of Federalism to the top.

Everything you've said here makes good sense to me.




To add my 2 cents and try to link EJs post back to my other one above, I offer the following:

The main point I was trying to draw out in longer posts was this: special purpose (revenue) bond defaults (which are typically backed by assets, tolls or fees) are sometimes written with moral obligations built in at the state level (moral obligation bonds that require a state legislative vote to default) and sometimes written with full faith and credit riders at the municipal level (double barrel or combination bonds) so that they end up having near the same effect on credit as GO (general obligation) bonds (which are typically backed by property taxes) when they fail.

Some, like the Harris County Sports Authority debacle (Houston, TX), look like they won't really fall onto the county's books and wreck its credit. Others, like a good chunk of the Phoenix, AZ downtown Marriott (Downtown Phoenix Hotel Corporation), look like they will.

What I suppose crawls under my skin about it is that many municipalities and states can skirt the typical voter approval in the case of these double barrel bonds. And the only reason one would even want to go through adding the full-faith-and-credit rider in is if the revenue stream on the revenue bond seems week. If it was strong enough, it would cover the difference in interest rates. It's basically a way to get projects funded that don't necessarily make financial sense and saddle the municipal taxpayers, and increasingly the municipal employees, with the costs.

GO bonds tend to be for vanilla things and are probably safer as EJ stated above. The greater default risk comes on the revenue and double barrel variety. This is particularly true when double barrel bonds stray from their more typical water and sewer purposes.

It seems to me increasingly like there should be a public stigma attached to these bonds, as opposed to the more vanilla GO or Revenue variety. And it seems that they've strayed into areas where one might not have expected them even a few years ago.

But sure, they're still likely safer than corporate, and you have the tax advantage.

(Yield / (1-(income tax percentage)) = Adj. Yield

So it's not pandemonium yet.

Unless you're a cop in Scranton.

[jk]

Re: Scranton Mayor Cuts All Municipal Employees Down to Minimum Wage

dcarrigg, that is an amazingly complete answer.
Thanks for putting it together.

+1, terrific post

[lektrode]

Re: Scranton Mayor Cuts All Municipal Employees Down to Minimum Wage

.... basically a way to get projects funded that don't necessarily make financial sense and saddle the municipal taxpayers, and increasingly the municipal employees, with the costs.
.....
....
It seems to me increasingly like there should be a public stigma attached to these bonds, as opposed to the more vanilla GO or Revenue variety. And it seems that they've strayed into areas where one might not have expected them even a few years ago.
........
So it's not pandemonium yet.

Unless you're a cop in Scranton.

maybe thats the answer dc ??? - get the local cops FIre'd Up about this sh-eye-t:

from EJ's link above:

http://www.washingtonpost.com/wp-dyn...120703314.html

December 7, 2010; 10:16 PM
Bank of America will pay $137.3 million to settle allegations that it defrauded schools, hospitals and dozens of other state and local government organizations, federal officials said Tuesday. The settlement stems from a long-running investigation into misconduct in the municipal bond business that raises money for localities to pay for public services.
....
The bank is paying $107.8 million to these organizations in restitution, $25 million to the Internal Revenue Service for abuses related to the tax-free status of municipal bonds and $4.5 million to state attorneys general for costs related to their investigations.

The government showed Bank of America leniency in the settlement because the bank first disclosed the illegal conduct that launched the investigation. As a result, the bank must pay restitution but does not have to pay an additional financial penalty.

(and know anybody else that would get 'leniency' from the IRS in a case like this???
well... besides geithner & rangel - but who's counting... guess being a ny dem pol/banker has some nice fringes)



A number of bankers and other professionals from a variety of financial firms have pleaded guilty in the probe, which centered on companies conspiring to win municipal securities business in violation of statutes requiring fair competition. The investigation was conducted by the Justice Department and the Securities and Exchange Commission, among other agencies.

"Bank of America's disclosure of wrongdoing and cooperation has led to an aggressive, ongoing investigation by the Department of Justice into anticompetitive activity in the municipal bond derivatives industry," said Christine Varney, the department's antitrust chief. "The Division's investigation of this matter continues, and the prosecution of anticompetitive conduct in the financial markets remains our highest priority."

(yeah, with all of 10, countem, people on staff to do it? - vs how many hundreds during the S&L fiasco in the 90's?)

"This ongoing investigation has helped to expose widespread corruption in the municipal reinvestment industry," said SEC enforcement director Robert Khuzami. "The conduct was egregious: In return for business, the company repeatedly paid undisclosed gratuitous payments and kickbacks and affirmatively misrepresented that the bidding process was proper."

The alleged misconduct dated from the late 1990s to the early 2000s. It affected municipal bond sales related to health-care facilities in Minnesota and utilities in Guam to universities in California.

hmmmm... looks like The Gift that Keeps on Taking really did start to unfold back in the late 90's
(which is not quite the narrative/meme that we've been led to believe lately, now is it?)

but the funniest (ironically) part of all this? is that when faced with irrefutable evidence of criminal activities by the lower manhattan mob, what have we gotten out of the dept of 'justice' ?

leniency?
no perp walks?
NO JAIL TIME???

guess bernie madoff was the sacrificial lamb/patsy for/so all the big boys could skate, eh?
and nobody in the 4th estate (cept fer matt taibbi, 60mins, frontline, INSIDE JOB) has had much to say about it?

and some wonder why i'm biased...
at least the enron and worldcom thieves went to jail.

the Rest of Us get robbed while the ny finance mob takes care of its own.

WHAT BS!

and i suppose this is a cry of futility at this point, but hey! what the hell...

REMEMBER IN NOVEMBER