Last December Meredith Whitney told a 60 Minutes audience that a municipal bond meltdown was coming. Ms. Whitney has been under attack ever since.
All year long financial commentators have been asking Meredith, “show us the defaults!”
The largest municipal bankruptcy in history was filed yesterday when the county commissioners of Alabama’s Jefferson County voted 4-1 to file Chapter 9. Melinda Dickinson reports for Rueters,
The bankruptcy filing by the southern U.S. county will add to concerns about the risks in the $3.7 trillion U.S. municipal bond market, which was hit recently by the high-profile debt crisis in Pennsylvania’s capital of Harrisburg.
Jefferson County, which includes the city of Birmingham, owes $5 billion surpassing Orange County’s filing in 1994. JPMorgan held more than $1.2 billion of the county’s sewer debt as of May and negotiated aggressively to avoid bankruptcy.
On August 1, tiny Central Falls, Rhode Island filed BK, citing pension costs it can’t afford.
While Jefferson County was throwing in the towel, officials were declaring a state of financial emergency in Flint, Michigan. This is the first step toward the state of Michigan taking over the city’s finances. This seems to be a trend as Mathew Dolan writes for the Wall Street Journal,
Three other Michigan cities—Pontiac, Ecorse and Benton Harbor—as well as Detroit’s school district are run by emergency managers. Flint, the state’s seventh-largest city by population, would be the largest municipality under state control.
Down the road from Flint, Detroit mayor Dave Bing is playing chicken with union members. The municipal unions have until November 21st to agree to $42 million in concessions or Detroit’s finances will be run from Lansing.
Retired city workers collected 25% of the Detroit’s $1.2 billion general fund this year in pensions.
Out west, the City of North Las Vegas has had it’s bond rating cut twice by Fitch Ratings. NLV bonds started the year at AA- but are now rated A with Fitch calling the city’s outlook ‘negative’
In order to see what a municipal default looks like, Michael Lewis visited Vallejo, California, a city that declared bankruptcy in 2008.
“Eighty percent of the city’s budget—and the lion’s share of the claims that had thrown it into bankruptcy—were wrapped up in the pay and benefits of public-safety workers,” writes Lewis.
And while the police and fire departments in Vallejo has been cut in half, in August a judge approved the bankruptcy plan for Vallejo, with its creditors ending up with 5 cents on the dollar, while public employees received something like 20 and 30 cents on the dollar.
This is what it looks like when a government can’t use the printing press to default slowly.
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The Obama Administration make no secret of the fact that “Stimulus Money” is being used to pay for police, fire fighters and teachers. Once this subsidy is cut, many more municipalities will have to default. This is a no-brainer.
Mainstream economists optimistic opinions are are based on economic growth (which is still not happening) producing enough tax revenue to take care of the problem.
“Melinda Dickinson reports for Rueters”
“officials were declaring a state of financial emergency in Flint, Michigan”
Get me Michael Moore on the horn!
I do believe in the cleansing process of Bankruptcy. Like baptism, it allows the sorrowful sinful to cleanse and be reborn. Praise be for the municipalities that elect to be re-born. Hallelujah! Cleanse those union pensions away.
Prichard Alabama is another example. Their pension fund ran out of money and in September 2009 the town stopped paying pensions to its retirees. After a year and a half of no pension checks the town basically starved the retirees into submission when they agreed to take only 1/3rd of what they were getting. They didn’t default on their bonds, but they did default on one of their obligations.
Central Falls is headed in the same direction as Rhode Island passed a law that mandates bonds are paid first even before pension obligations. In other words they’re going to pay Wall Street, but stiff the unions and pensioners.
This is just the beginning and promises to get much more interesting before all is said and done.
News flash, the writing on the wall for Jefferson County was there way prior to Meredith Whitney making her municipal bond call, and so far she has been dead wrong. Harrisburg, Valejo, and Jefferson County were all a major problem prior to her making here television appearance. All you need to do is look at the MUB over the past year or so. Don’t give credit where it is not due.
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