Muni Watch: All Signs Point to Doom

Well, at least in California.?

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First, a shot across the bow from Warren Buffet:

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A decision by Warren Buffett's Berkshire Hathaway Inc. to end a large wager on the municipal-bond market is deepening questions from some investors about the risks of buying debt issued by cities, states and other public entities.

The Omaha, Neb., company recently terminated credit-default swaps insuring $8.25 billion of municipal debt. The termination, disclosed in a quarterly filing with regulators this month, ended five years early a bullish bet that Mr. Buffett made before the financial crisis that more than a dozen U.S. states would keep paying their bills on time, according to a person familiar with the transaction.

I don't happen to know what was in the basket of swaps, but chances are good it was full of California debt:

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One of the nation's top credit rating agencies said Friday that it expects more municipal bankruptcies and defaults in California, the nation's largest issuer of municipal bonds.

Moody's Investors Service said in a report that the growing fiscal distress in many California cities was putting bondholders at risk.

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The municipal bond market has long been characterized by low default rates and relatively stable finances, Moody's said, but that outlook is beginning to change as bankruptcy becomes a tool for cash-strapped cities.

As a result, the agency will reassess the financial position of all cities in California, which issues about 20 percent of the municipal bond volume nationwide, "to reflect the new fiscal realities and the governmental practices."

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More than 10 percent of California cities have declared fiscal crises, according to the Moody's, with the most troubled areas lying inland in the middle of the state and east of the Los Angeles area.

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Gee, that sounds promising.

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Of course, there is a pensions dimension to this financial distress:

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The struggling port city of Stockton has declared bankruptcy after a spending spree where officials granted city workers an absurdly generous lifetime medical care benefit, dramatically increased pensions and floated debt to finance dubious downtown redevelopment projects.

When the city couldn?t make its pension payments in 2007, it borrowed $125 million ? by selling bonds ? to cover the mess it created by its pension increases. Now the city government is as upside-down as many Stockton homeowners, and officials are blaming the foreclosure crisis, conveniently neglecting that the current reduction in property tax revenue followed years of dramatic revenue increases.

Now, Stockton officials want to stiff Assured Guaranty, a Bermuda-based bond insurance company, for about $103 million. The company ? noting that Stockton is going under in part because it can?t make its pension payments to the California Public Employees Retirement System ? argued in a statement, ?If Stockton is disappointed with CalPERS? investment performance, it should be taking that up with CalPERS rather than reneging on the city?s obligation to holders of the pension bonds.?

While Steven Greenhut (the author of the above) sees higher taxes and reduced services if California towns are not allowed to cut pensions for current workers, I don't see it exactly the same way. That's the short-term upshot, to be sure, but I don't think these towns will be able to net higher taxes to begin with. There's a reason these towns and cities are cash-strapped ? their taxpayers are also cash-strapped. I'm not sure the "higher taxes" step will actually be able to occur.

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I believe it will go like this:

1. Cut services (already been happening)

2. Raise tax rates, but notice not gathering much more in taxes

3. Cut even more services

4. Exodus of taxpayers increases beyond where it is now

5. Public employees wonder who will pay them a salary, much less a pension

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Of course, public employees should already by worrying about if they'll get their pensions in full, based on the current promises. But I think it's going to take a massive hollowing out of the tax base (more than has already occurred) for them to face reality.

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Pass all the laws to deny reality that you wish, but taxpayers can, do, and have moved away when they are squeezed for money and they don't get much in return.?

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Source: http://www.conservativecommune.com/2012/08/muni-watch-all-signs-point-to-doom/

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