[Rod_Cloutier]

I went to see the movie 'Yogi Bear' tonight. It featured the mayor of a bankrupt municipality who decides to log Jellystone, and sell the land to agricultural interests to raise cash.

Athough it was all fictional, I wonder how long until munipalities actually start doing things like this; selling parks for agriculture or lumber interests. Selling public urban parks allowing them to turn into fenced private country clubs for the wealthy only?

I wonder at what point where city services become almost non-existant that residents simply stop paying their sky high taxes? That takes municipal default to a whole new arena. The validity of the government is brought into question, the goverment ceases to function and exist; then where is the value of all these municipal bonds?

[Cloud9]

At least on the Federal level, when you are down and out you get an earned income credit. If you don't pay your property taxes you are in the street in short order. Here in my county one entity bought 52 properties in a tax sale.

[mattduke]

$this->bbcode_second_pass_quote('', 'M')ore than 100 American cities could go bust next year as the debt crisis that has taken down banks and countries threatens next to spark a municipal meltdown, a leading analyst has warned.

Meredith Whitney, the US research analyst who correctly predicted the global credit crunch, described local and state debt as the biggest problem facing the US economy, and one that could derail its recovery.

"Next to housing this is the single most important issue in the US and certainly the biggest threat to the US economy," Whitney told the CBS 60 Minutes programme on Sunday night.

"There's not a doubt on my mind that you will see a spate of municipal bond defaults. You can see fifty to a hundred sizeable defaults – more. This will amount to hundreds of billions of dollars' worth of defaults."

[mattduke]

$this->bbcode_second_pass_quote('', '[')b]Pained Muni Investors Cry Uncle

Munis are wobbling as Uncle Sam's aid looks set to come to an end. Will Uncle Ben step into the breach? One whisper is that, in the unlikely event Federal Reserve Chairman Ben Bernanke were to decide next year on yet another round of quantitative easing, munis could be a target. But his hands are tied, and it isn't clear it would make sense even if he had unfettered room to maneuver.

Rising yields on Treasurys, growing funding gaps and the likely end of the Build America Bonds subsidy have driven states' borrowing costs up, sharply for weaker states like Illinois and California.

Muni yields overall are back above those of comparable Treasurys, according to Robert Nelson of Thomson Reuters Municipal Market Data. That seems irrational considering their tax-exempt status, until one considers state debt and municipal debt aren't nearly as safe as Treasurys.

[mattduke]

$this->bbcode_second_pass_quote('', 'T')his struggling small city on the outskirts of Mobile was warned for years that if it did nothing, its pension fund would run out of money by 2009. Right on schedule, its fund ran dry.

Last week, retirees asked the City Council for some help before Christmas. More Photos »
Then Prichard did something that pension experts say they have never seen before: it stopped sending monthly pension checks to its 150 retired workers, breaking a state law requiring it to pay its promised retirement benefits in full.

[mattduke]

$this->bbcode_second_pass_quote('', '[')b]New Jersey Pension Gap Hits $54 Billion

New Jersey’s pension gap grew to $53.9 billion in the last fiscal year, up from $45.8 billion, thanks to market losses and a lack of state funding, according to figures released Thursday.

Gov. Chris Christie’s administration said the gap, which reflected the state’s investment positions as of June 30, highlighted the need for proposed cuts to current public workers’ pensions. The $53.9 billion figure reflects the difference between the retirement benefits the state has promised to roughly 780,000 state and local workers over the next few decades and the amount on hand to pay those benefits.

For most of the past decade, New Jersey politicians from both parties have skipped required payments to the pension fund while giving increases in benefits to workers. Faced with a tight budget, Christie skipped a $3.1 billion payment this year, which experts said all but ensured next year’s gap would be even higher.

[Keith_McClary]

The Huge Threat To Muni Finances That Hardly Anyone Is Talking About Yet
$this->bbcode_second_pass_quote('', 'W')SJ noted that property tax changes generally lag housing prices by about three years, due to the timing of assessments. So we've seen big hits to housing that haven't even shown up yet in tax receipts for cities.
Hedgeye charted the data, showing tax receipts against Case-Shiller, with a three-year lag.

[nobodypanic]

the problem with california is simple: they pay out more in federal $$ than they get back. if they simply stopped trying to support the rest of the nation, they'd be just peachy.

soooo projecting into the future... well it doesn't take much imagination to see a sovereign california republic as the 10,000 lb regional super-power when the empire finally begins to splinter. they'll do better i think, for a time anyway.

[Cloud9]

How current is your data?

[mattduke]

The prescient Peter Schiff weighs in on munis on the rube tube.

http://www.youtube.com/watch?v=lSgf3oN8j7w

[mattduke]

$this->bbcode_second_pass_quote('', '[')b]Pittsburgh Council Passes Tax Plan to Fund Pension, Avoid State Takeover
The municipality of 334,563, whose pension problem was called a “financial Armageddon” by two councilors yesterday, joins cities such as Chicago and states such as Illinois and New Jersey that may cut services or raise taxes to meet ballooning retirement costs. Those states and 18 others skipped payments or underfunded their pension systems from 2007 to 2009, according to an October report from Loop Capital Markets in Chicago.

[eXpat]

$this->bbcode_second_pass_quote('', '[')img]http://market-ticker.org/akcs-www?get_gallery=1010[/img]
This chart is in fact much worse than it first appears - that break has now taken out critical support from 2008 before everything fell apart!
I have warned of the potential risk in these funds and municipal bonds as an asset class before.

The fact that no realistic action has been taken to address these issues, and that they may rotate into United States credit - that is, Treasuries, forcing big reductions in spending, is a serious problem.

Folks, the States are absolute pikers when it comes to this - The Federal Government is literally borrowing 40% of every dollar it's spending at the present time. This cannot continue indefinitely, and yet if it is pulled back GDP is going to instantaneous collapse by a double-digit percentage and the stock market will implode as profits go down the toilet immediately.

Is this a "sure things, short the farm" play? No. As we've seen the goofballs in our government are hellbent for leather on continuing to play Ponzi, borrowing ever-more in a furious (although ultimately futile) attempt to prevent recognition of the fact that we simply do not have the final demand and cannot manufacture it via borrowing on a durable basis to support our claimed "output" and "profits."

Bernanke, Obama and Congress think they're Khan - and invincible.

They're all wrong - The Market is in fact Captain Kirk.

[Fishman]

Oh my, you mean the unicorns aren't going to rush in and save the munis that have overspent and overspent? Those terrible tea party folks are going to make us live within our means? Clearly they are murderers, drug addicts will go without clean needles, benefits will be cut, oh my, nashing of teeth.!!
Welcome to post peak oil

[eXpat]

Chicago’s Mayor Daley says let pension funds go bankrupt! Communities are failing across America
S$this->bbcode_second_pass_quote('', '
')“I’m one who believes that pension funds can go bankrupt and then you reorganize, and that’s the hardest thing to say.”

Moderator Richard Stengel, managing editor of Time Magazine, then asked Daley: “Let them go bankrupt?”

“Yes, and then you reorganize it. I think the way government is trying to do it, we keep cutting and then some way, we’re going to tax everyone. I think even government can go re-organization, you want to call it go bankrupt, reorganize it, to the tune of this economy and this century.”

In other words let workers starve while the CEO’s and banksters make off with record profits and one percent of the population gets 34% of the American income.

[Cloud9]

I suspect the FED will allow one big municipality to fail, maybe even one state. This will do two things: First is will panic the muni bond holders into selling their assets for pennies on the dollar. All of which will be bought up as a favor to starving widowers and pension funds by our good friends in at Goldman Sachs. Police departments will quit. Water will be turned off and warlords will take over the city streets. Riots and social unrest will be the order of the day with twenty four seven news coverage.

Congress will scream for tighter restrictions on the body politic and demand a bailout.

Then, the second half of the plan will unfold: The FED will purchase the munis out right and then sell them at a discount to their friends on Wall Street. The middle class will be once again stripped of another asset. The Wall Street Boyz will enjoy billions of tax free interest payments knowing full well that the cities will be forever rescued by endless quantities of mouse click money.

The country will slide even closer to the great divide where ninety nine percent are on the public dole and the top one percent owns everything.

[eXpat]

$this->bbcode_second_pass_quote('', '�')��Throughout the country, 90 percent of cities and states are going to go bankrupt within the next five years, many of them sooner.” So says former Los Angeles Mayor Richard Riordan.

Reason.tv’s Tim Cavanaugh sat down with Riordan to discuss state and local budget crises, public-sector unions, and why Riordan recently became a fan of current LA Mayor Antonio Villaraigosa.

[bratticus]

When I look at charts of the US muni bond market, I find the way that it went so sharply off a cliff starting on Monday Nov 8, 2010 compels me to want to know what was going on then that would cause this to happen. The potential for state insolvency wasn't anything new, so it's doubtful that people woke up to it suddenly that day. It wouldn't be until next month in December 2010 that Congress would fail to renew Building America Bonds. Dodd-Frank and the Vocker rule were still being formulated, there's an off chance something became apparent that caused bond holders to flinch. But as I searched the news articles leading up to that week I found ones like these:
$this->bbcode_second_pass_quote('', '[')b]Fed to Buy Extra $600 Billion of Treasuries to Boost Growth
November 3, 2010
The Federal Reserve will buy an additional $600 billion of Treasuries through June, expanding record stimulus and risking its credibility in a bid to reduce unemployment and avert deflation.

[Outcast_Searcher]

Interesting, and there may be some truth to that.

There are other potential explanations though. However, none of them are good for the US economy or its citizens.

I think this is part of the repudiation of debt in general. Since so many of the states are in such a terrible (almost unbelievable, IMO) financial mess, I think this is a credit quality issue.

With Illinois, California, New York, and NJ (even with Chris Cristie valiantly trying to buy them some time) increasingly becoming obvious financial basket cases (and these are just blatant examples of a general issue for the states), AND both the leaders and special interest groups of those states clearly in complete denial about it and fighting ANY cuts to programs in BAU mode - this is increasingly banging against peoples' consciousness and waking them up.

So, I think this is another wave of debt repudiation, such that the CHEAP funding of such low quality debt (especially the long term debt) is going away. I think that these muni bond yields could go significantly higher - perhaps a couple of percent or so easy.

To me this is a very clear warning sign. If the congress doesn't do a HELL of a lot more cost cutting than I expect - then I believe this will happen to treasuries, if not by 2012, then certainly by 2016. As impassioned as the libertarian agenda of the tea party is, I have my doubts they'll win out. Voters don't want THEIR programs cut, and almost 50% of voters don't pay ANY federal income taxes, and MANY more pay a relative pittance. To them, the spending is a gravy train for their family.

I also fear that when it comes time for the tea partiers to run for re-election, they'll go for the porkers' trough just like mainstream dems and GOP'ers do.

Unlike the doomers, I don't see the mess causing a short term crash. I just see a wave of continuing problems caused by too much debt and unsustainable growth, and I see the trend gradually accelerating, as we demonstrate that beyond the flapping of lips in Washington, that BAU and money printing wins out over spending prudence.

I'm astounded it is taking bond holders this long to wake up. I suppose the fear of deflation/depression keeps many believing LT bonds will make them rich. I wish them lots of luck, since printing money is an easier route for politicians in the short run.

edit - grammar fix

[Sixstrings]

Good post, Bratticus.

I'm hardly an expert, but a muni bond crash has been talked about for a long time now. Meredith Whitney is probably the most prominent analyst on this:

$this->bbcode_second_pass_quote('', 'A')nalyst Meredith Whitney said on CNBC that she expected accelerated withdrawals from the municipal-bond market as state finances deteriorate in the next six months. Last month Whitney, who correctly predicted Citigroup Inc.’s dividend cut in 2008, forecast 50 to 100 significant muni-bond defaults this year totaling “hundreds of billions” of dollars.

Investors have pulled a net $22.7 billion from municipal-bond mutual funds in the past nine weeks, according to data from the Investment Company Institute in Washington.
http://www.fa-mag.com/fa-news/6680-vanguard-drops-muni-bond-fund-plans.html

[Outcast_Searcher]

Looking at a sampling of current (Jan 15) MSM articles about this, I find it interesting that the general consensus of the "experts" is "Don't panic. This may be a buying opportunity. Yadda Yadda.

Looking at longer term muni charts, that might be true, IF AND ONLY IF you think that this is just a blip, and that everything is fine, that the general ongoing recovery will lift all boats, fill all coffers, and fix this.

Usually I defend the MSM against the doomers on this site. This time, I think they firmly have their head in the sand and are relying on "this generally worked in the past" thinking.

I've been steadily selling the muni's in accounts I control since Sept, so I'm half out already. I want to be another quarter out. Then if I'm wrong, fine.

For risk assets (and long term bonds ARE risk assets), I'd rather be in diversified high yielding quality stocks or ETF's with a decent chance of increasing dividends over time. Energy MLP's come to mind, as do some HQ energy, drug, and even (acquiring gradually) certain REITs. At least you have decent upside in those, and they make good long term inflation hedges, especially compared to LT bonds.