States declaring bankruptcy?

And regarding unfunded pensions and OPEB liabilities--- look at Vallejo- filed in 2008. Still working it's way thru the courts and firefighters still make $240k a year. Bankruptcy is NOT a silver bullet. It may provide a LITTLE flexibilty, but filing doesn't necessarily lead to binding arbitration. Did a whole analysis on Vallejo/OC filings a few years back. Could talk for hrs about this but looking fwd to hearing others' comments.

I'd put my reputation on it- no state will file- local govs will, spreads will blow out in their state of domicile and create opportunity. Muni market so much more interestingthan it used to be these days...

That's an interesting perspective, AG. I'm thinking a state bankruptcy is inevitable at this point, the only question in my mind is which state goes first (I'm betting Illinois). But you've clearly got a lot more experience and insight into munis, so I defer to your opinion.

AG,

You are clearly more knowledgable than I am, but I'm with Eddie - I really think Illinois is heading down that path. They are already sticking it to the local governments. A school disctrict near me (in a pretty well off area) was discussing canceling all after school activities because the state was 6 months late on payments.

My town has a $30M grant from the state towards building a new high school, but now no one is confidant that the money will actually arive and the new hs is probably going to be put on hold.

This whole damn state is a mess and this "temporary" income tax increase probably isn't going to do much to straighten it out.

Tunisia's credit default swaps (post revolution) are 100bps cheaper than Chicago's. What does that tell you?

AssociateGuerilla - Meredith Whitney is predicting 100 large munis to default, but she's explicitly said she thinks they will be cities and not states. So as far as that goes I think you agree with her.

Her report certainly got a lot of knickers in a twist. I happen to think she should stick to her area of expertise as well, but I also think the Vallejo situation is just the tip of the iceberg. More cities will fall, but I think a few states will also go down to either bankruptcy or federal bailout.

http://dealbreaker.com/2011/01/muni-bond-queen-alexandra-lebenthal-has-…

Clearly Mrs. Lebenthal thinks Meredith can go somewhere. She was less than pleased with her thoughts on Muni's and was more than willing to tell anyone that would listen.

EB... tells me Chi-town's still in a really tough spot! They've already hocked off assets (privatized parking and skyway last year) - and have little wiggle room left. But the pension issue doesn't seem to be plaguing Chi nearly as much as it plagues Cali and NJ locals. The locals have just made promises they can't keep. If you PM me an email address, I'd be happy to send you the muni bankruptcy presentation I put together a few years ago on.

accountingbyday - you make a good point - but there you see the locus of insolvency already shifting down to school districts (the bottom of the GO heap gets hit first... SDs.... then cities... then counties.... THEN states) - SDs started taking the hit about a year ago. After school activities get cancelled, some districts in AZ shifted to 4-day weeks, music and art classes cancelled long ago, etc. etc.

Broadly speaking, the way I approached my GO analysis was by first looking at whatever entities' cuts causes the most manageable social outrage, gets screwed by the state first. Schools can cut programs, people get pissed off, but it still happens. Schools cut teachers, people get pissed off, but life moves on - the quality of the edumacation just drops. Its a whole different kettle of fish of public outrage when the pol's start talking about cutting police officers, sanitation services, and fire departments (city level) - or county road maintenance, sherrifs, etc.

Damn I could really go on a long time about this one. But I am with clients in houston all next week and really need to get my sht in gear and prep for the trip!

edit- monkeysama... fair enough. I'll admit I didn't even read her report. I discounted it (perhaps prematurely) simply because I tend to view her as a financials equity analyst, and muni's are on the other side of her area of expertise. So, do I think there will be hundreds? No. A handful? Sure. I think they'll be big names... but I'd call it around a dozen or so.

Meanwhile - the opportunity lies in DTB - dedicated tax bonds... legally secured by a first-lien on taxes, with debt service coverage in many issuers hovering around 10x. I'd jump on LADWP's (dept of water/power) DTB's in a heartbeat if LA files.

Good info, AG, and I'd absolutely like to see your muni bankruptcy presentation. Send it to [email protected]. Thanks man.

Hmmm. Folks need to remember that pension income always originates in the state that's paying it. So if states raise the income taxes on state-funded pensions to 30%, I really don't see how they would need to file BK.

Granted I was only an intern, but I worked with the municipal bond group at a large asset management firm over the summer an everyone in that group shared the same investment thesis. That was to buy as much Illinois and California debt as possible because there was no way they would default. There has only been one state default ever, and many believe the federal government will step in if it comes to that.

Not to mention states can always raise taxes and cut spending...(sarcasm)

i would guess states like ohio, michigan and california are at a much greater risk of default, if it ever comes to that

AG, you make a number of good points, but my question, particularly with Jersey and California, is whether or not they can raise taxes enough or privatives enough assets to cover the problems they are having. And in NJ, we're already past that point. The Municpalities are already aware that they are struggling and the State is floundering. Both are cutting programs and funding because it's a necesecity, and most taxpayers I've spoken to aren't that upset by it. The only people I've met who are outraged are those on the Union Payroll or have familys on the payroll, and it's not pretty when you talk to them, with their belief that they have a god given right to a raise every year and cheap benefits.

I can't speak for other states, but I can talk about Jersey. There's no way in hell that Education Funding in New Jersey is going to be cut. I'd wager that the State Supreme Court will guarentee that they need to maintain the current levels of funding, if not increase them to handle expenses. And yes, this matter is currently being heard by the Supreme Court of New Jersey. They are debating the funding issues and throwing more money to Abbot Funding among other education issues. And we're not even going to discuss the Teachers Extortion, Rape, Pillage and Plunder Association, er... I mean the Teacher's Union.

The Unions, in general, don't want their members to pay into their benefits yet demand that they get their annual raise and their pensions be paid in full with funds we don't have thanks to years of raiding the pensions, among other funds, by both Democrats and Republicans alike. Their heatlh benefits payment is 1.5% of their salary with the taxpayers on hook for the rest. Couple this with cities, like Camden, where the unions would rather let their officers get laid off instead of make any agreements with the city to keep people on (Last I heard, they rejected 30 Furlough days over a year and a half, a raise in the amount the unions paid into health care from 1.5% to 3% and over 100 troopers could keep their jobs at full pay and benefits), or Newark, which are fundementally corrupt to begin with, and you have to wonder when the tax revenue will dry up.

Lets not forget about taxes, because despite Christie's work at trying to limited Property Tax Increases, they haven't worked out the issues with benefits, pension costs and other expensive items that would increase regardless of the cap. It doesn't matter what assets you monitize. If the Turnpike and the Parkway become monitized, I'll take local roads but I'll pay for it anyway when the costs of shipping things up the Parkway/Turnpike Corridor increases due to private control over the roads. And one final consideration that no one has mentioned, but what happens if we get the other shoe to drop and the markets collapse again? What happens to the pensions, already underfunded, that now have to account for major losses in the value of the pension fund due to worsening market conditions (and that's assuming there is enough pressure to force the markets down despite the clear attempts by intervening forces made to keep the market afloat)?

It doesn't matter how badly the conditions get, the taxpayer can only take so much of a hit in this market before you erode any recovery. If Tax Revenues decrease, how long will it take for the states to finally look at bankruptcy. With states like NJ and California, you won't see Muni Bankruptcy, you'll see it at the State level, as no politician would risk suicide in either of these states to even suggest doing what Illinois did to income and business tax rates. At the end of the day, this is looking more and more like a slow march to inevitable. The first to fall in NJ will be Camden and Newark. When their tax burden becomes to much to deal with by the rest of the state, it will trigger a massive domino effect leading NJ to go bankrupt. There is no easy solution to this, but whatever happens, it will be ugly.

Vanilla... that's just a burden on the taxpayers. Do we really need to fund a taxpayer burden with that considering we've already tacked on QE and the insane amounts of Federal Spending to our individual tax burden?

Record $4 Billion Exits Muni Funds

http://online.wsj.com/article/SB100014240527487039215045760944008788664…

Top 3 states with the highest budget deficit (no order) California, IL, Ny. These states are also all in the top 4 states with the most immigrants, as well as all 3 democratic states.....Anyone see a trend?

I meant to say illegals not immigrants... And it is a fact, the more illegals in your state means the more welfare and public services your state will have to pay for. This means higher expenses without any additional revenues because illegals do not pay into the system.

Well my original post is not correct because many immigrants are hardworking and pay into the system, the real problem is illegals and it's sad that beuracrats are so obsessed with getting re-elected that they fail to realize the damage they are doing to the country by letting any asshole live her for free that poops out a baby on our soil.

Eddie,

Well said. That's happening in NJ, as it is one of the most expensive states to live in. Once people retire, they tend to move out of state and collect their pension and move to much cheaper places to live. Why pay taxes in NJ when you can rape them and leave when you retire? I know... always with the Jersey... but it's what I know.

Seriously though, is it legal to impose taxes on those collecting public pensions to pay an income tax on the funds to the disbursing state? I'd be interested to find out, because that screws everyone, and no one should be grandfathered into this.

You know your a shitty state when half the children aspire to be on the Jersey Shore.

A large portion of the money flowing into the PE funds comes from these state pension funds. Less money to the state pension funds means less money for the PE funds, which means less money to invest in our economy. One can argue the private individuals can use the money more efficiently in the economy than the government ever can. But one can not argue the private individuals can invest the money in the economy better and more efficient than the PE funds.

These state pension funds have been indirectly contributing to the most vibrant parts of our economy through their investment in the PE funds. Don't kill the goose that lays the golden eggs.

I'm pretty sure the term nexus applies to sales and income tax, but the fight right now is just over sales taxes.

The question is really where the income is coming from. If it's coming from within the state of Illinois, IL has the authority to tax it in the same way that even though I am an NJ resident, NY State has (and uses) the authority to tax my work income.

The bottom line is that there is what the public wants and then there is reality and what the public can get. At some point, IL will pass the point where it can ever hope to pay the pension and will need to decide between default and taxes.

HedgeKing, spoken like a Finance Type who doesn't want the good times to end.

It doesn't matter how big the commitment a Pension has, PE Funds aren't necessarily deploying it in the best way possible. Why do you we need mega deals when they won't necessarily work? Who says that the 20Bln fund managed by Blackstone can do a better job at putting the money to work? And once that money is invested, it's locked until the investment pays out, so that's capital these funds aren't getting back. Additionally, when you don't have money to pay out obligations (and those recieving Pension payments get paid out first, I might add), you don't fund the PE investments, particularly when you are dealing with long term commitments.

Eddie, IP, with the Tax issue, I was under the impression that Pensions were exempt from the same tax benefits and treaties that regular income is taxed under. I'm not sure how Pensionable Income is treated, as State Government sets the rules on their own state pensions instead of being governed by ERISA rules. Mind you, I'm in the same boat as Eddie in that I don't have a breadth of knowledge on Tax law.

I'm this close to throwing Monkey Shit at both of you for that comment. True Jersians are not "The Jersey Shore" types... those assholes come from Staten Island and Long Island. Get it right or next time I start flinging crap at both of you!

You want to hear something rather funny about both cities... In Newark, every mayor of the city from 1962 until 2006 was indicted on criminal charges. 3 Mayors governed over Newark and all 3 were indicted. Hugh Addonizio (He ran Newark from 1962 - 1970), Kenneth Gibson (Newark's first Black mayor was in charge from 1970 - 1986), and Sharpe James (The Double Dipping State Senator and Mayor of of Newark from 1986 - 2006) all served jailtime for corruption. The current Mayor, Cory Booker, is so far seemingly clean and if he ends his run as mayor without committing an indictable offense, I will be impressed. In Camden, of the last 5 mayors, Dana Redd, the current mayor of the city of Camden, is the only mayor to actually be free of any scandal so far. I mean, this is Camden we're talking about, so I doubt it will stay that way. It's not much, but that's just a testiment to the corruption.

I'm with you Frieds. I really don't know how Jersey gets such a shitty reputation. Some of the nicest communities I have ever been in were in New Jersey (Rumson, Chatham, etc.). Just because you drive through Newark doesn't mean you can pass judgement on the entire state.