Here is a great article from Reuters regarding the bankruptcy filing of San Bernardino:
http://www.reuters.com/article/2012/11/13/us-bern…
One of the most interesting things pointed out by the article relates to the "self interests of city workers, local politicians and state pension overseers." 75% of the general fund of the city is solely dedicated to funding the wages and pensions of firefighters and police officers. The combined hubris of those men and women who were supposed to serve the city, fucking sank it. Impressive.
One thing is for sure though: the SEC should start regulating municipality finances much more harshly. Annual Budgets and Certified Annual Financial Reports need to start following a stricter standard enforced by the SEC. Muni accounting almost always seems to be incredibly muddy and that needs to be cleaned up as well. If people wish to invest in muni bonds, then investors should be given significantly better information than what is available.
The article outlines a bit of a blueprint for what makes for a doomed municipality. I was wondering if any muni bond analysts had any light to shed on this story or just bankruptcies in general via their own experience?
EDIT: Also- I was wondering if there is a way to short muni bonds?
You can short muni bonds indirectly by shorting Assured Guaranty (AGO), the largest muni bone insurer, or one of the other bond insurers. They sell bond insurance, and a mass of defaults would wipe them out. Last I checked, they were in a legal battle with Stockton.
I actually like AGO - management has put stronger risk controls in place post crisis, they are a leader in a niche field with high knowledge, and the demand for bond insurance will rebound with interest rates. But feel free to disagree; I could be horribly wrong.
I don't think widespread municipal defaults are likely - tax revenues are climbing for municipalities. The primary threat I see is underfunded pensions, which will be strained as baby boomer retire en masse. But this is a long term threat.
The states and the federal governments are also not likely to allow a collapse of the muni-bond market. Stockton and San Bernadino were comparatively small failures; I think the government would intervene if a major entity were about to default (looking at you, Cook County). The potential for contagion is too great - I would hope they learned something from the fall of Lehman.
Love the article about ever increasing entitlements and the subsequent bankruptcy. Unfortunately I don't think anyone will learn from this.
Why are we still offering pensions in the public sector. Just provide defined contributions and let the individual manage their retirement.
That pretty much sums up a muni default (IMO). The expenses far outstrip revenues and the best part was that they hid it for years on the annual budget. I do agree...no one will learn from this. There will be more defaults, but as West Coast pointed out, the govt. will probably bail out a major entity to prevent contagion.
I really do think reporting for munis needs updating. Should be held to stricter guidelines than they currently are.
Yup, then federal tax payers (the 50% who pay anything) will be on the hook for this and the cycle will continue. There is no free lunch. Government workers should get a 401(k) and nothing else.
Defined benefit plans are, as whole, insane. I see no reason why they should still be in use. Is anyone who chooses a company based on their pension plan likely to be a top performer? It implicitly assumes that the worker will not seek better employment opportunities at other companies. A strong performer would want performance pay, not some fixed amount in retirement.
Pension plans are also too tempting as tool for smoothing earnings. Need an extra few million to hit your GAAP estimates? Well just adjust the assumptions on that pension plan a bit. Even when used as intended, the estimates for pension plans are almost always way off - you are essentially asking a company to forecast the longevity and medical expenses for retirees decades in advance.
Thanks for the information. I agree that something similar to the fall of Lehman could end up a major shit show... And I was hoping there was a way to be short the bond itself. The indirect short regarding AGO and other insurers is a bit too much for me, mainly because as you noted widespread muni defaults are unlikely. I was looking for a direct way to short the bonds (probably no way at all, but never hurts to ask).
I agree for the most part (regarding tax revenues climbing) and the majority of muni issues being underfunded pensions. The article itself stated that 75% of the city's general fund was set to pay off wages & pensions of firefighters and police officers. This isn't the first city to have corruption problems and most definitely isn't the last.
The muni bond market won't collapse. That much is sure. But muni bankruptcies are supposed to be rare. Maybe by improving financial reporting you can make more municipalities transparent, but that is for the SEC to regulate.
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