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Senior Advisor

Cities on the verge of default

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FORTUNE -- Several downtrodden cities are on the verge of defaulting on their debt, putting financially encumbered states and taxpayers on the hook to pick up the tab. The National League of Cities says municipal governments will probably come up $56 billion to $83 billion short between now and 2012. That's the tab for decades of binge spending; municipal defaults could be our collective hangover.

Municipal bonds, issued to fund public projects such as roads and public buildings, have historically been seen as one of the safest places to invest, which is why 80% of municipal bond holders are individual households and mutual fund investors, explains Jeffrey Cleveland, municipal bond analyst at Payden & Rygel Investment Management.

 

The average five-year cumulative default rate for investment-grade municipal bonds is less than half a percent, according to Moody's data. That's about one-third the amount of corporate debt defaults.

But municipal defaults are on the rise, and the trend is expected to continue. Last year 183 borrowers -- mostly "risky" municipal issuers, such as suburban developers in Florida -- were unable to make $6.4 billion of payments. That's way up from 31 defaults on $348 million just two years earlier, according to Distressed Debt Securities.

In the past year only one city has actually defaulted: Menasha, Wis. (Warrens, Wis. narrowly averted a default by agreeing to forbearance on a state loan.) But that could increase, says Matt Fabian, managing director at Municipal Market Advisors.

Rampant unemployment, tepid consumer spending, and deeply underfunded public pensions are the leading causes of the balance sheet issues cities are having today. But years of political chicanery and poor financial decision-making by city officials are what led to this problem.

 

Hint for Bruce....the last sentence equals socialism.

http://money.cnn.com/2010/05/28/news/economy/american_cities_broke.fortune/index.htm?source=cnn_bin

 

9 Replies
Senior Advisor

Privatise the pensions?

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Despite its stigma, bankruptcy has paid an important dividend for Vallejo: It has forced public employee unions to the negotiating table, providing city leaders an opportunity to rein in compensation, which city officials said accounts for more than three-quarters of Vallejo's general fund spending. City Councilwoman Stephanie Gomes said the effort has led to concessions from three of four city unions.

 

Like Vallejo, Los Angeles is suffering from weak revenue at the same time the cost of its pensions and other retirement benefits are rising. Former Mayor Richard Riordan said those factors put the government of the second largest U.S. city on track to declare bankruptcy between now and 2014.

 

Riordan sees bankruptcy as a necessary tactic for squeezing concessions from the city's public employee unions. It could also pave the way for 401(k) retirement accounts for new city workers instead of defined pension benefit plans with escalating costs, he said.

 

"The threat of bankruptcy is really the only way you're going to get them to make major changes," Riordan recently told Reuters.

Senior Advisor

Re: Privatise the pensions?

Why should labor take concessions? They have a negotiated contract. I suggest the  city reneg on all other contracts they might have. Fuel, electricity, heat, air conditioning or any other city obligation.

 

Why do you want to punish labor for a situation beyond their control?  Why should the cost of fiscal irresponsibiity be on labors shoulders? They didn't cause the shortfall. I guess you just don't like people that work for a living.

Senior Advisor

Re: Privatise the pensions?

When the town goes belly up they are going to wish they were private.

Senior Advisor

Re: Privatise the pensions?

I guess you will find satisfaction then. Town broke but the best thing would be workers out of work. Whatever turns your crank.  

 

Meanwhile who do you think is going to provide the services that the  people need? Typical republican solution. Workers working for less. Most people would applaud people prospering. Not so republicans. They want to prosper but want to do it at the expense of working folks.

Contributor

Re: Privatise the pensions?

Because labor accounts for three quarters of their costs.  Perhaps they should just cancel all other spending, let the city go to hell, but at least they can pay their bloated labor and retirement folks.

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Contributor

Re: Privatise the pensions?

Way to put words in his mouth you dishonest twit. 

 

 

Noone wants to see the city go bankrupt.  He's just saying if they don't negotiate they may get nothing or much less when the city does. 

Senior Advisor

Re: Privatise the pensions?

Bloated labor and retirement costs? What makes you think they are bloated? They are negotiated contracts signed by both sides. But then you have a tendency to think that people should be forced to concessions if it is helpful to you.

 

LABOR AND LANDLORDS SEEM TO BE YOUR TARGETS. THEY ARE ALL OVER PAID. RIGHT?

Senior Advisor

Re: How about the taxpayers?

Do they have any obligation to step up to the plate and sacrifice to keep the city running in an ordinary fashion. Is it not the taxpayers fault for not producing enough revenue to pay the bills. After all, that government is your creation and you have asked for services but now want to short change them on revenues.

 

Nobody steps up and says tax us more. Instead they want city employees to bear the brunt of the recession. As If city employees were the cause of it.

Senior Contributor

Re: Privatise the pensions?

"bloated labor and retirement folks" quite a statement from one who bragged of 7 figure worth but half of it came from govtn   govt payts make a good retirment plan,  govt 100% contirbution me 0%