Witnessing the problems that Europe – specifically some EU states – are having with their sovereign debt, and its impact on dampening global market performance this year, along with my last post highlighting the Standard and Poors (S&P) report last week about the burgeoning global corporate debt default rates and what that means to the global markets, the last thing that my readers want to hear is more dire financial and market news. Unfortunately…
I’m not finished, there’s more.
Warren Buffet, the Oracle of Omaha noted recently that state and municipal debt in the U.S. was the next financial time bomb waiting to explode. Buffett, whose Berkshire Hathaway Inc. has been trimming its investment in municipal debt, predicted a “terrible problem” for the state and municipal bond market in the coming months and years in the U.S. But more on Buffett in a moment.
The real news is that State and local government are frantically scrambling to meet huge budget deficits and revenue shortfalls as the anemic corporate sector (except, of course, Wall Street and Big Oil) and as constrained businesses hold back on capital expenditures, employment decisions stagnate causing high unemployment and shaky consumer spending and confidence, which mean less income tax and smaller sales tax revenue for government treasuries. At the same time, falling home prices and rising foreclosures will start to hit municipalities hard this year as all those property tax reassessments done over the past 18 months kick in, driving local government revenues and services down dramatically. Ask anyone who lives in the suburbs and they will tell you a familiar story: skyrocketing property tax rates, expanding school district budgets, and declining services. In fact, a couple of municipalities, like L.A. and Detroit, have even whispered the “B” word. Former L.A. Mayor Richard Riordan argued in a Wall Street Journal editorial last month that the city will most likely have to declare bankruptcy sometime between now and 2014. Also, several smaller markets, such as Harrisburg, Pa., and Jefferson County, Ala., have openly talked about filing for Chapter 9 bankruptcy — a reorganization available only to municipalities.
Municipal Bonds: The Next Financial Land Mine..?? Read more here.
Municipal bonds are typically issues by States and local governments to finance capital investments such as schools, roads, bridges, hospitals, court houses, water treatment facilities, sanitation equipment, etc. However, in recent years local governemnts have been issuing municipal bonds to finance their operating budgets, short-term deficits and other transient needs.
Getting back to the Oracle of Omaha, Buffett said the Federal government may end up having to bailout some States from their extreme financial woes. “It would be hard in the end for the federal government to turn away a state having extreme financial difficulty when they’ve gone to General Motors and other entities and saved them,” Buffett said at Berkshire’s annual meeting. “I don’t know how you would tell a state you’re going to stiff-arm them with all the bailouts of corporations.”
It would be hard in the end for the federal government to turn away a state having extreme financial difficulty when they’ve bailed out General Motors, Wall Street, AIG and other entities to save them, Buffett said, I don’t know how you would tell a State you’re going to stiff them after all the bail outs of private corporations. — Warren Buffett
Many State and local governments have promised overly generous retirement and health benefits to public workers without any viable plans to bring in the money necessary to pay for those benefits. They have assumed unrealistic returns in their pension fund investments and unrealistic revenue from taxes; and they have found increasingly “creative” vehicles and purposes for issuing bond debt – for example, so-called Tobacco bonds, “Big Mac” bonds, TANs, RANs, BANs, etc. The Pew Center on the States recently estimated that as of the end of 2008 budget years, states had $1 trillion less than needed to pay for future pensions and medical benefits. And that number doesn’t even reflect much of the losses suffered by pension fund investments in the 2H of 2008. “There will be a terrible problem, and then the question becomes will the Federal government help,” Buffett said at a hearing of the U.S. Financial Crisis Inquiry Commission in New York. But I think the real question is not will the Federal government bailout the States and large municipalities facing bankruptcy like L.A., Detroit, and Miami as it did for New York City in 1973-74; the real question is, canStates expect help from an already stretched-too-thin Federal government financing two wars, a Trillion dollar Wall Street bailout, a $700 Bn stimulus and a Healthcare package..?? Read more here.
Conventional wisdom would question how local and domestic finance might impact Federal finances and the national debt, so let’s make the connection. The State and local governments — over 50,000 individuals units all across America — are the conduits through which the Federal government collects most of its revenue via fees and tax receipts. Put a few kinks in the spigot, and pretty soon you have some serious economic hemmorhaging — potentially threatening every level of government in our nation. Add to this risk the economic ‘piling on’ of one increasingly expensive crisis after another inevitably raises serious questions of national economic security and foreign policy. Even now defense analysts and media pundits are raising questions about “re-defining” success in the Afghan war as the war becomes more “complicated,” while the Administration voices concerns about the financial weight the two wars it inherited lags on with seemingly no end in sight. Eventually all these financial constraints will constrain our ability to project our power and influence around the world. Which is precisely why Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff, stated in an interview last month that our financial health as a nation is directly related to our national security. Get it..??
Build America Bonds: An Obama Stimulus Success, Read more here.
