Muni Madness

"Investors are ignoring warning signs in the $2.8 trillion municipal-bond market, raising the risk of a reckoning, according to some market specialists. Numerous municipalities are struggling financially. ... But municipal-bond prices aren't reflecting much concern. Yields of municpal bonds, maturing in 2020 stood at 3.15% Friday, up slightly for the week but down from 3.3% in April. ... [Defaults] represented about $6.4 billion, or just .002% of outstanding municipal debt', [Matt Fabian] says", Ianthe Jeanne Dugan at the WSJ, 14 June 2010, link: http://online.wsj.com/article/SB10001424052748704067504575304782084631368.html.

Fabian, $6.4 billion / $2.8 trillion = .0023, not .002%. Check your arithmetic. Does anyone at the WSJ proofread anymore? I agree, the muni bond market is a disaster waiting to happen.

LA End Game

"Los Angeles is facing a terminal fiscal crisis: Between now and 2014 the city will likely declare bankruptcy. Yet Mayor Antonio Villaraigosa [AV] and the City Council have been either unable or unwilling to face this fact. ... Even if [AV] were to enact drastic pension reform today--which he shows no sign of doing--the city would only save a few hundred million per year. ... Five thousand is the number of employees added to the city's payroll during [AV's] first term as mayor. According to California's Economic Development Department, when [AV] took office there were 4.73 million jobs in Los Angeles and 252,000 unemployed people. Today, there are just 4.19 million jobs in [LA] and over 632,000 unemployed people. ... How have city leaders responded to this crisis? Pension officials have played accounting games, like smoothing the investment return over seven years rather than five years. ... And most egregiously, rather than laying off employees, city officials have shifted certain workers to agencies like the Department of Water and Power and the airport, which have their own funding. ... He continues to insist that bankruptcy is not an option for [LA] even as anyone who can count understands there is no other option", Richard Riordan & Alexander Rubalcava (R&R) at the WSJ, 5 May 2010, link:

http://online.wsj.com/article/SB10001424052748704608104575218392603082622.html.

Riordan is a former LA mayor. Rubalcava is an investment advisor. Yes, R&R, LA's bankruptcy looks inevitable. Got muni bonds? Sell!

Illinois Deficit

"Illinois lawmakers were in disarray Thursday as they groped for stopgap measures to address a $13 billion deficit equaling nearly half of the state's general-fund revenue. ... But the confusion in the legislature indicates that serious steps to fix state finances won't be taken until after the November elections--if then. ... An income-tax increase proposed by Democratic Gov. Pat Quinn is going nowhere. Even temporary steps, such as borrowing to make pension payments, have stalled. Illinois is months late on many of its bills and has no plan for catching up. ... A bill under consideration in the state House would give Mr. Quinn greater leeway to shift money among state funds and to require agencies to set aside part of their budgets now in case of future cuts. ... 'We are lucky in that we can still borrow,' [Donne] Trotter said, noting that lawmakers responded to rating-agency concerns last month by reducing pension benefits and lifting the retirement age for new state employees to 67 from 60. Lawmakers also are weighing the idea of postponing pension payments for the first half of the fiscal year until January, Mr. Trotter said. ... Mr. Quinn presented a budget in March that would still leave the state with a $10.6 billion deficit. His plan projected a deficit of $4.7 billion for the coming fiscal year beginning July 1--which he planned to cover through borrowing--and a $5.9 billion deficit carried over from the current budget. ... California officials said this week that April personal income tax collections lagged projections by 30% Federal estimates don't bode well for states, either", Amy Merrick at the WSJ, 7 May 2010: http://online.wsj.com/article/SB10001424052748703686304575228582377071698.html.

Illinois budget looks worse than California's. An old Chinese curse was, "May you live in interesting times". An updated version might be, "May your portfolio consist of 50% Illinois and 50% California muni bonds".

Multistate Debt Crisis

"California, New York and other states are showing many of the same signs of the debt overload that recently took Greece to the brink--budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay. And states are responding in sometimes desperate ways, raising concerns that they, too, could face a debt crisis. ... Connecticut has tried to issue its own accounting rules. Hawaii has inaugurated a four-day school week. California accelerated its corporate income tax this year, making companies pay 70 percent of their 2010 taxes by June 15. And many states have balanced their budgets with federal health care dollars that Congress has not yet appropriated. Some economists fear the states have a potentially bigger problem with their recession-induced budget woes. If investors become reluctant to buy the states' debt, the result could be a credit squeeze, not entirely different from the financial strains in Europe, where markets were reluctant to refinance billions in Greek debt. ... California's stated debt--the value of all of its bonds outstanding--looks manageable, at just 8 percent of its total economy, But California has big unstated debts, too. If the fair value of the shortfall in California's big pension fund in counted, for instance, the state's debt burden more than quadruples, to 37 percent of its economic output, according to one calculation. ... Unstated debts pose a bigger problem to states with smaller economies. ... State officials say a Greece-style financial crisis is a complete nonissue for them, and the bond markets so far seem to agree. All 50 states have investment-grade ratings, with California the lowest, and even California is still considered 'average,' according to Moody's Investors Service. The last state that defaulted on its bonds, Arkansas, did so during the Great Depression. ... Some states have taken even more forceful measures to build creditor confidence. New York State has a trustee that intercepts tax revenues and makes some bond payments before the state can get to the money. California has a 'continuous appropriation' for debt payments, so bondholders know they will get their interest even when the budget is hamstrung. ... In fact, New Jersey and other states have used a whole bagful of tricks and gimmicks to make their budgets look balanced and to push debts into the future. ... Some economists think the last straw for states and cities will be debt hidden in their pension obligations", my emphasis, Mary Walsh at the NYT, 30 March 2010: http://www.nytimes.com/2010/03/30/business/economy/30states.html.

Why shouldn't Connecticut have its own accounting rules? Doesn't Zimbabwe Ben? Who cares what state officals or the rating agencies say? NY's trustee does nothing for me. His existence is purely cosmetic. Do you still want to own muni bonds?

Los Angeles Is Scared

"Los Angeles is struggling to raise money and cut costs to fill a $200 million budget gap that could force thousands of layoffs and drive the city into bankruptcy. ... Officials ... worried that without the cuts, more businesses and jobs would flee the city, which has a 12.5% unemployment rate. ... 'If we didn't roll that [tax] back, there was a real chance many of them would leave,' said Austin Buetner, the mayor's new economic chief. 'They're high-paying businesses and the wages are spent in our city,' he said. ... Analysts say giving up cash for the prmise of job creation can be risky and doesn't always work. 'State and local governments are going to have to place their bets on what will bring in greater revenue and keep more jobs,' said Jessica Levinson, director of political reform for the nonpartisan Center for Governmental Studies in Los Angeles. 'It's a balancing act that every jurisdiction will have to face. Few governments have any room for error. Cutting taxes can mean laying off teachers and police officers to save cash. 'Most cities, counties and the states are strapped for cash and can't afford to make an ill-conceived gamble,' Ms. Levinson said", Tamara Audi at the WSJ, 9 March 2010, link:

http://online.wsj.com/article/SB10001424052748703954904575110003748502676.html.

Even LA taxpayers "vote with their feet". We'll see if LA's internet company tax reductions start a trend. Do you still want to own muni bonds?

Greece Now, California Next?

"While I have long predicted the collapse of the euro and eventually the European Union, I have to admit that Greece was not even on the periphery of my radar as a potential economic flashpoint. ... The response of the European Commission and the European Central Bank has been to take a page from Henry Paulson, former secretary of the Treasury in the Bush administration, and attempt to bluff the markets. ... State bankruptcies and monetary exits from the euro may not have been envisaged, but both are going to happen anyway. ... And it should be kept in mind that this is not an abstract exercise in American schadenfreude, as the more serious question is if the [US] financial system is itself strong enough to survive further economic pressure, since a number of US states, including Illinois and California, are now facing situations very similar to Greece. There is no known mechanism for a sovereign American state to declare bankruptcy", Vox Day at WorldNetDaily, 14 February 2010, link:

http://www.worldnetdaily.com/index.php?pageId=125098.

So the states won't file bankruptcy. They just won't pay their bonds.

BusinessWEAK vs. Pat Buchanan

"They are called the PIGS--Portugal, Ireland, Greece, Spain. What they have in common is that all are facing deficits and debts that could bring on national defaults and break up the European Union [EU]. Who brought the PIGS to the edge of the abyss? All are neo-socialist states that provde welfare for poor people, generous unemployment, universal health care, early retirement and comfortable pensions. Most consume 40 percent to 50 percent of their gross domestic product annually, a crushing burden on the private sector. ... For 30 years, the fertility rate of Europe has been below the 2.1 children per woman necessary to replace a population. In Russia and Ukraine, a million people disappear yearly. In Western Europe, the passing of the native-born goes on quietly, as Third World peoples come to fill the empty spaces left by the aborted and unconceived. ... These newcomers have neither the education nor the skills of the Europeans. Hence, they earn less and contribute less in taxes, but consume more per capita in social benefits. ... Thus the burden of pensions and health care grows steadily and the need for higher taxes and larger worker contributions increases. ... Greece is the first European nation to hit the wall. ... The EU'c crisis would then be like a crisis in the [US] should California default on its state bonds and interest rates on other municipal bonds surged to double digits. ... In every Western nation, government is growing beyond the capacity of taxpayers to bear", my emphasis, Pat Buchanan at Vdare, 9 February 2010, link:

http://www.vdare.com/buchanan/100209_pigs.htm.

"The [EU's] experiment with a single currency is deep in crisis because Europe failed to learn from the Greeks. ... Today's Sirens are the investors and traders of the global bond market, who lure nations into tapping abundant credit at low rates when times are good. ... Greece has fallen into precisely that trap. It got low-interest loans by promising to behave responsibily and keep its budget deficit low. ... At this point, Greece and the [EU] have no good choices left. It's hard to see how Greece can muddle through on its own. ... Yiannis Kelekis, 68, a retired construction worker who joined a demonstration in rainy Athens, complained: 'The people that caused the crisis are now asking for others to make sacrifices.' ... If the EU] refuses aid, the government could find itself unable to issue $26 billion worth of debt as scheduled this spring. ... Trouble is, extending aid isn't a great choice, either. ... For now, investors are pouring money into the US Treasury market as a safe refuge. ... When Greece joined the euro zone, its borrowing costs fell to near-German levels because bond investors bought into the theory that Greece had finally become fiscally responsible. ... According to economists Kenneth S. Rogoff of Harvard University and Carmen M. Reinhart of the University of Maryland, Greece has been in default for half of the time since it won independence from the Ottoman Empire in 1829. ... Greece and the EU wouldn't be in this no-win situation if they had followed their own rules from the start. But coming up with a failsafe mechanism that forces sovereign nations to do what's right when they feel like cheating is pretty much impossible", my emphasis, Peter Coy (PC) at Businessweek, 22 February 2010: http://www.businessweek.com/magazine/content/10_08/b4167018421438.htm.

Gary North's (GN) 17 February 2010 post at Lew Rockwell is about the PIGS: http://www.lewrockwell.com/north/north814.html. GN asks, "How wise is to to lend to wicked people? Not very". Consider what this implies for Treasury paper.

Obamacare anyone? California anyone? What's controversial about this?

PC is PC. He never suggests Greece reduce spending. Anyone who buys sovereign debt does it at his peril. The article was titled, "The Bond Vigilantes Who Left Greece in Ruins". Imagine, the bond market did it, not Greek government spending. Failsafe mechanism? Try the gold standard. "Lure nations"? Is Greece a naive 14-year old girl being seduced by Casanova?

Waiting List for Cops

"The bleak arithmetic of the recession has pushed cities across the nation to make deep cuts in police, fire and emergency medical services. ... Others have announced they will no longer respond to entire categories of calls, such as burglaries, check fraud, shoplifting and traffic accidents involving minor injuries. ... Public safety, considered a core government duty by voters on the left and right alike, has traditionally been protected from belt-tightening despite the fact that it consumes a big chunk of most budgets. ... Public safety accounts for 22% of general municipal spending nationally, according to US Census Bureau data. That's second only to education, which accounts for about 27%. ... Colorado Springs police no longer will deal with abandoned vehicles unless they pose a hazard. Officers are unlikely to respond to property crimes unless they have a solid lead on a suspect. ... Some police chiefs said the lean budgets have pushed them to do better. San Diego Chief Bill Lansdowne trimmed a number of specialized units to same money--including narcotics, canine and harbor safety--but assigned more officers to beat patrol", Stephanie Simon at the WSJ, 13 February 2010, link:

http://online.wsj.com/article/SB10001424052748704337004575059650511481356.html.

Property crime? Narcotics? What next? Will some cities stop enforcing prostitution laws? Stay tuned. Still want to hold muni bonds?

What's Chapter 9?

"Just days after becoming controller of financially strapped Harrisburg, Pa., in January, Daniel Miller began uttering an obscure term that baffled most people who had never heard it and chilled those who had: Chapter 9. ... Created in the wake of the Great Depression, Chapter 9 is widely considered a last resort and filings under it are more taboo than other parts of bankruptcy code because of the resulting uncertainty for everyone from municipal employees to bondholders. ... As their revenue declines faster than expenses, some public entities are scrambling to keep making payments on municipal bonds, And that is causing worry about the safety of securities traditionally considered low risk. ... For example, it isn't safe to assume that governments can raise taxes to cover shortfalls. ... Harrisburg Mayor Linda Thompson, a Democrat elected in November, opposes a bankruptcy filing and has presented an emergency plan that includes selling some of the city's assets. ... Since Chapter 9 was enacted in 1934, just 600 cases have been filed under the cose, partly because they require state approval. Some municipalities have found escape hatches, such as raising taxes. ... But many experts fear that a surge in municipal filings is unavoidable", Ianthe Dugan & Kris Maher at the WSJ, 18 February 2010, link:

http://online.wsj.com/article/SB10001424052748704398804575071591602878062.html.

Do you still want to own muni bonds?

California Death Watch-3

"California is deep in red ink again, according to a new report projecting that the cash-strapped state faces a $21 billion budget shortfall through June 2011. ... The state's Democratic controller, John Chiang, said on Wednesday that California could have trouble making payments as early as Spring 2010 if tax revenue remains below forecasts, among other reasons. Until at least June 2015, the report projected California will face annual budget shortfalls of about $20 billion. ... At one point, California was so close to insolvency it was forced to issue IOUs. ... Republicans, including Gov. Arnold Schwarzenegger [AS], opposing tax increases. ... 'The numbers cry loudly for California to focus on rebuilding our tax base,' said Democrat Darrell Steinberg, the Senate president. ... The new budget report said $6 billion of the projected shortfall in the current fiscal year is largely due to unrealistic budget assumptions about tax revenue and spending on schools and prisons", Stu Woo at the WSJ, 19 November 2009, link: http://online.wsj.com/article/SB125856632697953969.html.

"Facing a $21 billion shortfall through June 2011, California leaders want billions of dollars in budget relief from Washington that could head off deep cuts expected to state programs. Gov. [AS] will ask the White House to waive rules that require the state to spend its own money on certain programs to receive federal funds, according to California officials briefed on the Republican's coming budget proposal. ... His message: The national economy will depend on California's recovery. ... 'Under President Clinton, we got 94 cents back on every dollar we sent,' said gubernatorial spokesman Aaron McLear, citing data compiled by the nonpartisan Tax Foundation. 'Now it's 78 cents on the dollar. It makes no sense that California should be subsidizing programs in other states.' ... If the state doesn't receive federal aid, health and welfare programs could be eliminated, the officials said", my emphasis, Stu Woo at the WSJ, 31 December 2009, link: http://online.wsj.com/article/SB126222107949110937.html.

Absent a federal bailout, I don't see how California can avert defaulting its bonds.

Are you arguing against "progressive income tax rates"? That California gets back less than say Alabama results from California's higher average incomes. Look at The Guvernator's argument, it amounts to California is the Vampire Squid.

California's Begging Bowl

"California Governor Arnold Schwarzenegger, anticipating a $21 billion state budget deficit, plans to ask President Barack Obama to ease mandates and minimums on social programs to save as much as $8 billion. ... 'The problem is that there are no easy solutions left,' said Jean Ross, executive director of the California Budget Project, a Sacramento-based research group concentrating on issues facing the poor. ... The arsenal of one-time accounting maneuvers he and lawmakers have previously used to temporarly paper over parts of the gap--such as accelerating income-tax collections--have been mostly depleted, making efforts to erase the latest $21 billion deficit more difficult. ... The state also has struggled to implement cost-cutting measures that were part of the $85 billion spending plan approved in July. Courts blocked part of the budget that cut funding for home care for the disabled and another part that borrowed $800 million from an account that sets aside money for local transportation agencies. ... The state was the biggest bond issuer this year, selling $36 billion of debt", Michael Marois and William Selway at Bloomberg, 24 December 2009, link: http://www.bloomberg.com/apps/news?pid=20670001&sid=aFdI2wUyyroI.

My answer: bring back quartering! Don't feed me any third amendment crap either.

TAANSTAAFL-Stadium Style

"Years after a wave of construction brought publicly financed stadiums costing billions of dollars to cities across the country, taxpayers are once again being asked to reach into their pockets. From New Jersey to Ohio to Arizona, ther stadiums were sold as a key to redevelopment and as the only way to retain sports franchises. But the deals that were used to persuade taxpayers to finance their construction have in many cases backfired, the results of overly optimistic revenue assumptions and the recession. ... In 1996, voters in Hamilton County approved an increase of half of one percent in the sales tax that promised to build and maintain stadiums for the Bengals and the Reds, pay Cincinnati's public schools and give homeowners an annual property tax rebate. The stadiums were supposed to spur development of the city's dilapidated riverfront. ... The teams have not volunteered to rewrite their leases. So in the coming weeks, the county plans to cut back basic services, lower its legal bills and drain a bond reserve fund with no plan for paying it back. ... Mark Rosentraub, the author of the book 'Major League Losers,' said many of the stadium deals included 'revenue bombs,' with financial traps like balloon payments on debt in later years and sweetners like the Hamilton County property tax rebate to win public support", Ken Belson at the NYT, 25 December 2009, link: http://www.nytimes.com/2009/12/25/sports/25stadium.html.

No one should be surprised by this. My answer: default the muni bonds supporting these deals. Let the Bengals leave Cincinnati. Who needs 'em? Taxpayers support billionaire sports franchise owners and milionaire players with concessionary finance. Disgusting. Where are the supposed spinoffs? About 12 years ago we discussed these deals in my LA finanical group and concluded they made no sense and the projections that rationalized them were nonsense.

California Stimulus?

"If the world's eighth-largest economy were a company, it would have been on the edge of bankruptcy all year. California's legislature and its governor have already plugged more than $60 billion-worth of holes in the state budget, either by raising taxes or cutting spending. But as soon as one hole is filled, the economy--still bad, even if it no longer technically in recession--digs another. Mac Taylor, the state's non-partisan legislative analyst, now expects to see a deficit of $6.3 billion for the current fiscal year, which ends next June, rising to $14.4 billion next year. ... This means that California's legislature, having already made cuts that exceed the entire budget of many smaller states, must deal with another gap of $21 billion in the coming months. This is larger than, for example, California's entire spending on prisons and higher education combined. ... The problem, as in other states, is tax revenues are coming in below even pessimistic estimates and spending requirements that are rising with welfare claims and other legal requirements, such as Medicaid, the health system for America's poorest. ... The answer, suggests Taylor, must be a mix of additonal cuts and extended temporary taxes, although Republicans, a minority in the legislature large enough to block any tax or budget deal if they wish, are already saying no to more taxes as they prepare for an election year. But whatever the mix, taxing more and spending less is 'the opposite of what we should be doing' in a weak economy, says William Lockyer, California's treasurer, who is a Democrat", Economist, 3 December 2009, link: http://www.economist.com/world/unitedstates/PrinterFriendly.cfm?story_id=15020012.

Good luck Lockyer.

Back to California's Future

"Of all the states in the union, California has probably had a more durable and magical appeal for Americans than any other. ... California's future will not be like its past. The last several decades have witnessed a tragic despoilation of the Californian paradise. Both federal and state governments have set what could have been a shining outpost of European civility on a sure course towards third-world squalor. The single greatest threat to California's future is its buregeoning population. Thanks to waves of immigration and to high birth-rates among immigrants after they arrive, the state is growing almost as quickly as such developing countries as India and Brazil. Every year, there are about 700,000 more Californians, the vast majority of whom are non-white. Between 1920 and 1990 the state's population increased tenfold and now stands at more than 31 million. At current rates of increase, there could be nearly ten million more Californians by the year 2000 and yet another ten million the decade after. ... In the last 20 years, while the state's population increased by half, the number of Californians on welfare doubled. During the same time the prison inmate population tripled. ... As recently at 1970, California was 77 percent 'Anglo,' to use the currently fashionable term that reflects the Hispanic perspective. ... Los Angeles is only 40 percent white. Long Beach and San Jose are both about 35 percent white, and Oakland, which is 44 percent black and 15 percent Asians is only 18 percent white. ... During the 1980s, California received more than 2,300,000 legal immigrants and unkown numbers of illegals, but once they arrive, non-whites have more babies than native-born whites. ... The economic structure that supports this massive system of services and give-aways is breaking down. ... Currently, California has only 1.2 taxpayers for every recipient of tax dollars", Marian Evans at American Renaissance, Feburary 1993, link: http://amren.com/ar/1993/02/index.html.

"As California loses its white majority, it is also losing any sense of ethnic or cultural coherence. This will be the state's most devastating loss. ... The hatred they share for whites is hardly enough to unify blacks and Hispanics. Though the press is squeamish about reporting it, the blacks in South-Central deeply resent the influx of Hispanics. AR has already reported (Dec. 1992) on one of the irresolvable questions that face growing numbers of minorities. What happens to affirmative action benefits when there are no more whites left whose interests can be sacrificed? ... So where does this leave the poor bloody white man? It has begun to dawn on him that if public schools spend their time teaching Hmong and Guatemalans how to speak English there may never be time for algebra or Shakespeare. It has begun to dawn on him that as the numbers of tax money receivers overtakes the number of tax payers, he can look forward to having his very own, probably brown-skinned dependent to take care of. It has begun to dawn on him that the newcomers show few signs of becoming American and that they resent him because he is American. It has begun to dawn on him that as more than 600 black, Hispanic, Vietnamese, and Chinese gang members gun each other down every year, he might be caught in the cross-fire. Although there are times when parts of California still feel just like the paradise they used to be, more and more whites can see the future well enough to know that it holds no place for them. The white exodus has begun. ... Whites who would doubtless find 'ethnic cleansing' a loathsome horror in the Balkans do not hesitate to practice a form of it themselves. ... When neighborhoods lose their white majorities schools decay, crime increases, taxes rise, welfare proliferates, and what was once an outpost of civilization subsides into barbarism", Marian Evans at American Renaissance, March 1993, link: http://amren.com/ar/1993/03/index.html.

"Once the envy of the other 49 states, California has become the measure of failure. Historically a trend-setter, once again, as California goes, so may go the nation. ... 'The same pressures that drove the Golden State toward fiscal disaster are wreaking havoc in a number of states, with potentially damaging consequences for the enrtire country,' concluded the study, 'Beyond California: States in Fiscal Peril.' ... California, Illinois and New Jersey repeatedly have used borrowing or accounting schemes to put off tough budget decisions. ... The problem will only be aggravated by bailing out states like California that repeatedly have used poor judgment in relying disproportionately on cyclical industries, and that have borrowed excessively or employed accounting gimmicks rather than making tough decisions about which activities to stop doing, or do less of. ... The 'too big to fail' approach to fiscal management is merely more of the same poison that made these states so economically ill", Editorial at the Orange County Register, 2 December 2009, link: http://www.ocregister.com/common/printer/view.php?db+ocregister&id=222145

This was written almost 17 years ago!

Quoted without comment.

Amen.

Chanos on Munis

"James Chanos, the famed short seller who was among the first to forsee the collapse of Enron, recently sounded the alarm on the municipal bond market--in the hallowed halls of the New York Historical Society, no less. ... In a subsequent telephone interview with this columnist, Chanos said, 'State and local municipal finance are a mess and going to get worse.' ... California faces a $60 billion deficit, and the politicans there believe that in a worst-case scenario, the federal government will bail them out,' says Chanos. ... Ex- [New Jersey] Governor James McGreevy had bonded for current-account expenses before he resigned, and the bonding was stopped by the state's courts. His Democratic successor, former Goldman Sachs honcho Jon Corzine, promised property-tax relief to the middle class but couldn't deliver, and therefore got the boot. Given the scope of the problem, 'munis are a bad bet,' says Chanos", Tom Sullivan at Barron's, 9 November 2009, link: http://online.barrons.com/article/SB125755357455934925.html.

I agree with Chanos, munis are a disaster waiting to happen. "But many state constitutions require bond holders get paid first". So? If you think a piece of paper will protect you as a muni bond holder from the need to run: local police forces, courts, prisons, etc., you're nuts! See my 5 January 2008 post: http://skepticaltexascpa.blogspot.com/2008/01/municipal-bonds-at-risk.html.

Muni Bonds at Risk

"Municipal bonds are favorites of widows and others seeking stable, even staid places to tuck their money. This year, however, they have performed more like go-go stocks. ... Two facts go hand in hand with this kind of performance. One is that yields aren't as good as they were at the beginning of the year. The Bond Buyer index of 20-year general obligation municipal bonds is priced to yield 4.39% to maturity, down from 5.16% in January. The other is that the widows should be on guard against the risk. Something that can go up 46% can just as easily go down 32%, back where it started. ... So far this year, [investors] have dumped a net $60 billion into tax-free funds. ... Thus, a state that otherwise might have paid 3.9% on a long-term tax exempt bond instead offers a 6% taxable coupon, then gets 2.1% back from Uncle Sam. ... Build America Bonds [BAB] have two effects on investors. One is that they now have the option of tucking high-yield munis into their tax-deferred accounts like IRAs. The other is that states and cities are finding the [BAB] deal so attractive they are cutting back in issuance of conventional tax-exempt bonds. This has reduced the supply of, and driven down the yield on, tax-exempt munis of the sort you'd put in your taxable brokerage account. ... The shrinking supply of conventional munis has helped send yields on triple-A-rated one-year paper from 2.4% at the beginning of the year to 0.4% now. ... That has prompted investors to stretch to earn more. Some are doing so by buying longer-term bonds and assuming greater interest rate risk", my emphasis, Scott Woolley at Forbes, 30 November 2009.

Teresa Ghillarducci must be beaming. Imagine, you can put BAB's in your IRA. Good luck.

NY's Broke

"Gov. David A. Paterson took the rare step on Monday of addressing a joint session of the Legislature during its traditional off-season and used the speech to underscore New York's deepening financial crisis. Mr. Paterson repeatedly used stark language to describe the gravity of the state's economic health as he prodded lawmakers to make cuts he has proposed to programs long considered sacrosanct. ... The state's budget crisis and the negotiations between the governor and lawmakers over how to confront it have raised a fundamental question: Can New York, which is more generous in its social welfare programs than any other state, afford to continue to finance its expansive health care safety net and generous education spending? ... A growing number of budget experts believe that New York can no longer afford to spend so much in the wake of the economic crisis, rising unemployment, the collapse of the stock market and the travails on Wall Street--the state's main fiscal engine. ... 'We're going to fall off a cliff unless we get our revenues and our expenditures in true sync,' said Lt. Gov. Richard Ravitch, the adminstration's point man in budget negotiations with the Legislature. He said that the state could no longer rely on its usual strategy of turning to an array of short-term solutions or ask more of the state's taxpayers, adding, 'We're at the outer limits of the elasticity of our tax system'," Danny Hakim at the NYT, 10 November 2009, link: http://www.nytimes.com/2009/11/10/nyregion/10paterson.html.

"Desperate for cash amid the worst fiscal crisis in years, New York State is pursuing tax debtors more aggressively than ever before, doubling the number of cases it is investigating and seeking to collect from delinquents ranging from JPMorgan Chase to an out-of-business convenience store on the Bowery. ... By the end of this year the state's Department of Taxation and Finance will have filed the largest number of warrants ever in a single year and settled about a million open cases, the most in state history", Nicholas Confessore at the NYT, 10 November 2009, link: http://www.nytimes.com/2009/11/10/nyregion/10taxes.html.

Quoted without comment.

There is no place in NY for the middle class. Leave.

Lenin Visits New York

"An old saying goes that the time to live in New York is when you're young and poor, or old and rich--otherwise, you're better off somewhere else. ... Between 2000 and 2008, the Empire State had a net domestic outflow of more than 1.5 million, the biggest exodus of any state, with most hailing from New York City. The departures also have perilous budget consequences, since they tend to include residents who are better off than those arriving. Statewide, departing families have income levels 13% higher than those moving in, while in New York County (home of Manhattan) the difference was even more severe. ... In 2006 alone, that swap meant the state lost $4.3 billion in taxpayer income. Add that up from 2001 through 2008, and it translates into annual net income losses somewhere near $30 billiion. ... That pattern is consistent with the annual migration patterns, showing that highly taxed and economically lackluster states were most likely to end up in residents' rear view mirrors. According to the annual study by United Van Lines, states like New York New Jersey, Michigan and Illinois have been big losers in recent years. ... Liberals continue to insist that they can raise taxes ever higher without any effect on behavior, but the New York study is one more piece of evidence that this is a destructive illusion", Editorial at the WSJ, 28 October 2009, link: http://online.wsj.com/article/SB10001424052748703574604574499772371161800.html.

Lenin gets around pretty well for a dead guy. After visiting California, my 10 July 2009 post, he is now making the rounds east of the Mississippi, link: http://skepticaltexascpa.blogspot.com/2009/07/lenin-comes-to-california.html.

Wait Listed by Jail-11

"One of the newest residents on Arizona's death row, a convicted serial killer name Dale Hausner, poked his head up from his television to look at several visitors strolling by, each of whom wore face masks and vests to protect against the sharp homemade objetcs that often are propelled from the cells of the condemned. ... But in a first in the criminal justice world, the state's death row inmates could become the responsibility of a private company. ... The privatization effort, both in its breadth and its financial goals, demonstrates what states around the country--broke, desperate and often overburdened with prisoners and their associated costs--are willing to do to balance the books. Arizona officials hope the effort will put a $100 million dent in the state's roughly $2 billion budget shortfall. ... Assuming the company could operate the prisons more cheaply or efficiently than the state, any savings would be equally divided between the state and the private firm. ... Arizona is no stranger to private prisons or, for that matter, aggressive privatization efforts (recently, the state put up for sale several government buildings housing executive branch offices in Phoenix). Nearly 30 percent of the state's prisoners are being held in prisons operated by private companies outside the state's 10 complexes. ... For advocates of prison privatization, the push here breathes a bit of life into a movement that has been on the decline across the country as cost savings from prison privatizations have often failed to materialize, corrections officers unions have resisted the efforts and high-profile problems in privately run facilities have drawn unwanted publicity. ... As tough sentencing laws and the ensuing increase in prisoners began to press on state resources in the 1908s, private prison companies attracted some states with promises of lower costs. ... 'There simply isn't the money to keep these people incarcerated, and the alternative is to free many of them or lower cost,' said Ron Utt, a senior research fellow for the Heritage Foundation", my emphasis, Jennifer Steinhauer at the NYT, 24 October 2009, link:

http://www.nytimes.com/2009/10/24/us/24prison.html.

If the company can reduce costs, Arizona can hire it as a consultant, pay it a fee and reap the savings. I expect this to save Arizona nothing. Operating and financing decisions are separable. It doesn't matter who owns the prisons, what matters is what the new owners do differently.

California's Gestapo-2

On 19 October 2009 I received a letter from California's State Board of Equalization (SBE). What did the SBE, which collects California sales taxes want? I read the letter which described California's "qualified purchaser" concept and said I should register to pay California use tax on items I bought for which I paid no California sales tax. It said penalties and interest will be applied to late payments and I should also report my 2007 and 2008 purchases. Well "Ahrnold" come and get me. I sold my LA condo 34 months ago. I have no assets in California. Good luck "Ahrnold". Be warned, we Texans are well armed and if you send your "agents" to collect, we may send them back. You don't want that? We don't either. If I sent the letter to our local US attorney Tim Johnson, would he get a grand jury to indict the SBE for mail fraud, 18 USC 1341, or extortion, 18 USC 876? The SBE letter does not state with no California business you are exempt from registration. Hey "Ahrnold", did you hear of interstate commerce? The SBE's three registration conditions apply to every Texas business doing over $100,000 in annual sales. Go ahead SBE, come to Texas to collect your tax. We're ready. California is desperate. Got California muni bonds? Poor you. See also my 20 October 2008 and 25 July 2009 posts:

http://skepticaltexascpa.blogspot.com/2008/10/californias-gestapo.html.
http://skepticaltexascpa.blogspot.com/2009/07/leaving-la.html.