Friday, June 29, 2012

Debt Dominoes

Basing the entire economy around debt is starting to look like a bad idea:
Surprised local taxpayers from Stockton, Calif., to Scranton, Pa., are finding themselves obligated for parking garages, hockey arenas and other enterprises that can no longer pay their debts. Officials have signed them up unknowingly to backstop the bonds of independent authorities, the special bodies of government that run projects like toll roads and power plants.

The practice, meant to save governments money, has been gaining popularity without attracting much notice, and is creating problems for a small but growing number of cities.

Data from Thomson Reuters suggests that local taxpayers are backing so-called enterprise debt at five times the rate they did 10 years ago. The resulting municipal bonds are sometimes called “double barreled,” because they are backed by both the future revenue of a project and some sort of taxpayer backstop. The exact wording and mechanics can vary.

With many cities now preoccupied with other crushing costs — pension obligations, retiree health care, accumulated unpaid bills — a sudden call to honor a long-forgotten bond guarantee can be a bolt from the blue, precipitating a crisis. The obligations mostly lurk in the dark. State laws requiring voter pre-approval of bonds don’t generally apply to guarantees. Local governments typically don’t include them in their own financial statements or set aside reserves to honor them.

The Governmental Accounting Standards Board on Monday released a draft of a new standard that would require governments to disclose details of the guarantees they have issued for other entities’ debts. The board started working on the new rules last year, after seeing more and more little-known guarantees coming to light.

The board’s research also showed that some guarantees were very large. The State of Texas, for one, has guaranteed the debts of all the school districts in that state, to the tune of a total of $50 billion. Texas has set aside about $25 billion, however, which analysts consider adequate. A number of states have also guaranteed venture capital projects.

Scranton’s version of a debt crisis began when a local parking authority said it couldn’t make a bond payment coming due in June, calling on the city’s guarantee. The authority had issued bonds to finance parking garages that the city had used in a campaign to woo Hilton Hotels and Resorts to operate a conference center downtown.

Each time the authority issued more bonds, the city backed them with a powerful “full faith and credit” guarantee. But by 2008 the authority had $54 million in bonds outstanding, and was spending about 60 percent of its budget on debt service — so much that it could not cut parking rates to compete with cheaper parking lots nearby.
With No Vote, Taxpayers Stuck With Tab on Bonds (New York Times)
There’s not a big, identifiable problem that’s driving Stockton, Calif., into bankruptcy. That’s why other cities are worried about its example.

Many of the high-profile public-sector bankruptcies over the past few years were triggered by massive projects that went bad, like the $3 billion sewer bond problem in Jefferson County, Ala., or Harrisburg, Pa.’s big incinerator. That has allowed municipal mavens to argue that forecasts of waves of bankruptcies from the likes of analyst Meredith Whitney are overblown.

The central California valley town of Stockton, however, has no such signature failure. Its woes are the result of a combination of many different factors.

Sitting beyond what was once considered the outer edge of the Bay Area, Stockton has been particularly hard hit by foreclosures. Its retirement benefits have been on the generous side -- people who worked for the city for as little as a month could count on health coverage for life. It also borrowed money during boom times for some high-profile projects along its waterfront. The city made some poor decisions, but nothing hundreds of other places haven’t done.

Because its recipe for disaster was not unusual, many other California cities are nervous. City officials from Fresno to San Jose are using Stockton as a warning of what could happen if they aren’t able to trim pensions and make other changes to what has been standard operating procedure.

“Stockton’s predicament varies only in degree from the woes faced by many other local governments in the state that acted as if the good times would last forever,” editorialized the San Francisco Chronicle. “It may be the largest to face bankruptcy, but it likely won’t be the last.”
Stockton, California’s Bankruptcy Makes 'Normal' Cities Nervous (Governing)

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