Monday, March 26, 2012

Municipal Cuts

From the website we get this story, rather generalized about local government bankruptcies impending. this isn't news necessarily and inasmuch as this source is a financial advice website one has to wonder how much truth there is in the supposition that the crisis is upon us. Yet at all local levels we know services are being cut and with them the quality of life of our cities and schools.

For many, the horizon of U.S. economic recovery can now be seen in the not-too-far-off-distance. But on second glance, that faint line in the sky is actually the crest of a new tidal wave heading straight for the shores of the nation's cities and states.

From Miami to Phoenix; New York to California -- a growing wave of debt is forcing many once-thriving municipalities onto the edge of bankruptcy. And in the case of Jefferson County, Alabama -- which filed the largest Chapter 11 case in U.S. history last November -- right over that edge.

In the words of one recent news source: "The $3.7 Trillion municipal market is facing major headwinds. The rate of municipal bond defaults doubled to 5.5 a year in 2011 from 2.7 in the previous 39 years." (Associated Press)

As the list of under-water cities grows, the mainstream economists do a good job assessing the post-trauma of the municipal crisis.

But was there a way to identify the pre-conditions of said crisis before it occurred? Yes.

In his 2002 best-selling book Conquer the Crash (now in its second edition), EWI president Robert Prechter foresaw that one of the main lynchpins to city solvency -- municipal bond-buying (the other being tax revenue) -- would soon become vulnerable, as the economic downturn took hold. There, Prechter wrote:

"In the United States, default could happen to municipal bonds at any time after times get difficult. Politicians in many jurisdictions have borrowed and spent way more money than is likely ever to be paid back. Merely paying the interest on that debt in tough economic times will become an acute problem for many issuers. In such cases, default for many cities and counties will be inevitable."

The potential for municipal hardship was just one part of Conquer the Crash's blue-print. There, Prechter also anticipated that state leaders would respond to the crisis via cutting government services and wrote:

"School districts will have to adopt cost-cutting measures. The tax receipts that pay for roads, police and jails, fire departments, trash pickup, emergency (911) monitoring, water systems and so on will fall to such low levels that services will be restricted."

Now, according to a March 10 New York Times quote from New York Mayor Michael R. Bloomberg, these exact measures are now being followed:

"'We really are up against it,' Bloomberg said during a recent trip to Albany, urging the state to reduce pension benefits for future public employees...'Towns and counties across the state are starting to have to make the real choices -- fewer cops, fewer firefighters, slower ambulance response, less teachers in front of the classroom.'"

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