By Dave Anderson:
The big public policy story in Western Pennsylvania is the ongoing Pittsburgh city budget fiasco. The mayor wants to lease out all of the city's parking assets to provide a short term infusion of cash into the city pension fund. City Council opposes that plan. The state may take over the pension plan administration and require higher ongoing contributions. The actuaries have revised their projections and under one probable scenario, any of the quick fixes would be insuffiicent to actually put a serious dent into the problem.
I recently spoke with a well-connected city focused wonk. She is convinced that the entire city decision-making system is stuck in a cycle of nihilistic ennui as no policy decision that is politically acceptable to discuss would actually solve any of the intermediate to long term structural problems of the city.
The one bright spot on the city's fiscal horizon is that the city has no need to go to the bond markets for new cash (instead of refinancing over the same time period) in the next several years. That bright spot allows for an unacceptable but significant budget gap opener to be a plausible solution; strategic default on any and all non-general obligation bonds issued by the city government. The city would save significant cash flow while the lawyers fight about the seniority of debt-holders for the next decade or more.
That approach is not yet part of the discussion in Pittsburgh as the city has several state oversight boards that are seeking to protect bondholders. However the Wall Street Journal reports that municipal defaults on non-general obligation bonds is becoming part of the municipal finance discussion instead of an immediate conversation killer and a marker of unseriousness:
Such cases are rare but could increase in number as municipal governments struggle to meet their obligations on projects that have run into trouble. The greatest default risk is in small municipalities with overleveraged projects buffeted by the recession. Those places also might need to access credit markets less in the future than big cities, making it easier to walk away from their debt...
"Where you have a stressed, weak government coupled with a weak enterprise, that puts bondholders at particular risk," says Robert Kurtter, Moody's managing director of U.S. state and local government ratings...
Investors in municipal debt backed by so-called appropriation pledges typically are unsecured creditors...
And once the first couple of distressed but not yet broke municipalities make the decision that the short term credit impact is much less politically expensive than the cut in general services or increased taxes meeting non-general obligation debts, all distressed communities will be paying risk interest rates or insurance premiums. So the first one out the door gets a significant advantage of freed-up cash flow and a faster reset on their creditability.
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