Municipal finance notes

By Dave Anderson:

Vallejo, California is about to emerge from Chapter 9 bankruptcy.  Most stakeholders are taking a haircut.  Retirees will pay more for their healthcare, defined benefit pensions are cut back and service levels will be maintained at the 60% of the pre-bankruptcy levels.  However the biggest haircuts are inflicted upon unsecured bondholders.  Bloomberg has more:

The plan allocates $5 million for unsecured creditor claims, which include those held by employees and retirees. About $50 million of debt is supported by the city�s general fund, its main account. Under the five-year plan, Vallejo would defer principal payments until 2013, then resume paying bond debt at about $1 million a year....

Marc Levinson, a lawyer with Sacramento-based Orrick, Herrington & Sutcliffe LLP who�s drafting the exit plan, said in an interview. �Every dollar that goes to pay creditors is a dollar that doesn�t go to fix a pothole or to help hire another police officer...."

Chris Briem, a municipal finance wonk, notes that the bondholders will receive payments from the bond insurers.  He also repeats the point that Pittsburgh (and several other Rust Belt cities) wish that they had Vallejo's pre-bankruptcy problems as that would represent dramatic improvements in their fiscal positions. 

Calculated Risk summarizes the major housing price indices:

In real terms, all three indexes are back to 2000 / 2001 prices. The real Case-Shiller national index is at a new cycle low, and the real Case-Shiller Composite 20 and real CoreLogic indexes are just above the cycle low (and will be at new lows soon)....With high levels of inventory, prices will probably fall some more. (My forecast earlier this year was for 5% to 10% additional price declines on the repeat sales indexes).

Property taxes lag property values.  This lag occurs because assessments lags.  This creates a nasty revenue and political dynamic that I've outlined before:

People who are stuck with mortgages and houses that they can not sell, refinance or service will be looking for help. They will be looking for refinancing deals, special breaks, holds on foreclosures, delays on credit reporting, and most significantly at the local level, assistance on minimizing the quasi-fixed costs.... and most importantly, constant and downwardly revising re-assessments without concurrent increases in millage rates......

Michigan is seeing a major municipal finance crisis because the assessment lag from the bubble crashing is coming into effect, and the amerliorating federal aid from ARRA is rapidly phasing out.  Quite a few communities will be facing significant cash-flow problems by Spring 2011 according to Bloomberg:

Cities and towns across Michigan have had property-tax collections plunge as much as 20 percent in the past year, the steepest drop since a 1994 state tax rewrite, forcing scores of communities to choose by March whether to borrow to pay bills or risk default on bonds.

The municipalities rely on property taxes for as much as 60 percent of their revenue, according to the Michigan Municipal League. State support that typically makes up an additional 20 percent to 35 percent of city budgets has been slashed by almost a third in the past year, during the longest recession since the 1930s.

The end of a three-year federal stimulus that sent $3.1 billion to Michigan -- a sum roughly equal to two annual budgets for Detroit -- will force �fundamental decisions,� according to a memorandum from the Michigan Senate Fiscal Agency...

The fall in property-tax collections comes even as Michigan is beginning to emerge from a long economic slump. The University of Michigan on Nov. 19 forecast a net increase in jobs in 2011, the first gain in more than a decade. The state�s economic activity in September reached its highest level since June 2008, driven by resurgent manufacturing

Every unit of government below the federal government has engaged in a multi-year game of beggar and bugger thy subordinates by grabbing revenue streams that traditionally flowed downhill to fill their own budget holes.  That game is coming to an end as there is no money left. 

Communities are coming to the point where local core services will either be cut to the bone to make bond payments, or default.  Forcing bondholders to take a haircut is politically attractive compared to gutting the schools, police, fire and road maitenance bugets.  And once a few communities make the decision to forgo the credit market by defaulting, most marginal communities will be shut-out from the credit markets by higher interest rates.