Municipal finance quick-hits
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…
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…
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.
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Thank you for the article, Dave.
It made me think right away of the Dillon’s Rule states, like Virginia.
Am I correct in thinking that the response of local governments in those states will most likely be to aggressively jack up property taxes to attempt to address revenue shortfalls? Which means that residents wind up squeezed two ways: less local gov’t infrastructure, and at the same time less money in their own pockets.
(I suspect it is a good time to invest in senior care facilities, as this will price a lot of seniors out of their homes.)
I suspect it is a good time to invest in senior care facilities, as this will price a lot of seniors out of their homes.)
Nope, private prison stock because you get a little health care, food and a cot;) Sad isn’t. The best bet for cities, counties and state is default spread the pain.
despite my nym, i currently live in MI, and yeah, i’ve been waiting for this. don’t kid yourself: the uptick (which is slight) in jobs here is a result of the infusion of cash the govt gave to the auto companies, and most of that went to the rich executive class, and anyway it won’t happen next year. but GM isn’t taking that ‘record profit’ from the last quarter and building new plants here with it, yo.
the funny thing for someone like me is that i’m all in favor of munis spending less on crap we don’t really need. expensive traffic stop police cameras, shiny new police K9 units, stupid “improvement” projects that are basically handouts to muni officers’ crony buddies selling some bit of junk in the name of “beautification.” and of course, taxing the rich who live here? out of the question, because the muni officials who also make up the backbone of the party apparatus are too cowardly to even suggest such a thing to the higher ups in the state leg.
but yeah, it’s been interesting to watch. my family owns a few properties in this state, and i’m seeing how in each case, the “upside down” reality is hitting more and more of our neighbors. it’s fascinating, to know that really, the only thing preventing a total collapse in home values here is the sheer stubbornness of people like one neighbor, who insists on listing her house for about 50% more than it’s worth, and standing firm. she’ll never get that price; i don’t know what will happen to her but she’s almost ready to retire and can’t unless she sells. as i keep telling people who operate in the job market here: people who make a max of $14/hr with no benefits can’t afford even Flyoverland mortgage prices. sorry, but your $200K McMansion is worth about $75K, to the people who will actually stay here and try to buy a home. as for the real talent that has the misfortune to be born here? most of us move as soon as we are able, to places that offer real opportunity. i’ll be leaving as soon as i can, i know that much.
the future of America is Detroit. i’ve said it before, and so far, i’ve not been proven too wrong. smart progressives will check it out and the decisions that led to the conditions in that city today, for they’re coming to yours soon, if you’re not careful.
the only thing preventing a total collapse in home values here is the sheer stubbornness of people like one neighbor, who insists on listing her house for about 50% more than it’s worth, and standing firm. she’ll never get that price; i don’t know what will happen to her but she’s almost ready to retire and can’t unless she sells.
I’ve seen this a number of times in the past couple of years (since 2006) where people will simply list the house at a desired price and it just won’t sell, even after a year and longer. The owner doesn’t know the price of their house.
But what is more likely keeping house prices from collapsing is the large “shadow inventory” of bank-owned houses that the banks are not putting up for sale, hoping to dribble out supply, I guess, and keep prices higher than they would be if those houses were on the market. They’re not doing it out of stubbornness, I don’t think. The banks are doing it because if these houses were to become available, supply would farther outstrip demand, and as a consequence prices would drop. If these houses were then to be sold, the banks would have to acknowledge their actual value in their accounting, and this would lead to many banks becoming insolvent and closing. If the banks don’t make the houses available, they will continue to be businesses that pay their employees, at least for a little while longer.
as for the real talent that has the misfortune to be born here? most of us move as soon as we are able, to places that offer real opportunity. i’ll be leaving as soon as i can, i know that much.
There have been numerous news articles about this same “emigration of talent” happening in European states, specifically, Latvia and Ireland, for the same reasons.