Public Unions Took Taxpayers Hostage - Taxpayers Lose Most When Munis Fluctuate

RealClearMarkets - Taxpayers Lose Most When Munis Fluctuate

How Public Unions Took Taxpayers Hostage

from Manhattan Institute Articles by Steven Malanga 1-26-11

Near panic in the market for municipal bonds has prompted talk of a coming Armageddon in state and local finance, with predictions of major bankruptcies and even a proposal to allow states, whose debt has been a safe haven for many investors for decades, to seek the protection of Chapter 9.

But the real losers in this game will not be traditional muni investors. That's because most big municipal issuers in America, despite their budget woes, do not face an imminent liquidity crisis of the sort that is likely to prompt massive defaults. Instead, these issuers have built up significant long-term obligations that legislators are now under increasing pressure (including pressure from the market) to deal with after having ignored them for years. The result is likely to be what I call the Illinois solution: some service cuts, moderate concessions from unions and big tax increases which politicians will justify in part by saying, ‘the market made me do it.'...

So far, at least one governor, Chris Christie, is trying to deal with both his state's long-term obligations and its short term deficit without raising taxes. It's a worthwhile effort. But New Jersey's politicians (and voters) have dug themselves such a deep hole that there is also no quick fix. The state still has problems balancing its budget even though it is not making contributions to its pension system, which require another $3 billion a year in revenues that the state doesn't have. Illinois is in similar shape.

Of course, there's always the chance that some unanticipated, ‘black swan' event could prompt a real liquidity crisis, perhaps by further rattling the muni markets and prompting a flight from the debt of those states and municipalities that have been most irresponsible. It is perhaps because Illinois legislators finally saw how jittery the muni market was about their budget that they finally decided to act earlier this month.

But absent any such unanticipated event, the real risk right now is not to bondholders from some massive series of defaults. It is instead to taxpayers who are about to take it on the chin.

[read the full article at the above link]