The Start of the Tsunami??

We’ve talked about the coming financial tsunami of public employee pension funds. That’s going to be a two to three trillion dollar shortfall in the coming years that nobody is even trying to address. A more immediate problem, that will have to be addressed, is “budgeted” spending by towns, cities, counties and states. I haven’t seen a projection of that number, but I think it’s safe to say it’s in the trillions as well.

Governor Chris Christie of New Jersey is achieving “hero” status with those on the right because he’s actually reducing spending in the Garden State to achieve a balanced budget. Tim Pawlenty took a shot at spending reduction in Minnesota as well and it looks like he may push his actions into a Presidential run in 2012.

They are exceptions. Pretty much everybody else is playing “kick the can”.

The latest edition of “Nightmare on Elm St” is happening in Harrisburg, PA. That’s Harrisburg, the state capitol of PA. The long and short of the story looks like this…

In 2003, the city decided to renovate its aging and inefficient trash incinerator — but the project quickly went awry and costs ballooned, leaving the city on the hook for $280 million-plus debt.

So, a unit of government lets a contract for several HUNDRED million dollars and costs went up. That’s probably never happened before. It’s interesting that the article doesn’t note what the original contract was for, but that would be an interesting number to dissect.

Anyway, Harrisburg sold bonds to cover the cost of their incinerator. Municipal bonds are historically viewed by investors as very low risk and are very attractive because they are typically tax exempt so they are able to pay a significantly lower interest rate. Well, as it turns out Harrisburg is looking for more help than just a lower interest rate.

Pennsylvania’s financially troubled capital city is trying to avoid painful budget cuts while city leaders feud over how to deal with a staggering debt that is threatening to drag the city into bankruptcy.

With Harrisburg’s newly elected mayor and city council at odds, the city is taking the rare step of skipping a $3.3 million general obligation bond payment due Sept. 15 as an alternative to laying off city employees, firefighters and police officers.

The city already has skipped millions of dollars in payments on bonds it backed for the costly and poorly managed renovation of a trash incinerator, including a $2.2 million installment due Sept. 1.

Bottom line, the city of Harrisburg is getting ready to treat their bondholders just like Barack Obama treated GM’s secured debt holders. They’re about to get screwed.

The real question is whether a court will allow the city to default and declare bankruptcy because they actually have a way out and it doesn’t even involve laying off overworked and underpaid city employees.

Last year, the [current Mayor] Thompson-led council rejected a proposal by her predecessor to lease the city’s parking lots, spaces and garages for 75 years to a private company in exchange for a $215 million up-front payment.

Oh, and how about a bail out by the state?

Gov. Ed Rendell has declined to bail out Harrisburg, and has endorsed the idea of the sale or lease of major city assets, such as the parking garages and an island in the Susquehanna that is home to a soccer field and a minor league baseball park.

Is the financial community watching this mess?

Fewer than 20 rating-worthy municipal bond issuers out of about 25,000 have defaulted, said Matt Fabian, managing director of Concord, Mass.-based Municipal Market Advisors, a municipal bond research firm.

Still, it wouldn’t take many defaults in the $2.8 trillion municipal bond market to possibly drive up the cost of borrowing for all municipalities, Fabian and others say.

The bottom line in all of this is that deficit spending is likely coming to an end, even for capital projects at the municipal and state level. It would be an interesting exercise to audit states – including municipal and county governments – and see if any are technically solvent. I would guess no. And I’m sure that any solution is going to be ugly, painful and long lasting.