Municipal bonds are bonds issued by an American county, city, publicly owned airport, seaport, school district, or utility. The bonds are issued to improve the said cities or counties, or are tied specifically to a project within a county or city. Therefore, the bonds are backed by the county, city, or specific project. One general aspect of municipal bonds that makes them attractive is that they provide income with great tax benefits. Usually, municipal bonds are completely exempt from federal taxes. Municipal bonds trade in the bond markets, much like most of the other major bonds in the U.S.
The mainstream and politicians tell us the “wounds” of the financial crisis are over and the U.S. economy is in recovery mode. This simply isn’t true.
A few of the key indicators I follow to see where an economy stands are personal income, consumer demand, and businesses’ activity. All three of these indicators are telling me the U.S. economy is definitely going in the wrong direction.
First of all, the income gap in the U.S. economy continues to grow. The top earners make more, while the lowest income earners make less. According to the Wage Statistic from Social Security, in 2012, 23 million of the lowest wage earners earned a total of $47.0 billion in the U.S. economy. But those who earned $10.0 million or more annually in the year 2012 earned $64.3 billion! Here comes the kicker: there were only 2,915 wage earners in this category in the U.S. economy last year. (Source: Social Security, November 5, 2013.) Yes, you read that right. Less than 3,000 people cumulatively made more than 23 million people.
The bottom line: while Wall Street and big business has boomed again, the average working American family is struggling under an after-inflation personal income that is lower than it was in 2009—four years ago. In 1999, real median household income (that’s adjusted for inflation) in the U.S. economy was $56,030. By 2012, that number was $51,017. (Source: “Real Median Household Income in the United States,” U.S. Department of Commerce, September 18, 2013.)
Next, American consumers are pulling back on their spending—something that’s not supposed to happen when an economy is recovering.
One indicator of … Read More
We have seen cities like Detroit and others in California tell their municipal bonds investors, “Sorry, we can’t pay you.” The reason behind this? Their budget deficit was out of control, they reached the breaking point, and they filed for bankruptcy.
But the troubles of municipalities and cities aren’t behind us. In fact, they are marching forward with full force. And it’s not just rural cities and counties that are struggling to fix their budget deficit; major ones are doing the exact same thing. And truth be told, they are failing at it.
Take Fresno, California, for example. In the fiscal year 2014—which began on July 1, 2013 and ends on June 30, 2014—Fresno, one of the largest cities in California, will register a budget deficit of $6.0 million. If the city is unable to reduce its budget deficit in the fiscal year 2014, then its budget deficit can grow to as much as $32.2 million in the next five years. (Source: “FY 2014 Adopted Budget,” City of Fresno, California, May 29, 2013.)
And Fresno has worked very hard to keep its budget deficit under control. In the last four years, the city has decreased its workforce by 1,200 employees (25% of the city’s workforce), reduced or completely eliminated the maintenance and replacement of equipment, and now relies on volunteers for parks maintenance, community centers, and for different functions in the police department. The city has also reduced the number of employees working in public safety. One would assume that after this many cuts, the budget deficit would be controlled; but that’s certainly not the case for Fresno, California.
While … Read More
Detroit, once the emblem of the growing U.S. economy, had no other options than to file for bankruptcy. Other cities in California, and cities like Jefferson County, Alabama, have done the same for very similar reasons: registering a budget deficit year-after-year as revenues declined and costs rose—especially pension costs.
Municipal bond investors are crushed when cities file for bankruptcy. But that’s old news. Unfortunately, there could be many more bankruptcy situations at the city and municipal level going forward.
Cities across the U.S. economy are experiencing rising budget deficits, and contrary to popular belief, it’s not just smaller cities; major cities are in the same situation. In fact, two major American cities are in big fiscal trouble.
Chicago, the “Windy City,” is expected to incur a budget deficit of $338.7 million next year. By 2015, this budget deficit will increase to $1.0 billion, moving up to $1.15 billion by 2016. The city is in deep trouble as pension liabilities are soaring—police and fire pensions are in a cash crunch. (Source: Chicago Sun Times, August 1, 2013.) The city has received credit rating cuts and warnings from credit rating agencies. It owes billions of dollars to its suppliers and it can’t pay them.
Baltimore is in a similar situation. In February of this year, the city’s long-term budget deficit was projected to be $750 million. In a desperate attempt to fix the issue at hand—to reduce the budget deficit—the city cut about 2,200 dependants from the health insurance plan it provides to its employees. (Source: Baltimore Sun, August 2, 2013.)
When a city is faced with a budget deficit, … Read More
By now, we all know Detroit, once a notorious manufacturing hub in the U.S. economy, filed for bankruptcy. The city defaulted on its municipal bonds simply because it didn’t have the money to give its creditors. The city had three main reasons for filing bankruptcy: out-of-control budget deficits, declining revenues, and staggering pension liabilities.
Municipal bonds investors beware.
Detroit isn’t the first city to file for bankruptcy due to a budget deficit and default on its municipal bonds. We have already seen multiple cities in California and Jefferson County, Alabama do the same thing. Unfortunately, we might see similar troubles going forward—more cities are headed into a downward spiral due to budget deficits and pension liabilities, resulting in severe scrutiny for municipal bonds investors.
A senior fellow at the Brookings Institution (a public-policy not-for-profit research organization), Alan Mallach agrees with this notion. He said, “None of the other cities are far along, but there are dozens, if not hundreds of cities that have similar issues… Every other industrial city has problems that could send them down the same path.” (Source: Selway, W., “Detroit’s Bankruptcy Reveals Dysfunction Common in Cities,” Bloomberg, July 21, 2013.)
Chicago just witnessed a downgrade in its municipal bonds by credit reporting agency Moody’s Investors Service. The main reasons for the downgrade? Its budget deficit and rising pension liabilities. Analysts at the credit rating firm said, “The current administration has made efforts to reduce costs and achieve operational efficiencies, but the magnitude of the city’s pension obligations has precluded any meaningful financial improvements.” (Source: “UPDATE 1-Moody’s cuts rating on Chicago’s bonds, cites pensions,” Reuters, July 17, 2013.)… Read More
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