Friday, December 07, 2007

Another budget bust on Pittsburgh's horizon?

Pittsburgh is functionally bankrupt. Right now there are two state appointed boards that have final (and occassionally non-cooperative) say on all of Pittsburgh's budgetary decisions. The biggest problem for the city is a debt servicing problem. The city due to its previously higher population has a very large pension and other retirement obligations relative to both state aid (which is tied to the current number of municipal employees)and the current tax base and population base. Throwing in expensive to maintain aging infrastructure and the diversion of local and county tax revenues such as RAD to fund signature but negative net value projects, and Pittsburgh is in a pickle.

Everything that I have read strongly suggests that the overwhelming majority of Pittsburgh's debt is insured by one of the major bond insurers. This makes the municipal debt look decent despite the city having a credit rating that is not in the toilet but is "hovering over the toilet like a soused fraternity jock after a hard St. Patrick's Day, crying that, as God as it's witness, it will never drink like that again..."

Officially Pittsburgh is out of the intensive fiscal care unit, but re-admission looks probable as a series of short term fixes and freezes have not fixed the underlying structural problems in the budget. Some of these fixes such as the 50% parking tax are state mandated to decline despite what seems to be fairly inelastic demand for parking.

There could be another, wider problem coming in soon, and that is related to the general credit market crunch and more importantly the absolute crap that was reassembled, rematched, and released as AAA bonds that were insured for a song. Mish at Global Economic Analysis caught an ugly piece of news from Bloomberg on two of the dominant insurers:
MBIA Inc. had the biggest drop in more than 20 years in New York Stock Exchange trading after Moody's Investors Service said the biggest bond insurer is "somewhat likely" to face a shortage of capital that threatens its AAA credit rating.

"The guarantor is at greater risk of exhibiting a capital shortfall than previously communicated," New York-based Moody's said. "We now consider this somewhat likely."...

MBIA is among at least eight bond insurers seeking to ward off potential credit-rating downgrades by Moody's, Fitch Ratings and Standard & Poor's. The insurers guarantee $2.4 trillion of debt and downgrades could cause losses of $200 billion, according to Bloomberg data.
MBIA's problems are not isolated to their business model. There is a systemic problem in the bond insurance industry, and if there is a run on insurance due to collapses in bond values so that the perception of the value of the guarantee significantly decreases, Pittsburgh will be facing significantly higher debt service costs. These costs will occur either due to new bonds being priced at Pittsburgh's real credit rating of Moody's AA3 or priced at AAA with very expensive insurance premiums.

The city budget is heavily committed to debt service already, and a 50 or 100 basis point increase in interest rates is between a long term, recurring $5 to $10 million dollar hole in the budget.

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