Saturday, March 01, 2008

More Municipal Finance Wonkery

Chris Briem at NullSpace is digging through the Vallejo California municipal financial problem, and compares it to the basic set of problems that Pittsburgh faces. Pittsburgh has problems that are as significant if not more so than Vallejo, and the issues come from two general areas. The first is the massive pension funding liabilities that have arisen from a combination of generous pensions, state pension aid formulas that are tied to current level of government employees and not past levels, declining population and short term and myopic government cash flor management. The second is a generic mass of municipal general obligation debt.

Pittsburgh currently has a barely investment grade credit rating and will be facing significant need to refinance elements of its debt in the next couple of years even if revenue holds up in the short term. There is some more bad news on the horizon and that is municipal bond interest rates are shooting through the roof. The Wall Street Journal has the story:

As a result of that surprising forced selling, yields on debt from municipalities and other tax-exempt issuers jumped to their highest levels in history, when compared with safe debt issued by the U.S. government. The average AAA-rated, 30-year municipal bond yielded 5.14% Friday afternoon, compared with 4.42% on a U.S. Treasury 30-year bond.

Remember, municipal bonds are tax free, so the pre-tax equivilant rate is roughly 8% compared to 4.42% for US Treasuries. And this if for good governments with significant reserves and a history of responsibility

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