L.A. at mercy of bonds
Wall Street analyst Meredith Whitney declared on CBS’ 60 Minutes last December that the U.S. municipal bond market would experience 50-100 major defaults, totaling an apocalyptic net loss of “hundreds of billions of dollars.”
But the chaos has since faded, with rates actually declining significantly in some areas. It seems the speculation on default risk was just that — speculation.
Still, government default risk remains a problem, with one estimate pegging municipal default losses at $100 billion over the next five years. It remains unclear whether or not municipal bonds are out of the woods.
California is particularly susceptible to fluctuations in the municipal market, and it can hurt residents and impede the state’s economic growth.
Cities and towns in California have been hurt the most as a result of the municipal bond, or muni, fluctuations, as they are held to the same legal standards as the state — and are experiencing the same deep economic woes — but they do not enjoy the same ability to tap into large capital resources.
The City of Los Angeles is in particularly dire straits. Mayor Antonio Villaraigosa, after Los Angeles’ credit rating was downgraded last April, called for a twice-a-week shutdown of non-essential services to meet debt service obligations.
The cost of debt has risen as a result of the downgrade, and the volatility in the muni market has made it even more expensive for Los Angeles to issue debt for critical projects and to maintain current debt service payments.
The spike in muni yields has forced Los Angeles to use more money from both the general fund as well as the reserve fund, crowding out funding for desperately needed public services.
The state has its own budget problems and is in no position to extend meaningful aid to municipalities to help cover the cost of both debt service and public services.
Municipalities will have to seriously cut back their services or, as has been done in a big way in Los Angeles, shrink the public employment ranks to meet debt obligations.
The key question remains just how much cutting will have to occur.
Conceivably, if the muni market has stabilized after being hammered for the last several months, yields could decline and free up resources for municipal project financing, debt repayment and service provision.
Conversely, if negative forecasts are to be believed, municipalities could still be majorly constrained, with perhaps the specter of bankruptcy on the nearer horizon.
Students might not understand the financial impact the suffering muni market has on their daily lives.
But as students look to find secure employment upon graduation, it is vital to know the economic conditions they will face beyond the protective walls of USC.
What happens to the muni market in the coming weeks will dictate not only the quantity of services municipalities can provide, but also the larger economic health of the nation.
Here in Los Angeles, that translates into the very real possibility that the long, painful road to economic recovery could get even tougher in the near future.
Teddy Minch is a graduate student studying public policy and civil infrastructure finance.