Failed States Train Wreck Averted… for Now

A year ago, I approvingly cited research by Wall Street analyst Meredith Whitney who predicted a wave of municipal bond defaults by state and local governments. (See “The Next Train Wreck: Failed States.”) There have been a handful of spectacular flame-outs — most notably the city of Harrisburg, Pa., and Jefferson County, Ala. —  but they are exceptions that prove the rule, concludes a paper by the National Association of State Budget Officers, “Municipal Bonds in 2011: An Update on State and Local Borrowing.”

Write the authors:

Municipal defaults continue to be a very small percentage of both the number of issuers and the aggregate dollar value of outstanding tax-exempt debt. There were no defaults on state general obligation bonds and none had been expected. In the first nine months of 2011, there were 42 municipal defaults totaling $949 million, falling from the 79 defaults experienced in 2010, amounting to $2.89 billion. The declining number of issuers defaulting, and the decreasing dollar value of those defaults indicates that local governments and municipalities are better able to meet debt obligations this year than in 2010.

Further, the overwhelming majority of defaults were on bonds issued by hospitals, industrial development organizations, and housing development
projects, not general obligation bonds tied to cities, counties, and states with taxing authority. The Harrisburg and Jefferson County bankruptcies can be traced to monumental human error, not systemic conditions. Conclude the authors: “Trends in the municipal markets suggest state and local governments will continue to have access to capital for years to come.”

In the post I wrote a year ago, I feared the possibility that the federal government would be moved to bail out irresponsible states and municipalities. Fortunately, as financial conditions for the states gradually improve and as states from Wisconsin to California make tough choices, no federal intervention has been necessary. As the failure of the Congressional super-committee to craft a budget-fighting agreement drives home, the biggest systemic threat to governance in this country remains the federal government itself.


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3 responses to “Failed States Train Wreck Averted… for Now”

  1. If I’m not mistaken, the problem in Harrisburg was not so much economic condition, but a huge failed bet on an alternative garbage to energy plant.

    Could still be related to economics though. Less consumption less waste, less margin for expensive alternative systems.

  2. I think the Harrisburg deal was one of those public private partnerships where the private gets the profits and the public gets the risk.

  3. I think the whole idea of “failed” whether it is local, state or Fed is over-hyped in general.

    a govt entity that goes negative is not like a business that fails.


    Because.. even if a county…say Fairfax or Henrico or for that matter even the poorest county or town in Va goes belly-up… they will STILL be collecting taxes and generating revenues.

    It’s true… that creditors may take their fire engine or other infrastructure but at the end of the day – tax bills will go out and most will be paid and the money will… as Hydra always says…”go round and round”.

    For proof… I offer you Greece… which is still a country… still has significant business activity… still has people earning salaries …and still has people and businesses paying taxes.

    So I challenge the meaning of the term “failed” in the context of a govt entity.

    the worse that can happen realistically is that people will not receive payments and I’m not minimizing the impacts of that… but again… the govt entity continues on …. and worse than that.. just because a govt entity goes “broke” does not mean that new blood will take over and run it “right”.

    it’s just means some ugly stuff happens and no guarantee at all that another set of crooks (with different faces) takes over.

    then we have the really illicit narrative emanating from the right-wing blather butts…..

    “social security is a ponzi scheme”….. “my kids will never get social security”… ” the country will have to kill social security because it will no longer be able to pay for it”.. or the really good one – ” the trust fund is a bunch of worthless IOUs and because they are… Social Security is dead”.

    none of the above is true. It’s all part of a cleverly-constructed narrative that contains some facts, some truth mixed liberally with propaganda, lies, misrepresentations and disinformation.

    How do you know when this is being done?

    Usually when right wing sites like the Heritage Foundation opens their mouths with a “new”…”terrifying study” which then is obediently, with relish blathered long and hard by the right wing echo chamber and those appropriate dumb and gullible or too lazy to get the real facts which ironically includes many who support SS but are too busy to find out the truth.

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