U.S. counties and cities are going bankrupt. County administrators and city managers blame employees and the employees' pensions and unions, with whom they contracted.
The real problem is not enough money. Bad insurance products are a much bigger cause of bad budgets than anything else including pensions. The root cause is the people who made, and make, bad budget decisions.
Interest rate swaps and credit default swaps ("CDS," another form of credit insurance) are not subject to pressure. Munis must pay the premiums. There is no exemption for derivatives, for which the munis contracted as a part of their financing, even if the munis declare bankruptcy. The derivatives manufacturers made sure of that. See, e.g., Mary Williams Walsh, "Detroit Wins $55 Million Concessions From 2 Banks" p. B1 (New York Times Nat'l ed., Wednesday, December 25, 2013); Mary Williams Walsh, "'Safe Harbor' in Bankruptcy is Upended in Detroit Case" p. B1 (New York Times Nat'l ed., Tuesday, December 24, 2013).
As a result, bankrupt debtors including counties and cities have no ability to pressure a creditor whose deal is backed up by law enforcement.
Nor do bankrupt debtors have any incentive to draw unwanted attention to their derivatives creditors. If they do, they might not get financing the next time.
Small-government or muni administrators who agreed to have their munis pay for these insurance products had and have little experience with them. They do not know what they are getting into. DENNIS J. WALL, 1 "LITIGATION AND PREVENTION OF INSURER BAD FAITH" §§ 3:109 & 3:110, "The New 'Credit Insurance?' Credit Default Swaps" & "Bond Insurance on and for 'Municipal Bonds,' and the Subprime Credit Crisis" (THOMSON REUTERS WEST THIRD EDITION AND 2013 SUPPLEMENT).
Employees, pension plans and unions are subject to intense pressure on the other hand. That pressure includes small-government officials putting out the story that government employees and unions are responsible for bad budgets. See Rick Lyman and Mary Williams Walsh, "Police Salaries and Pensions Push California City to Brink" p. A1, col. 5 (New York Times Nat'l ed., Saturday, December 28, 2013). The reporters' story is written much more fairly than the headline written by an editor suggests. But we know from previous New York Times reports in particular that bad financial insurance products are a much greater cause of bad muni budgets. Again, see, e.g., Mary Williams Walsh, "'Safe Harbor' in Bankruptcy is Upended in Detroit Case" p. B1 (New York Times Nat'l ed., published in print on Christmas Eve, 2013); Mary Williams Walsh, "Detroit Wins $55 Million Concessions From 2 Banks" p. B1 (New York Times Nat'l ed., published in print Christmas Day, 2013).
The root cause of bad municipal budgets today is the bad insurance purchasing decisions made yesterday. Those bad decisions were made by some if not most of the same muni managers that are also responsible for misdirecting our attention away from their bad insurance purchasing decisions, to the contracts they entered into for employee pensions, i.e., to their employees. County and city employees are to be forgiven if they are under the impression that small governments would stand by the contracts they made with their employees, too.
© 2013 by Dennis J. Wall. All rights reserved. No claim to original U.S. Government works.
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