I can’t see how we avoid municipal defaults

With the current policies state and local governments have adopted, we are looking at a catastrophic loss of tax revenue to state and local governments.

Nearly all of state government revenue comes from personal and corporate income taxes and sales taxes. With what will probably be the highest level of unemployment in US history looming, they aren’t going to be collecting much of either.

Spreads on municipal bonds (the risk premium investors demand to hold municipal bonds used to finance the construction of new government facilities and refinance existing debt compared to Treasuries, which are considered safer assets from a credit perspective) have instantly blown out.

State budgets can be lumped into four categories: (1) education spending, which is the largest category by far, (2) health care, which primarily means Medicaid spending, also a very large category, (3) pension contributions, which have been growing as pensions are underfunded and the population of older folks skyrocketed, and (4) everything else politicians want to spend money on, which includes the principal and interest due to be paid to bondholders for capital projects (any public facility).

If states are looking at preserving essential government services – and I don’t care what any hedge fund manager says to the contrary, that is ALWAYS their first priority – the easiest way now is to cut payments to bondholders.

It would not surprise me to see rapid layoffs of non-essential government employees and even teachers as revenues plummet. There is usually a months-long delay between when the economy craters and when that starts showing up in tax collections. But this is happening during the tax filing season, headed towards the end of the fiscal year for most state and local governments, when they expect an inflow of cash that some have even been borrowing against to be able to cash flow already.

From a human perspective, this could present a massive disruption for schools and Medicaid, which would affect the most vulnerable populations in our country immeasurably. This is why I was saying that this “shut the whole country down” mentality either has to stop or has to get as close to a total lockdown as possible to ensure it does not last very long.

This goes against my policy attitudes under any normal circumstances, but I think the federal government should guarantee a basic income to all Americans for a period of a few months at least. And by all Americans, I mean all Americans. Making the cut-off be $85,000 to receive cash is just penalizing the middle class in high cost areas, some of which have implemented the most draconian measures. If they go the total lockdown route, they should do this even if it means the Fed printing trillions of dollars. We are looking at a period of deflation now anyway, so don’t cry to me about inflation. This is healthy under these circumstances and needs to be done.

This will also help avoid a massive call for state bailouts – and don’t kid yourself, that is coming. States like Illinois, New York, and New Jersey were financially on the precipice before this event. They are fucked seven ways to Sunday now.

3 thoughts on “I can’t see how we avoid municipal defaults

  1. This is the scary reality of this pandemic. I work as a CPA in Chicago, and I’ve been talking about how the city needs to declare bankruptcy for years at this point. This might be the trigger that causes municipal gov’ts to finally do it. I am not looking forward to it.

    Liked by 1 person

    1. The city of Chicago is run like a literal Ponzi scheme, actually. They borrow money to pay existing bondholders, and have been doing that for years. They borrow long-term to finance projects with short useful lives and to pay for things like muliti-million dollar police brutality settlements. They essentially push operating costs into borrowing to be able to fund personnel-driven costs. They’ve been functionally insolvent for the better part of a decade, but politically connected financial institutions keep lending them money.

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