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More on Municipal Malfeasance

Posted by Larry Doyle on August 15, 2012 7:01 AM |

We should never discount the lengths to which some will go to fund a supposed immediate need via an exorbitant future expense. I highlighted specifics of just such a reality a few days back in writing Joel Thurtell Shames Poway, CA Financing.

What do others think of the financing Poway and other municipalities have undertaken? Not much. Bloomberg highlights further details of this horrendous situation in writing, California Schools Barring Taxes Push Bills to 2051,

California school districts are financing projects by pushing debt payments as far as 40 years into the future, defying a warning from the Los Angeles County treasurer while incurring interest that dwarfs principal by 10- to-1 or more. 

Last year, 55 school districts were among local authorities selling bonds that mature in more than 25 years, the most since 2007, according to data compiled by Bloomberg. The practice is akin to state and local governments raising pension benefits without funding them, said John Hallacy, head of municipal research at Bank of America Merrill Lynch. Increased retirement costs helped push Stockton and San Bernardino into bankruptcy court this year.

“It’s not so much kicking the can down the road as it is burying a drum of toxic waste in the back of the school,” said Jonathan Fiebach, a partner at Grant Williams LP, a Philadelphia investment advisory firm.

The practice persists in California, Illinois and other states, even though Michigan outlawed the bonds in 1994 and Los Angeles County Treasurer Mark Saladino last year counseled California school officials against issuing them.

San Diego County Treasurer Dan McAllister said many districts are struggling to come up with funding for much-needed expansion and modernization projects, causing them to turn to nontraditional instruments. McAllister has approved the longer- term bonds even though debt service on some “is a pretty outrageous proposition,” he said.

The Poway and Santee bond sales were managed by Stone & Youngberg LLC, which was acquired last year by St. Louis-based Stifel Financial Corp. (SF) Stifel’s media-relations department didn’t return phone messages left last week and yesterday.

Three of the 11 districts with capital-appreciation bonds maturing in 2051, including Poway, were advised by Dolinka Group LLC, a consultancy in Irvine, California, that has worked for more than 250 school districts, community college districts and county offices of education, according to its website.

The municipal market has traditionally had very low rates of default. Those days are gone. With more municipalities financially strapped, they have clearly forsaken any semblance of prudent financial management. One reader had expressed keen insight on these municipal financings,

Is not there some standard of “reasonableness” that should be in place here, such as a reasonable expectation that the loan can be paid back without “pie in the sky” projections for property values in place (e.g., CalPers anticipated returns for the State of California’s, now unfunded pension liabilities).

I know that after the meltdown there was much talk about the concept of reasonableness in mortgage lending. This seems pretty egregious and another example of so many people being asleep at the wheel.

Another reader also had two words of wisdom for investors.

Caveat Emptor.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.


  • coe

    Having served as a budget officer for a number of years for a fairly wealthy school district in a wealthy county, I feel compelled to comment that there is so much bloat and excessive waste built into these municipal budgets it is scary…the politicians tend to be scare mongers – trying to assert that essential services would be compromised with any serious effort to pare back the budgets…THAT IS PURE NONSENSE!

    Is the quality of local governance enhanced, say in NJ, where every small town has its own police force, school system and the full complement of departmental beaurocracy – I think not…

    The form of capital appreciation financing you point out is quite inapproipriate…your analogue to the mortgage origination process and problems is a good one

    How about taking a concerted look at a zero based budgeting exercise…I know it wasn’t wildly successful back in the Carter days, but these are very challenging times…

    I believe the root of municipal finance troubles resides in headcount and benefits costs…including the ridiculous pension entitlements that are choking the future.

    How about a little common sense and a whole rethink of the way municipalities form budgets and fund themselves? It’s way overdue and quite necessary these days.

  • fred


    Well said.

    “The politicians tend to be scare mongers – trying to assert that essential services would be compromised with any serious effort to pare back the budgets.”

    They always start with the schools because they know it will mobilize the moms, their objective to override property tax caps so that they can give their employees raises and avoid any layoffs.

    Department budgets always were and always will be “padded” a minimum of 10% and loaded with non recurring capex items (which shouldn’t be in the budget to begin with).

    Things were alot easier when property values were rising exponentially and nobody really cared about town budgets.

    Ah, the good ole days!

    • coe

      They were quite good! (But undeserved…)

  • JR

    The rating agencies really are the willing accomplices in faciltating the sale of this kind of debt….they are the enablers of an end run around the balanced budget requirement of municiplaities. A lot of the California CABs are AA rated ….reflecting low concerns about solvency over the “horizon” considered by S&P/Moody’s. The fact that the rating agencies would not push back against really flawed budgeting by the school districts reflects an ongoing weakness in the system. too bad there is not a grown up in the equation strong enough to stand up and say “This is nuts.”

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