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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.


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