Why are municipalities taking on so much debt? The simple answer: to keep up with spending. Taxes aren’t doing the trick. Remember, as opposed to individuals and businesses, who typically earn money in some way, the only way government “earns” money is via taxes. So if a government doesn’t take in enough in taxes to pay for its expenses, it has to borrow. Basically, it’s spending more than it earns. What’s all the spending about? Just as the federal government provides services (national defense, social and “entitlement” programs, internal security, all those government agencies, etc.), so municipal governments (states, counties, cities and towns) provide services: local roads, bridges and tunnels, public schools, trash collection, water and sewage services, police and fire protection, etc. Most of these are necessary expenses. (Yes, we know, in many cases, there’s a lot of fat that could be trimmed. But let’s keep this simple for now.) The fact is, even though some services have been “privatized,” government – state and local – still provides the bulk of these services in some way. Now all of this doesn’t count the pensions many of our municipal employees get. State and local employee pensions have been enhanced – to put it mildly – over the years, especially in states like New York and California. As a result, these two states – and many others – face large future obligations to pay pension benefits to their retirees. Once you start counting the pension obligations – current and future – you start coming up with some pretty astounding numbers like this: the unfunded pension liability for all the states right now stands at around $2 trillion. Oh, and let’s not forget Medicaid. Remember, the states, with some help from the federal government, have to fund that program. A survey by the Kaiser Family Foundation says that in fiscal 2009 the states estimated that Medicaid enrollment grew by an average of 5.4%, the highest rate in six years. It’s expected to increase 6.6% in 2010. A 1/28/10 paper by the Center on Budget and Policy Priorities says that total state budget shortfalls for 2010 and 2011 are estimated at $350 billion including gaps already closed and gaps projected for the future. Even after taking into account the federal Recovery Act dollars that should remain available for fiscal year 2011 ($40 billion), states will still have to close shortfalls of some $260 billion for fiscal years 2011 and 2012 combined. As you might imagine, we could continue piling on more numbers at this point, but let’s stop for minute to catch our breath and look at all this while using our common sense. The fact is, it’s nothing new that municipalities can’t raise enough money in taxes to pay their way. Since the 19th century, they’ve been raising money by issuing bonds – municipal bonds. Now, borrowing’s not the worst thing in the world. After all, most of us borrow to buy a home. But as many of us have seen, when the borrowing gets out of hand, trouble begins. And that’s pretty much what’s brewing for municipalities – trouble. There’s certainly some recognition of the problem. After all, cuts have begun in earnest in some states and cities. The difference between the trouble brewing for municipalities and the trouble we’ve seen in the case of some individuals and some businesses in the last couple of years is that municipalities have more ways of hiding their troubles – or at least giving the appearance that things aren’t all that bad. Not that individuals and businesses can’t fool you sometimes too. Companies fiddle with their books and fool their lenders, shareholders and employees from time to time. Remember Enron? Individuals also can fool us – for a while. Witness more and more McMansions in foreclosure these days – symbols of wealth that never really existed. Now they stand abandoned, empty shells built by borrowed money, no longer adorned with those shiny, expensive leased cars or filled with all that furniture and various trinkets bought with high-limit credit cards. But municipalities can fool us more and for a lot longer. And that may be what’s going on right now, as they continue borrowing in the face of ever-declining revenue. But why be surprised? When you look at the increases in municipal debt we outlined above, you see they’ve been keeping up appearances for years now. The question is: is there any limit? Put another way, will reality ever set in? Will municipalities continue to borrow more and more or will investors start to scratch their heads and wonder how they’ll ever be paid back? Right now, we’d have to say there’s very little scratching going on. Admittedly, we’re a bit on the conservative side, so it shouldn’t surprise you that our view isn’t universally accepted – that too many municipalities have borrowed way too much money. But, really, California and New York – with their budget deficits in the tens of billions – continuing to issue municipal bonds and investors continuing to lap them up…Are we really the crazy ones? Maybe it simply comes down to two related issues: the search for return and a belief that the federal government will ultimately save the day. If there’s one thing we’ve learned these last ten years or so as interest rates on CD’s, money markets and bonds plummeted , it’s that the search for return will cause people and institutional investors to take some pretty crazy risks to get a return on their money. As for the belief that the federal government will save the day, Henry Thornton described it this way in 1802: a central bank will be called on to bail out insolvent banks in order to avoid a wave of defaults. In 1878, Walter Bagehot, then criticizing the Bank of England, gave it a name: moral hazard. Like we said before, it’s nothing new. We’re running out of space this month, but there’s a lot more we can talk about next time. So next month we’ll just continue with:
For now, with Passover and Easter pressing in on everyone’s time, we’ll finish up with our promised link to the Presentation of the Rose – right after this Personal Note…Passover and Easter are pretty close together this year. When I was growing up, I liked it that way. We lived in what would today be called an “ethnic” neighborhood filled mostly with Irish, Italians, Polish, Jews, and some Germans. We all had our own traditions but we also shared them from time to time – like when Easter and Passover came together. My Mom would share her pizza grana with some of our neighbors and either Mrs. Rosenfeld or Mrs. Guttmann (I forget which) would bring us something they made for their Seder – usually gefilte fish. I wasn’t a big fan of gefilte fish, but I always enjoyed eating some with my Mom and Dad. Somehow the taste mattered less than the fact that we two were able to share something together that our Jewish neighbors had shared with us. It’s funny that I can’t remember which of these two ladies would bring us the fish. They couldn’t have been more different. Mrs. Guttmann was large and loud with a thick German accent. Mrs. Rosenfeld was short and petite, American born and bred. Mrs. Guttmann always made her points whether you wanted to hear them or not. You always had to strain a bit to hear what Mrs. Rosenfeld had to say. From time to time one or the other would ring our bell and come in and sit with my Mom. I had no interest in what they talked about, so I’d usually go about my own business. But whatever they talked about, my Mom always enjoyed their brief visits. And since my Mom liked them, so did I. When you grow up Italian-American, you learn that food is more than just fuel. But we weren’t the only ones who understood this. That’s why sharing food was so special. It helped me to recognize that we’re not made to live alone in this world. We were made to live with one another. Which brings me back to the Presentation of the Rose. Now, before you click the link – in case you’re not an opera fan – you should know that Octavian’s role was written for a soprano, but while it’s sung by a woman, the character is a young man. It’s just an old technique opera composers sometimes use when they want to blend voices a certain way – artistic license and all that. So don’t read anything into it. Anyway, I picked this particular link because one of the sopranos, Joyce DiDonato (who plays Octavian), introduces the scene a lot better than I can. It’s a concert version, so there’s no scenery and costumes. But the two sopranos act the scene out pretty well. You’ll see the “love at first sight” when Octavian and Sophies’s eyes meet. And I hope you feel the love captured in the unforgettable music and singing. I don’t know if either Mrs. Guttmann or Mrs. Rosenfeld were opera fans. And of course we certainly didn’t all love each other in our apartment building the same as Octavian and Sophie. But I am sure that it was some kind of Love that bound us all together then, in spite of our differences. The Love symbolized by the silver rose was in some way the same Love that we shared with our pizza grana and gefilte fish. Here’s the link. Wishing you all Happy Easter and Happy Passover,
Richard S. Esposito, ChFC Email: resposito@lighthousewm.com
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| Copyright © 2010 Richard S. Esposito. All rights reserved.
Disclaimer: Richard S. Esposito is Managing Member of Lighthouse Wealth Management, LLC, an investment advisory firm. Opinions expressed are his own and may change without prior notice. All communications are intended solely for informational purposes. Errors may occasionally occur. Therefore, all information and materials are provided “as is” without any warranty of any kind. Past results are not indicative of future results. |
