You can't blame U.S. cities for eyeing the federal government's open vault and asking for a bailout, too.
Atlanta, Detroit, Philadelphia and Phoenix have all asked in recent days for some of the Troubled Asset Relief Program billions. You can expect more to ask.
Some want the government to spend the money on infrastructure-construction projects and to buy short-term note issues to help tide them over. Others want the money to help pay for employees and mass transit, among other things.
Whether you're a municipal bond investor or simply a taxpayer, this should make you feel a little queasy. This isn't good news.
It seems like we have been talking about recession forever. It's still early in the process, though, and we have tens of thousands more layoffsahead of us nationally. Even optimists think that 2009 is going to start off badly, and it's good to keep in mind that states and municipalities lag behind. Layoffs and shutdowns now translate into lower tax revenue next year.
And cities are already pressing the panic button?
So far, Treasury Secretary Henry Paulson has rebuffed the cities, telling them that the TARP isn't meant for them -- go home. The mayors may find more receptive ears on Capitol Hill, with their congressional delegations.
Firing People
As a taxpayer, I wish the federal government would just say no.
Cities, and states for that matter, should do what they have always done after bubbles burst. They have to reduce spending. They have to lower headcount. They have to cut services. They have to think about raising some fees and taxes, and borrowing.
None of these things is easy, especially firing people. It comes with the territory of being elected to run the nation's cities and states.
The argument against firing people is that such moves will just make things worse by throwing more people out of work. I can understand this, but it doesn't seem like all the nation's cities plunged into a death spiral all the other times they have been forced to cut back.
I'm not one of those who automatically think the worst about government, and you have to be careful about not generalizing, but the public sector isn't known as a model of efficient operation.
And here I'm not even talking about the pensions and other retirement benefits our state and local governments have handed out over the years, some more lavishly than others. That bill is still on its way to the table.
Record Defaults
Many cities, and some states, already are experiencing big drops in tax revenue. Desperate choices loom for some of them. They should make those choices. These are government entities with lots of options, not banks or financial-services companies or even homeowners -- all now the objects of TARP assistance -- facing bust.
This is a great time to bring up another piece of news that came out last week: Municipal bond defaults have set a new record, $6.24 billion, according to the Distressed Debt Securities Newsletter of Miami Lakes, Florida.
The previous record was $5 billion, set way back in 1991. The municipal default total for all of 2007 was $324 million.
A big portion of that $6 billion-plus is due to Jefferson County, Alabama. The newsletter has added the county's $3.8 billion in sewer debt to its yearly default total, although the county is still wrestling with the investment banks that hold the securities and may yet refinance the whole thing.
On the other hand, the county may file for bankruptcy.
`City of AAA'
That default figure for 2008 is likely to grow, and I wouldn't be surprised if we set another record in 2009. That's scary news for investors who have been told that municipal bonds almost never default (which is true), and who believe that there are such things as AAA and AA bonds. I'm sorry, but City of AAA doesn't sell municipal bonds.
I wouldn't be surprised if, this time around, we see the number of even general-obligation bonds that miss debt service payments climb. Some little cities and towns may just have to take a debt service holiday if the strain becomes too great.
The good news for investors is that municipalities generally make good on such missed payments, even if it takes years.
That is, if the municipal bond defaults of the Great Depression are guides.
(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Joe Mysak in New York atjmysakjr@bloomberg.net
