2012 White Paper Archive

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February 2010   March 2010   July 2010   August 2010   October 2010   December 2010

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	May 16, 2012 - Reuters - Puerto Rico’s black swans
	June 22, 2011 - Morgan Stanley Smith Barney - Munis and The Big Reset
	February 14, 2011 - The Bond Buyer - State Level Bankruptcy, No; Muni Bankruptcy Reform, Yes
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	May 18, 2012 - Weekly Recap & Corporate Update
	May 11, 2012 - Weekly Recap & Healthcare Reform Legislation's Potential Impact on Healthcare Bonds
	May 4, 2012 - Weekly Recap & Tax Reform
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	March 2012 - Puerto Rico's Challenge
	December 2011 - 2012 Credit Outlook
	July 2011 - State Credit Enhancement Programs
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Credit Outlook: Tough Policy Choices but Credit Quality Remains Resilient

Municipal issuers will again face unrelenting budget deficits and negative headlines in 2011. States forecast over $100 billion in fiscal 2012 operating deficits, and additional deficits in fiscal 2013. Local governments face similar imbalances. Municipal credit quality is likely to continue to diverge in 2011. Some governments will demonstrate a greater willingness to tackle deficits this year which will, in turn,


impact their ability to meet obligations over the long-term. A “wave” of defaults seems unlikely in 2011, but an uptick in defaults over the next 12-24 months seems probable. The medium- and long-term challenges facing lower-quality issuers are noticeably greater than those facing higher-grade issuers, and a handful of very weak issuers may succumb to high unemployment rates, assessment declines, tax appeals, and the end of federal stimulus. We believe that our long-standing, bottom-up approach to fundamental credit analysis is now more important than ever.

Despite the grim policy environment, credit quality remains sound for most state and local governments: debt levels appear manageable, liquidity is adequate, rollover risks are limited, pension obligations remain tamable, and alterable spending programs drive today’s budget deficits, not fixed debt service expenses.¹ This fiscal setting portends relatively few municipal defaults. Defaults provide little budget relief while inviting larger deficits, a loss-of-access to credit, lawsuits, and political backlash. As we discuss below, today’s credit fundamentals belie misconceptions about municipal debt as reported in the news.

Misconception 1

State and Local Debts are Unprecedented and Overwhelming

U.S. municipal debt levels remain manageable. Outstanding state and local debt is presently 16% of GDP, well within the post-1978 range of 12% to 18%.²

Annual carrying costs also remain relatively tame. Principal and interest costs for most high-investment grade issuers are less than 10% of revenues.³ During prior municipal debt crises, servicing costs were far more burdensome. When several states defaulted on their debts in the 1840s and 1870s, interest payments sometimes comprised 100% of revenues,⁴ and during the Depression, most issuers faced servicing costs exceeding 20%-of-revenues.⁵

Even when pension liabilities are included, municipal debt levels appear reasonable. Unfunded pension liabilities and outstanding bonded debt comprise a smaller share of state economic activity than does bonded debt in other major countries. For example, in 2008, bonded debt, unfunded pension obligations, and unfunded retiree healthcare debts comprised 35% of Hawaii’s gross state product, tops among U.S. states.⁶ That year, bonded debt alone comprised 65% of GDP in Germany and 63% in France.⁷


Municipal debt levels have remained stable, in part, because of the due process requirements attendant to its issuance. For example, voters usually approve general obligation bonds for infrastructure projects, and the approval process usually requires multiple public hearings, on-record votes by public officials, and legal opinions by bond attorneys. This due diligence contrasts with the relatively lax lending standards for corporate and individual borrowers between 2000 and 2008. It also contrasts with the severe lack of regulation exhibited in the municipal market during the Depression-era.⁸

Misconception 2

Municipal Issuers are “Cash-Strapped”

State and local governments finished fiscal 2010 with adequate reserves. U.S. cities reported a collective fiscal 2010 general fund balance of nearly 20% of revenues – better than during the last two recessions.⁹ States’ fiscal 2010 balances were 5.6% of expenditures.¹⁰ Year-end balances can be understood as a proxy for “reserves.”


The stable liquidity position of state and local governments is attributable to their monopoly powers and public finance laws. During recessions, governments use their monopoly pricing power to raise revenues, cut services, and delay payments to vendors. They are aided in these efforts by laws that require balanced budgets, prioritize debt service, and mandate year-end reserve levels.

State and local governments’ durable liquidity characteristics also reflect their stable revenue streams and super-priority status with respect to tax collections. Government revenue generally lacks significant volatility. Unlike households, governments do not face the possibility of months without income. Also, governments benefit from their ability to punish tax cheats. A citizen’s obligation to pay taxes is materially different from a customer’s obligation to pay a business for its services.

Misconception 3

State and Local Governments Face “Rollover” Risks

State and local debt is old fashioned and stable in design. It is relatively well insulated from rollover risk.

Municipal debt generally finances long-term infrastructure projects that the government owns, and debt service payments are typically “level.” Governments repay bondholders in equal, periodic payments just as a mortgage is repaid to a bank (see chart below comparing California and Illinois’ repayment schedule to the bulleted maturities faced by sovereign issuers).


Short-term refinancing risks are also low. Short-term debt represents a small (6%) portion of the state and local market,11 and when short-term notes are issued they are generally repaid with ample ongoing tax revenues, as opposed to new short-term debt.¹²

Misconception 4

Unfunded Benefit Obligations Imminently Threaten Bondholders and Policymakers are Failing to Act

State and local governments’ unfunded pension and retiree healthcare obligations continue to grow, but for most issuers, these obligations remain a medium- or long-term problem. In 2009, state pension fund contributions comprised 4.7% of state revenues¹³ and plans assets exceeded 13 years of benefit payments.¹⁴ Only one high-profile issuer, Puerto Rico (BBB-/stable) is near to exhausting its pension assets. That issuer is four years away from pension fund insolvency.¹⁵ It has yet to default on any obligations. By contrast, Illinois’ woefully underfunded pension funds are unlikely to reach Puerto Rico-status until sometime around 2022.¹⁶

Pension underfunding was addressed by lawmakers in nearly every state in 2010.¹⁷ The most common actions included delaying the retirement age and increasing contribution rates for future workers. However, benefit cuts and contribution increases were imposed on current workers in at least nine states.¹⁸


The most dramatic reforms took place in Colorado, Minnesota, and South Dakota. There, lawmakers imposed cuts on retired beneficiaries. This kind of change was believed illegal and politically impossible only a year ago,¹⁹ but it is now spurring debate elsewhere.²⁰ Reducing retirees’ benefits saves a lot of money. A one percent reduction in annual cost-of-living adjustments reduces pension fund liabilities by 9% - 11%.²¹

Importantly, voters have generally supported pension reform efforts. Support for labor unions is at an historic low (48%) in the United States,²² and in bellwether California, 70% of residents support converting state employees’ retirement benefits to 401k-type plans.²³

Misconception 5

Obstinate Public Employee Unions Will Force Bond Defaults

Elected officials and labor leaders are more likely to renegotiate unfunded employee obligations than they are to default on their bonds.

For management, default signifies administrative incompetence and invites political backlash. Politicians who permit default must convince angry taxpayers (who often own their government’s debt) to re-elect them while governing in a post-default environment of higher taxes and fewer services.

For elected labor leaders, default is also a choice of last resort. Defaults induce more layoffs than necessary, shrinking the size of the rank-and-file while dampening union morale. A default also makes it more likely that public employees will be forced to accept 401k-style retirement plans instead of pensions (a switch adamantly opposed to by labor leaders because pensions are a major union recruiting tool.) Moreover, typical labor coalitions are split on the issue of default. Private sector trade unions, including those for electricians, carpenters, and construction workers, generally oppose defaults because they benefit from bond-financed infrastructure projects.

Renegotiation of benefit obligations has so far been the norm for state and local issuers; defaults have been the exception. In Minnesota, the state employees’ union supported cost-of-living reductions for pensioners to avoid killing “the goose that lays that golden egg.”²⁴ In California, the lesson of bankrupt Vallejo has been that “out-of-court negotiations yield better results” for elected officials, labor leaders, and taxpayers.²⁵ Chapter 9 has cost Vallejo over $9 million in legal fees that could have been used to mitigate wage and benefit cuts for policemen and firefighters. (Nine million dollars is an amount equivalent to 12% of Vallejo’s general fund budget.²⁶)

Misconception 6

Governments Are Incapable of Fiscal Austerity and to the Extent They Have Cut Spending, There’s No “Fat” Left to Cut

Over the past two years, state and local governments have cut spending and increased revenue to balance operations. In fiscal 2011, state general fund spending will be 7% below fiscal 2008 levels. Twenty-four states increased personal income, sales, or corporate income taxes in 2011.²⁷ To date, these spending reductions and revenue enhancements have been traditional in character (e.g. laying-off workers, eliminating programs, etc.).

Balancing state and local budgets in fiscal 2012 and beyond will require wholesale changes in the way governments deliver, and pay for, public services. The National Governor’s Association has labeled the new budget environment “The Big Reset.”²⁸ Policy reform is likely to focus in three areas: human resources management, tax simplification, and mandate relief.

Spending reforms are likely to be concentrated in the human resources function. Most state and local governments have yet to address health benefits, renegotiate union contracts, or reduce pension benefits for employees (see chart below). These


budget items comprise a significant portion of state and local issuers’ long-term structural deficits and must be addressed to ensure solid credit ratings over the long-term. Governors in Ohio and Wisconsin have proposed to eliminate public employee collective bargaining rights to gain negotiating flexibility with respect to these obligations.²⁹

Revenue reform is likely to include simplifying state and local tax codes by expanding the tax base and lowering tax rates. Tax exemptions and deductions cost states billions of dollars in income, sales, and property tax revenue each year. Lowering rates and eliminating exemptions can often increase government revenues without sacrificing growth. There is significant revenue potential to these reforms. For example, New Jersey will lose $2.1 billion in income tax revenue this year as a result of exclusions.³⁰ Sales tax exemptions will cost Connecticut over $3 billion.³¹

Regulatory reform, including “mandate relief,” is also likely in fiscal 2012. States are likely to simplify rules for municipal mergers, eliminate burdensome work rules for local governments and public universities, and curtail prevailing wage requirements (which force governments to pay union-scale wages for certain construction projects).

Misconception 7

Municipalities will Declare Bankruptcy to Impair Debt and Force Union Concessions

Municipalities are unlikely to seek bankruptcy protection either to impair debt or to seek union concessions. It is extremely difficult for local governments to access the bankruptcy code, and once accessed, the code does not always empower a municipality to abrogate its debt obligations. Rather, the uncertainty associated with a bankruptcy filing is the main risk posed to municipal bondholders. A bankrupt municipality is likely to return investors their principal and interest, but selling tainted bonds might prove challenging.

Municipalities’ access to the bankruptcy courts is limited. Twenty-four states prohibit municipalities from filing for Chapter 9 of the bankruptcy code.³² In these states, federal law requires municipalities to repay bondholders absent a negotiated solution.³³ Bondholders are therefore in a strong negotiating position when a state appointed receiver or control board is assigned to resolve a municipality’s fiscal problems.

In twenty-six states, municipal bankruptcy is permitted, but accessing the bankruptcy courts is far from guaranteed. Municipalities must prove they are “insolvent” to enter Chapter 9.³⁴ This is difficult. A municipality is insolvent only if it is both unable to pay its debts as they come due and cannot access credit (whether from the state, vendors, or private investors).³⁵

Once “in” the bankruptcy court, abrogating debt contracts is challenging. Most revenue bonds are exempt from the automatic stay in bankruptcy,³⁶ and in some states, including California, general obligation bonds are exempt from the stay.³⁷ Debt service on these bonds typically continues uninterrupted in a Chapter 9. In states where general obligation bonds are subject to the automatic stay, the time honored tradition is to continue making debt service payments. Governments honor general obligation debt because, regardless of bankruptcy rules, the general obligation pledge is the “gold standard” covenant in the municipal market. Defaulting on such a pledge makes it more difficult to access credit precisely when a municipality needs it most: during a restructuring.

Issuers generally use bankruptcy to restructure overwhelming obligations. Manageable obligations are less likely to be impaired. If an issuer over-borrows, bondholders might make concessions while other creditors remain unimpaired. When labor costs trigger the bankruptcy, employees make concessions and bondholders remain unimpaired (e.g. the San Jose School District in 1983).³⁸

The primary credit concern related to municipal insolvency is the uncertainty associated with the process. There is a dearth of Chapter 9 precedent, and resolving a municipal bankruptcy often takes years (federal courts have limited power to force a resolution between a debtor and its creditors in Chapter 9). The demise of the bond insurance industry adds additional uncertainty insofar as future recovery rates could conceivably be worse for investors. Finally, it is possible (though unlikely) that municipalities’ respect for the general obligation pledge may have lessened in the post-Great Recession environment.

Default and recover rates suggest that investors are likely to receive timely principal and interest payments during a Chapter 9 or state-based insolvency proceeding. The issuer, a guarantor, an insurer, or the state usually steps-up to make payments. At the very least, bondholders are likely to be made whole, eventually.³⁹ However, it is likely that bondholders will be less able to sell their bonds at par while the taint of insolvency lingers.

Misconception 8

Municipal Disclosure is Inadquate and Oversight is Weak

Financial disclosure and oversight in the municipal market is far better than realized.

Most state and local governments provide publicly available annual financial reports that provide more-than-enough information to adequately assess credit quality. These statements are available through issuer websites and the Municipal Securities Rulemaking Board (MSRB) via “EMMA” (Electronic Municipal Market Access).⁴⁰ In addition, municipal governments often make available prospective budgets, five-year capital

Select Disclosure and Oversight Differences Between the Private and Public Sectors
Oversight	Corporations	State and Local Governments
Centralization	Mostly centralized process driven by federal and state regulation.	Mostly decentralized process driven by the separation of powers inherent in a republican form of government and a free press.
Key “Regulators” of Investments	4,000 SEC employees oversee 35,000+ entities with the help of self regulating organizations (SROs) including FINRA, NYSE, NASDAQ, and other organizations. State securities regulators and attorneys general also play a role in the regulation of investments.	Executive branch agencies, state oversight boards, state and local debt commissions, state legislative review committees, the press, whistle-blower statutes, attorneys general, the MSRB, and the IRS regulate the muni market, among others.
Obligation to Report Fraud	Strong for publicly traded companies. Securities laws require managers and directors at publicly traded companies to report SEC violations.	Strong for both large and small issuers. Managers/Directors are public officials with legal obligations to speak out and act in the public interest.
Disclosure
Sources of Information	Corporations disclose information through 10Q, 10K, and 8K reports. Managers/Directors must keep silent pursuant to “blackout” and other disclosure rules.	State and local governments disclose information through annual reports, public hearings, newspaper articles, videos, public transcripts, monthly budget reports etc. Governments must disclose most financial information subject to federal law through freedom of information requests.
Bond Analyst’s Over-arching Goal	Analyst wants to assess how efficiently a company generates cash-flow.	Analyst wants to assess extent to which debt service competes with other budget priorities for today’s (and tomorrow’s) resources.
Information Disclosed	Sales figures, covenants, cash position, cashflows, revenue centers, cost centers, market position, coverage ratios, leverage targets, etc.	Annual debt service expense, amortization rate, property values, tax collection rates, expenditure characteristics, revenue sources, pension obligations, retiree healthcare obligations, demographic and economic fundamentals, major employers, year-end reserves, depreciation rates, cash management rules, etc.
Pensions	Obligations are accounted for on the balance sheet.	Obligations are reported in the notes section of the financial statements and in the fiduciary funds statements.

plans, minutes of board meetings and public hearings, and monthly revenue and spending disclosures. Also, state governments collect and report data on their school districts and municipal governments. None of this information is proprietary, and virtually all of it is subject to freedom of information requests. There is a good argument to be made that many municipal governments have better disclosure than publicly traded corporations, at least if one knows where to look and how to analyze public sector financial statements (which employ two sets of accounting statements).⁴¹

Oversight in the municipal sector is also stronger than generally understood. Municipal officials and their actions are policed by a host of distinct actors including state intergovernmental finance commissions, whistle-blower statutes, newspaper reporters, debt commissions, legislative audit committees, politicians, municipal finance laws, attorneys general, underwriters, financial advisors, the MSRB, and the Internal Revenue Service. This oversight system is fragmented, but its decentralized nature has served the market well for several decades. Oversight in the corporate sector is far more centralized, predominated by 4,000 SEC employees and self-regulating agencies including FINRA, NYSE, NASDAQ, and other organizations.

Misconception 9

Harrisburg, Jefferson County, and Vallejo Foreshadow a “Wave” of Defaults

The much publicized defaults of Harrisburg, PA, Jefferson County, AL, and Vallejo, CA were triggered by factors other than the Great Recession. Each default had an independent underlying cause, and in each situation, creditor protections were weak, and retail investors were insulated from the default. Harrisburg’s debt situation results from the city’s guarantee of a failed incinerator project. Investors in Harrisburg’s incinerator bonds were secured primarily by


the incinerator project’s revenues. Guarantors, including an insurer and Dauphin County, PA, are now making timely debt service payments to keep bondholders whole.

Jefferson County’s debts are predominantly the result of fraud. Prosecutors have won convictions against nearly two dozen county employees, contractors, and financiers, as well as several county commissioners, in conjunction with the County’s sewer debt.⁴² The County has defaulted on bank bonds owned by J.P. Morgan, not retail investors. Its decision to default was made easier when J.P. Morgan employees were implicated in the County’s bribery scandals.⁴³

Vallejo is an example of a rare self-created municipal crisis. Upon filing for bankruptcy protection in 2008, the typical Vallejo police officer earned $122,000 per year, and city firefighters earned $130,000 per year.⁴⁴ These numbers exclude overtime payments. Some wealthier jurisdictions can afford these kinds of salaries,⁴⁵ but Vallejo’s economic fundamentals were underwhelming and California’s property tax caps limited the City’s flexibility. Also, Vallejo’s bonds were poorly secured: they were not general obligation bonds. Most importantly, the City’s fiscal deterioration was detectable. Vallejo’s situation worsened progressively over several years.

Nationwide, the Great Recession has not yet produced a “wave” of defaults. Between January and November 2010, there were 72 municipal bond issues in default, totaling $2.5 billion. In 2009, there were 204 issues in default totaling $7.3 billion.⁴⁶ These defaults represent a tiny fraction of the $2.8 trillion municipal market, and the vast majority of defaulted bonds were unrated and in higher risk municipal sectors.

The Year(s) Ahead

The municipal market comprises 89,000 state and local governments with varying credit quality and unique credit characteristics. The overwhelming majority of these governments will not default on their bonds in 2011 or thereafter. Most state and local governments exhibit sound credit fundamentals and should ably navigate the current credit cycle. Given the current financial condition of municipal issuers, there is very little benefit or relief associated with default.

Despite the low risk of default, state and local governments are entering what is likely to be a multi-year reform process. In the coming years, lawmakers are likely to address labor costs, including healthcare and pension benefits. They are also likely to enact unpopular revenue reforms, including tax hikes and the elimination of tax-exemptions. Some states may address local funding stresses by easing contracting rules, reducing state mandates, simplifying municipal consolidation or changing municipal insolvency rules.

In the current fiscal environment, municipal bond investing requires bottom-up credit analysis. Credit quality is likely to improve for state and local governments that make swift and positive policy changes. Credit fundamentals are likely to deteriorate for issuers that fail to adequately correct today’s deficits. Breckinridge continues to assess each of its client’s bonds, credit by credit.

DISCLAIMER: The material in this document is prepared for our clients and other interested parties and contains the opinions of Breckinridge Capital Advisors. Nothing in this paper should be construed or relied upon as legal or financial advice. An investor should consult with an investment professional before making any investment decisions. Factual material is believed to be accurate, taken directly from sources believed to be reliable, including but not limited to, Federal and various state & local government documents, official financial reports, academic articles, and other public materials. However, none of the information should be relied on without independent verification.

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¹ Today’s deficits are different from those during the Depression era in that they do not result from “too much fixed overhead expense in the form of debt service.” See A.M. Hillhouse, Municipal Bonds: A Century of Experience, p. 245, Prentice-Hall, New York (1936).
² See Federal Reserve Flow of Funds, Table L. 211 (September 2010) and Bureau of Economic Analysis estimate of Q2 GDP.
³ Fitch Ratings, “U.S. State and Local Government Bond Credit Quality: More Sparks than Fire,” p. 2 (November 2010).
⁴ For example, in 1842, the State of Illinois had annual revenues of $98,000 and faced annual interest costs of $800,000. In 1871 Louisiana, annual interest costs exceeded 30% of the state’s budget. (See Rights, Remedies, and the Impact of State Sovereign Immunity, Christopher Shortell, State University of New York Press (2008), pp. 61 and 89. By comparison, today’s debt service costs include both principal and interest, and in Illinois annual servicing costs are a mere 4% of the state’s budget.
⁵ See A.M. Hillhouse, Municipal Bonds: A Century of Experience. Prentice Hall (1936), p. 267.
⁶ Calculation based on gross state product figures for 2008 from the U.S. Bureau of Economic Analysis, tax-supported debt numbers from Moody’s Investors Service, and pension and retiree healthcare figures from the Pew Center on the States. Calculated by Breckinridge Capital Advisors for all 50 states in December 2009.
⁷ See Economist.com debt clock. Available at: http://www.economist.com/content/global_debt_clock.
⁸ Depression-era municipal issuance was poorly regulated. Local politicians wooed voters to approve debts by promising lucrative construction contracts. In general, municipal bond issuance reflected a public desire to reap a variety of private gains from the issuance. See A.M. Hillhouse, Municipal Bonds: A Century of Experience (1936), pp. 251-254.
⁹ General fund balance is not identical to “cash reserves,” but it is a useful measure of municipal liquidity and municipalities’ ability to repay bondholders over the near-term.
¹⁰ See Fiscal Survey of the States, National Association of State Budget Officers, Fall 2010, Executive Summary.
¹¹ See Federal Reserve Flow of Funds Reports, Table L. 211 (1965 - Present) and Bureau of Economic Analysis figures for each year’s GDP figures.
¹² For example, California routinely issues “revenue anticipation notes” which are backed by what is essentially a “first lien” on the state’s revenue collections. California’s annual collections typically exceed the amounts borrowed by over eight times.
¹³ Per Bloomberg data. State governments’ pension contributions were $72.4 billion in FY 09 while overall state government revenues were $1.5 billion.
¹⁴ Per Bloomberg data, December 8, 2010.
¹⁵ PiperJaffray, “Investors Beware Credit Challenges Loom for Puerto Rico,” November 9, 2010. Puerto Rico expects to “run out” of pension fund assets in 2015.
¹⁶ Breckinridge analysis, December 2010.
¹⁷ See Ronald Snell, “Pensions and Retirement Plan Enactments in 2010 State Legislatures,” National Conference of State Legislatures, September 1, 2010.
¹⁸ See Jeannette Neumann, “State Workers, Long Resistant, Accept Cuts in Pension Benefits,” Wall Street Journal, June 29, 2010.
¹⁹ See Stephen Fehr, “States test whether public pension benefits given can be taken away,” August 10, 2010, Stateline.org, available at: http://www.stateline.org/live/details/story?contentId=504503.
²⁰ For example, in New Jersey, the state treasurer has refused to rule out benefit cuts for retirees. See Jason Method, “Can NJ keep its pension promises? No way, many officials concede,” Asbury Park Press (July 25, 2010).
²¹ See Robert Novy-Marx and Joshua Rauh, “Policy Options for State Pension Systems and Their Impact on Plan Liabilities,” October 19, 2010.
²² Fewer than half of Americans approve of labor unions, an all-time low according to Gallup.com. See: http://www.gallup.com/poll/122744/labor-unions-sharp-slide-public-support.aspx.
²³ See January 2010 poll, Public Policy Institute of California, p. 22.
²⁴ Quote from AFSCME-Minnesota Executive Director Eliot Seide. See Jeannette Neumann, “State Workers, Long Resistant, Accept Cuts in Pension Benefits,” Wall Street Journal, June 29, 2010.
²⁵ Alison Vekshin and Martin Z. Braun, “Vallejo’s Bankruptcy ‘Failure’ Scares Cities Into Cutting Costs,” Bloomberg, December 14, 2010.
²⁶ See City of Vallejo, CA Comprehensive Annual Financial Report (Fiscal Year 2009) p. 22.
²⁷ See The Fiscal Survey of States, Fall 2010, published by the National Governors Association and the National Association of State Budget Officers, pp. vii and 44. Fiscal Year 2008 spending totaled $697 billion compared to a budgeted $645 billion for FY 2011.
²⁸ See: “The Big Reset,” National Governors’ Association. Available at: http://www.nga.org/Files/pdf/1002STATEGOVTAFTERGREATRECESSION.PDF
²⁹ See: Jim Seigel, “Collective Bargaining is Target of Next Ohio Senate,” Columbus Dispatch, December 21, 2010. Available at: http://www.dispatch.com/live/content/local_news/stories/2010/12/21/collective-bargaining-is-target-of-next-ohio-senate.html and Lee Berquist and Jason Stein, “Walker Looks At Showdown With State Employee Unions,” Milwaukee Journal Sentinel, December 7, 2010. http://www.jsonline.com/news/statepolitics/111463779.html
³⁰ See: A Report on State Tax Expenditures, March 2010. Available at: http://www.state.nj.us/treasury/taxation/pdf/expenditure_report_final.pdf
³¹ See: Connecticut Tax Expenditure Report, March 2010. Available at: http://www.ctmirror.org/sites/default/files/documents/TaxExpenditureReportMarch2010.pdf
³² Mintz, Levin, Cohn, Ferris, Glovsky, and Popeo, P.C. (Bankruptcy Conference Handout), NFMA Bankruptcy Conference, October 2009.
³³ See Congressional Research Service report: “Municipal Reorganization: Chapter 9 of the U.S. Bankruptcy Code,” March 8, 2007, footnote 19. See also: 11 U.S.C. §903.
³⁴ See 11 U.S.C. §101(32).
³⁵ See David Gelfand (editor) and James Spiotto (Chapter author), State and Local Government Debt Financing, Chapter 13:10, p. 35 (2008).
³⁶ See 11 U.S.C. §902(2)
³⁷ Local general obligation bonds in California are exempt from stay because they are treated as “special revenues” for the purposes of Chapter 9. See In re Sierra Kings Health Care District, Case No. 09-19728 (Bankr. E.E. Ga. September 13, 2010).
³⁸ In re San Jose Unified School District, No. 5-83-02387-A-9 (BC ND Cal 1983).
³⁹ Even during the Depression, most cities were able to repay their debts in full, albeit through extended maturity schedules or other strategies. See A.M. Hillhouse, Municipal Bonds: A Century of Experience, p. 29, Prentice-Hall, New York (1936). Also, according to former Managing Director of Public Finance Ratings at Standard & Poor’s, Geoff Buswick, there was a 100% recovery rate on S&P’s rated general obligation bonds between 1980 and 2008. Buswick made the comments at a bankruptcy conference sponsored by the National Federation of Municipal Analysts in October 2008.
⁴⁰ See Electronic Municipal Market Access at: http://emma.msrb.org/
⁴¹ See: “Why Governmental Accounting and Financial Reporting is – and Should Be – Different,” Governmental Accounting Standards Board, March 16, 2006. Available at: http://www.gasb.org/cs/ContentServer?c=Page&pagename=GASB/Page/GASBSectionPage&cid=1176156741271. Among other things, state and local financial statements remain confusing to the uninitiated largely because the purpose and presentation of government financial statements differs from that in the private sector. Government accounting rules are designed to ensure that financial statement users can hold governments accountable for the use of their financial resources. Regulators, policymakers, taxpayers, and creditors must be able to assess how the government raised revenues and spent its resources in a given year and whether certain obligations were deferred to future taxpayers. In contrast, the primary focus of private sector financial statements has been on the generation of cash flows. Resource allocation is not a huge concern in private sector financial analysis except insofar as it generates future cash flows.
⁴² See “Jefferson County Sewer Scandal: Gary White Sentenced to 10 Years in Prison for Bribes, July 30, 2010.” Available at: http://media.al.com/spotnews/photo/730corrupjpg-ea474d2178c19458.jpg
⁴³ Martin Braun and William Selway, “J.P. Morgan Ends SEC Alabama Swap Probe for $722 million,” Bloomberg, November 4, 2009. Available at: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSnn.A.FX0bM
⁴⁴ See “Fat Pensions Spell Doom For Many Cities,” Janice Revell, Money Magazine, March 6, 2009. Available at: http://money.cnn.com/2008/06/02/pf/retirement/vallejo.moneymag/index.htm
⁴⁵ For example, in New Jersey, the median police salary is over $90,000. Many upscale NJ communities can afford such a police force; others cannot. See: Chris Magerian, “New Jersey police salaries rank highest in nation with median pay of $90,672,” September 19, 2010. Available at: http://www.nj.com/news/index.ssf/2010/09/nj_police_salaries_rank_highes.html.
⁴⁶ “Default is Dirty Word to America’s Willing and Able,” Joe Mysak, Bloomberg News, citing Richard Lehmann of the Distressed Debt Securities Newsletter. November 29, 2010.

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