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View Diary: Bankruptcy, coming to a municipality near you! (12 comments)

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  •  Some observations. (2+ / 0-)
    Recommended by:
    Kcaridad, Lujane
    1.  What kind of municipality issues variable rate bonds?
    1.  The bonds impacted are those backed only by a governmental enterprise, in this case sewer system revenues, not bonds backed by taxpayer full faith and credit.  Increased costs drive up sewer charges, but won't drive up taxes per se, at all.
    1.  Banks don't come out ahead meaningfully.  The investment bank gets fee based mostly on the issue size which amounts to a sales commission.  The banks in turn sell the bonds to rich people who buy them because they are tax-exempt.
    1.  Generally speaking, municipal bond interest rates are about two-thirds of the interest rates of corporate bonds of comparable terms and length, as a result of the tax exemption.  An inability to sell municipal bonds at 10%, even without insurance, suggests either unjustified investor panic or an incredibly risky repayment situation.
    1.  Jefferson County's best option may be to refinance the bonds based on sewer revenue, with fixed rate bonds guaranteed by the full faith and credit of the general fund backed by taxes.  This should dramatically reduce the interest rate, and honestly, how risky can the stream of revenues out of a county sewer system really be?

    "Those who can make you believe absurdities can make you commit atrocities" -- Voltaire

    by ohwilleke on Thu Apr 10, 2008 at 12:59:29 PM PDT

    •  The rates are effectively set by (2+ / 0-)
      Recommended by:
      Kcaridad, Lujane

      the bond rating services.

      I live in Columbus, Ohio and Franklin County, Ohio, and these communities have had outstanding financial management for a very long time, 40 or more years, and both governments have the very highest bond ratings possible for a municipality, AAA.

      This rating leads to very low rates on our commnity's borrowing.

      Any other rating means that the cost of money to the government entity will be greater.  The question that should be asked is "what is Jefferson County's bond rating?

      If it is something like Baa or Bba, then the cost of the bonds will be reflected in this risk level.

      •  Usuually there are multiple bond ratings. (0+ / 0-)

        A municipality itself usually has quite good bond ratings for its full faith and credit backed bonds, absence an economic collapse of a Detroit scale.  Usually, a court order mandating a tax increase/municipal spending cut can be secured if worse comes to worse under balanced budget requirements.

        Individual municipal enterprises whose revenues alone are pledged towards repayment are evaluated individually and usually have worse ratings.  While the municipality is unlikely to go bust, the sewer authority might (and indeed, if it can't refinance, it will).

        Also, most municipal issues of all types aren't amenable to either putting up collateral or to seizing assets in the event of a default to secure payment.  How do you foreclose on a highway or a sewer system?

        "Those who can make you believe absurdities can make you commit atrocities" -- Voltaire

        by ohwilleke on Fri Apr 11, 2008 at 09:50:07 AM PDT

        [ Parent ]

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