Before I get into my rant today about the troubled municipal bond market, first I have to say that I just couldn’t believe it when I saw this cross the newswire yesterday: On Wednesday, January 23, 2013, Congress voted to “temporarily” do away with the U.S. government’s debt ceiling. Once the Senate passes the measure and the President signs it, there will be no limit on the amount of money the government can borrow. At this point, I’m thinking everyone in Washington has gone mad. How can you give the government unlimited borrowing power? The race to a $20.0-trillion national debt and a debt-to-GDP multiple of 125%—we’ll get there a lot quicker now! Back to today’s story… Municipal bonds investors beware! Gone are the days when municipal bonds were the “best investment.” Some may still argue that they provide tax breaks, but today the risks of holding them are piling up. Cities across the U.S. are experiencing budget deficit problems. As budget deficits increase, the ability of cities and municipalities to pay their creditors decreases. A number of municipalities filed for bankruptcy last year, because they accumulated too much debt under their budget deficits—and defaulted on the payment of the municipal bonds they issued. As we enter 2013, the epidemic of increasing budget deficits could make 2012 look like the tip of the iceberg! Syracuse, New York, is estimated to have a budget deficit of $25.0 million this year. The city’s pension costs have increased 40% in one year and healthcare costs are rising at nine percent on a per-year basis. (Source: The Post-Standard , January 17, 2013.) Cities and towns in Rhode Island have added a significant amount of debt with their budget deficits skyrocketing. The City of Woonsocket made the list of cities with the most debt load in the state. The city increased its deficit by borrowing $90.0 million about 10 years ago for its pension liability, $74.0 million to construct two new middle schools four years ago, and another $11.5 million to manage the deficit in the city and school budgets. (Source: Golocal Prov , January 18, 2013.) When the housing market in the U.S. economy collapsed, cities lost their main source of revenue: property taxes. Now with home prices stagnant and millions of people still living in their homes with negative equity, I really don’t expect the budget deficits of municipalities to become any smaller, unless severe cuts are made to local government payroll and to promised pension benefits. What I do see coming: municipal governments asking for bailouts from state governments as they buckle under their budget deficits. Eventually, all these requests for money will make their way to the ... Read More