Magazine article Nation's Cities Weekly

The 1995 Bond Market: A Taxing Year for Municipal Finance

Magazine article Nation's Cities Weekly

The 1995 Bond Market: A Taxing Year for Municipal Finance

Article excerpt

On December 6, 1994, Orange County, California filed for federal bankruptcy protection, making it the largest municipality ever to seek protection under federal bankruptcy laws. The sudden and unexpected filing has disrupted the $1 trillion municipal bond market for all cities and towns. It immediately affected 37 cities in California which had funds in the insolvent county pool, but its aftermath has affected every community America.

The filing set in motion a series of changes that are Likely to change municipal access to the securities market, and it may permanently alter the roles, responsibilities, and liabilities of municipal elected officials.

No sector will be more affected than municipal elected officials. There will be greater liability. There will be new federal mandates. There may be new laws passed by Congress or state legislatures to restrict municipal authority and ability to handle local finance. Most GOP Presidential candidates and Democratic leaders in the Congress are supporting proposals to eliminate or devalue tax-exempt municipal bonds. Those changes could increase the cost of financing schools, roads, and other public improvements by as much as 20 percent in the future.

From a bipartisan California legislative committee, to a grand jury report, to Congress and the administration; there has been a' conjunction of forces to impose greater responsibility and liability on local officials and to grant greater protection from liability for fraud to the advisors-broker-dealers, bond counsel, investment advisors, the rating industry--municipal officials have traditionally relied upon to make investments of municipal cash and pension funds or to issue short and long-term debt. The combination of reckless behavior in Orange County and unprecedented campaign contributions to key lawmakers in Washington has created a potent force for change that will have serious implications for local budgets and public infrastructure.

Already the Securities and Exchange Commission (SEC) has imposed new, mandatory municipal disclosure rules. Both the SEC and the Internal Revenue Service (IRS) have significantly expanded their investigation and audit apparatus to examine local financing practices and to prosecute. And while Congress has made clear its disinterest in federal campaign finance reform, it has signed off on SEC changes in local campaign finance.

The Orange is Squeezed

Orange county, a suburban area south of Los Angeles and one of the largest and wealthiest local governments in the nation, filed for Chapter 9 federal bankruptcy protection after lenders refused to make any more short term loans and the county ceased to be able to meet its obligations.

It affected not only the $7 billion in outstanding tax-exempt municipal debt of Orange County, but also the debt of some 180 municipalities and local government agencies that had invested in the county's main fund.

In the aftermath, a blue ribbon report by a bipartisan California state senate committee cast the blame for the unprecedented on the officials and citizens of Orange County. The report looked at citizens who wanted to maintain county services, but not pay for them, resulting in a "breakdown of the established governmental process." A grand jury special report said the elected county officials bear the lion's share of blame for the bankruptcy. The report warned that future troubles are inevitable unless the existing in bureaucracy is restructured, noting the failure of the supervisors to exercise basic oversight procedures.

After the voters of Orange County refused to raise sales taxes to ball out the bankrupt county, California Governor Pete Wilson gave final approval to a $2 billion so-called "Consensus Recovery Plan" that continues to pass the buck. The plan is the end result of months of negotiations involving over 150 municipalities, employees, bond and note holders, and vendors affected by the $1. …

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