ties market, however, raise questions well beyond the local community. A municipal bond default tests the interests of bondholders and the state and federal governments. Bondholders are many and often scattered (in an economically random process) around the country. This makes bondholders the constituents of many public officials, who try to respond to public pressure. In addition, a municipal bond issuer is either a state government or a state-created political entity (for example, a municipality, county, or statutory agency), thus justifying state monitoring and fiscal control (see financial emergency).
The legal status of the municipal market rests with the federal government. Congress has the power to eliminate the tax-exempt securities market ( South Carolina v. Baker, 1988). As the search intensifies for more U.S. income tax receipts to aid in the federal deficit reduction effort, the tax expenditures associated with the tax-exempt market are enticing targets ( Carter and Hildreth 1992). Therefore, financial emergencies and defaults give Congress and the president ammunition for imposing tighter federal supervision over municipal securities.
Disclosure is central to federal securities law and the functioning of efficient capital markets. Yet, federal securities regulation is weaker for the municipal market than for corporate bonds. In a theme reminiscent of its earlier report on New York City's debt problems, the U.S. Securities and Exchange Commission's report on circumstances surrounding the WPPSS default noted systematic disclosure problems in the municipal securities industry and deficient disclosures to WPPSS investors ( U.S. Securities and Exchange Commission 1977 and 1988). The WPPSS report questioned whether the bond disclosure documents adequately revealed significant facts regarding the projects. Without adequate disclosure, investors are unable to make an intelligent decision regarding the probability of repayment. Thus, defaults have encouraged federal securities regulators to assert tighter regulation over the municipal securities market ( U.S. Securities and Exchange Commission 1993).
Municipal debt defaults are the culmination of legal, economic, political, managerial, and financial problems (see generally Hillhouse 1936; Hemple 1971; Advisory Commission on Intergovernmental Relations 1973 and 1985). Although the court's invalidation of the power sales agreements was the legal event that precipitated the WPPSS default, the original energy demand estimates were unrealistic, the political pressures to keep low power rates were high and growing, project schedules were too hard to maintain, and the escalating project costs occurred in a high interest rate environment (see Jones 1984; Myhra 1984). In Cleveland, the city defaulted on the repayment of short-term notes (not bonds). While the Cleveland default occurred during a highly charged political debate between the mayor and the local banks holding the notes, the city faced significant underlying managerial and financial problems (see Swanstron 1985). Municipal defaults, therefore, reflect underlying problems that, left unresolved, can impose a burdern on investors.
W. BARTLEY HILDRETH
Advisory Commission on Intergovernmental Relations, 1973. City Financial Emergencies: The Intergovernmental Dimension. Washington, D.C.: U.S. Government Printing Office.
-----, 1985. Bankruptcies. Defaults, and Other Local Government Financial Emergencies. Washington, D.C.: U.S. Government Printing Office.
Carter, Rosalyn Y. and W. Bartley Hildreth, 1992. "The Evolving Regulatory Environment of State and Local Tax-Exempt Securities". Public Budgeting and Financial Management, vol. 4:491-527.
General Accounting Office, 1984. Guidelines for Rescuing Large Failing Firms and Municipalities. Washington, D.C.: U.S. Government Printing Office.
Hempel, George H., 1971. The Postwar Quality of State and Local Debt. New York: National Bureau of Economic Research.
Hildreth, W. Bartley, 1994. "The Gordian Knot of a Project Revenue Bond Default". In Aman Khan and W. Bartley Hildreth , eds., Case Studies in Public Budgeting and Financial Management. Dubuque, IA: Kendall/Hunt Publishing Company, pp. 403-421.
Hillhouse, A. M., 1936. Municipal Bonds. New York: PrenticeHall, Inc.
Jones, Larry R., 1984. "The WPPSS Default: Trouble in the Municipal Market". Public Budgeting and Finance, vol. 4 (Winter) 60-77.
Myhra, David, 1984. Whoops! WPPSS: Washington Public Power Supply System Nuclear Plants. Jefferson, NC: McFarland & Company, Inc.
South Carolina v. Baker ( 1988). U.S. Supreme Court, April 20.
Spiotto, James E., 1993. "Municipal Insolvency: Bankruptcy, Receivership, Workouts and Alternative Remedies". In M. David Gelfand , ed., State and Local Government Debt Financing.Vol. 3. Deerfield IL: Clark Boardman Callaghan, Sections 13:01-13:56.
Swanstrom, Todd, 1985. The Crisis of Growth Politics: Cleveland, Kucinich and the Challenge of Urban Populism. Philadelphia: Temple University Press.
United States Securities and Exchange Commission, 1977. Staff Report on the Transactions in Securities of the City of New York. Washington, D.C.: Securities and Exchange Commission.
-----, 1988. Staff Report on the Investigation in the Matters of Transactions in Washington Public Power Supply System Securities. Washington, D.C.: Securities and Exchange Commission (September).
-----, 1993. Staff Report on the Municipal Securities Market. Washington, D.C.: Securities and Exchange Commission.
DEFERENCE PRINCIPLE. A court doctrine used by judges to yield or defer to the judgment of agency administrators (experts). The deference principle is a basic doctrine in administrative law. It is rooted in the separation of powers doctrine and in plain common sense. In