BY FRANK KEEGAN – No one uttered the dread word “Truth” during five hours of intense testimony Thursday on growing malaise ripping through municipal bond markets like rumors of plague as awareness of the state and municipal fiscal crisis grows.
NEW YORK – Municipal bond issuers, investors and raters told the National Association of Insurance Commissioners and about 100 guests a lot of things about the mind-numbing world of public finance but said little about the fundamental flaws in how state and local governments routinely cook their books.
Even as the NAIC panel heard expert testimony, technically bankrupt California was in “scramble mode” dealing with market uncertainty forcing up interest taxpayers must shoulder to sell state debt, according to The Bond Buyer newspaper.
One thing all the experts agreed on Thursday is that uncertainty about municipal bonds is unwarranted. Citing specific figures, they all said default historically is so rare as to present almost zero risk. Almost, because past performance is no guarantee of future results.
The problem is right now nobody is sure how to figure out for certain which few among the thousands of bond issues will be the ones that leave investors holding an empty bag.
Why? Because state and local government accounting is such a web of deception even public officials actively performing this ledger legerdemain have deceived themselves into a surreal world that baffles the most experienced rating agencies, analysts and institutional investors.
What state and local governments need most are “Truth in Accounting” laws that force them to follow accurate bookkeeping practices so taxpayers, public workers, leaders and bond investors know how bad things really are; because no matter how bad they think things are, they’re worse.
According to Sheila Weinberg, founder of The Institute for Truth in Accounting, the bookkeeping is so bad “most governors and legislators actually believe they’ve been passing balanced budgets for years,” when actually they have been falling deeper and deeper into debt.
According to the Government Accountability Office, that hidden debt is more than $9.9 trillion and will require real operating expense cuts of at least 12.3 percent every year for 50 years.
For all governments that will require dire service cuts, layoffs and increased taxes. For many it will impair their capacity to pay interest and principal on existing debt.
Economist Arnaud Marès in the first edition of his “Sovereign Subjects” newsletter for Morgan Stanley wrote, “Ask not whether governments will default, but how?”
That is what worries insurance companies and the state regulators who oversee them.
Insurance companies hold $462 billion in municipal bonds because those investments are supposed to be about as close as you can get to a sure thing.
Insurance companies love sure things. States require them to keep a lot of policyholders’ money in safe investments to ensure that when policyholders file claims, insurance companies can pay what they promised.
Recent downgrades of municipal bond ratings triggered legal requirements for insurance companies to ante up more money to meet them.
That is what triggered the NAIC hearing Thursday.
Testimony universally stressed that most traditional municipal bonds are safe investments – BUT, the market needs more transparency to avoid uncertainty that can feed on itself, crippling stressed governments’ ability to borrow and actually increasing the probability of defaults.
Transparency and certainty, no matter how painful, is what “Truth in Accounting” laws will provide.
Every witness at Thursday’s hearing admitted taxpayers and public workers betrayed by negligent – or worse — leaders are in for at least a decade of severe pain so bond investors get their money and retirees their benefits.
We will not bear that pain if politicians refuse to give us an honest accounting.
On Nov. 4 Americans turned over state government more than in any election since 1928, and the message should be clear to politicians at every level: We are fed up with the lies.