Wednesday, September 2, 2009

Cities and States Going Broke

As the financial crisis deepens (yes it will deepen regardless of what the media is now saying) states and cities will be financial disasters. Unlike the federal government, cities and states can't print money to fund their deficits. I expect a significant number of municipal bond defaults next year.-Lou

Budget Crisis: City Takes Out $275M Loan

PHILADELPHIA (CBS 3) ― Philadelphia is taking out a short-term loan to help with cash flow as Pennsylvania's budget crisis continues.Mayor Michael Nutter announced Tuesday the city will take out the $275 million loan from JP Morgan Chase. The loan comes with a 3 percent interest rate if paid in full by November 30.

On December 1, the interest rate increases to 8 percent.Mayor Nutter expects the city will re-finance the loan at a lower interest rate in the public markets – once Pennsylvania's budget crisis is solved.Mayor Nutter also said Tuesday that by the end of next week, he will submit a new pension plan to the public agency that oversees the city's pensions. Officials in Harrisburg are forcing the mayor to take that step.

Last week, the State Senate signed off on the mayor's plan to raise the city sales tax by a penny and delay about $150 million worth of pension payments this year – but only if the city cuts the costs of its pensions.Going forward, the city must freeze pension benefits for current workers and reduce pension costs for new workers by 20 percent.

The mayor has said a new pension plan might include some type of 401(k) option to cut costs.Pensions eat up a large share of the city's budget – this year it's expected to be some 12 percent, or $450 million out of a $3.7 billion budget.According to the Pension Board, the city owes pensions to roughly 65,000 workers – but less than half, 29,215 are still on the job. Most of the rest are already retired and collecting those checks.

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