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SEC Puts Muni Bond Market On Notice


The past few years have been awful ones for government finances. It started when the public pension crisis began burning a hole in city and state budgets. It got worse when ratings agencies noticed, lowering the credit ratings of struggling states and making it much harder to borrow the money they need to keep services running. Illinois, where the pension crisis is worst, now has the lowest credit rating of any state in the country, and the other states with serious pension issues aren’t far behind. This is emerging as a perfect storm for these cities and states, many of which are finding it harder to borrow at just the moment when they need the money most.

Now these cities are facing a new problem: an increasingly active SEC looking to increase oversight of the bond markets. Although the SEC has less power to oversee cities than it does with banks and other financial institutions, it does have the authority to examine governments’ statements to bond investors for claims that could be misleading and punish offenders accordingly. As the Washington Post reports, the SEC has begun to exercise this ability much more often over the past few years. Earlier this year the SEC charged Illinois with securities fraud for misleading investors about the status of the state’s finances, then took similar action against Harrisburg and South Miami for statements made by officials and attorneys. Clearly, the SEC is sending a message:

By taking a more aggressive tack, the agency is basically warning the municipalities that if they don’t clean up their act, they may be making a case for the SEC to seek — and get — more robust regulatory powers from Congress, Fabian said.

“If you want to reduce speeding, you can either lower the speed limit or enforce the current speed limit more,” Fabian said. “Fewer warnings and more tickets, and the likelihood is that people will slow down. This is the SEC’s way of forcing municipal bond issuers to grow up.”

This is bad news for the multitude of cities and states who desperately need to borrow, but where spotty finances and massive pension liabilities could spook the bond market. And amazingly, things could even get worse. If Detroit enters bankruptcy and stiffs creditors, as many believe that it will, it will send shockwaves throughout the municipal bond market that could make it even more difficult for these struggling cities to borrow. Governors and mayors, be warned.

[SEC headquarters image courtesy of Wikimedia Commons]

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  • Corlyss

    “Earlier this year the SEC charged Illinois with securities fraud for misleading investors about the status of the state’s finances ***”

    The betting window is now open on whether this administration’s DoJ is going to do squat about prosecuting the case. Little will be said, less written, and in the last days of the Obama administration, DoJ will settle the case for a mere bagatelle, lightly slap a few wrists, and then pardons everyone of everything.

  • FranMeaney

    It isn’t just the pensions. The health care obligations in Massachusetts cities and towns are bigger than unfunded pension obligations because there is NO funding mechanism at all. Bet it’s that way elsewhere.

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