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10 Signs That America Is On The Verge Of A Horrible Municipal Debt Crisis

Is America on the verge of a horrible municipal debt crisis?  Unfortunately, the answer is yes.  From coast to coast there are an increasing number of cities, towns and counties that are rapidly going broke.  Financial analyst Meredith Whitney took a lot of heat when her prediction of a municipal bond crash in 2011 did not happen, but she was not fundamentally wrong in her analysis.  A horrifying municipal debt crisis is starting to unfold right in front of our eyes.  It just did not happen as soon as she thought that it would.  When most Americans think of our “debt problem”, they think of the federal government.  But the truth is that we have hundreds and hundreds of smaller “debt problems” all across the country.  In 2012, cities such as Stockton, California and Harrisburg, Pennsylvania have already defaulted and a whole bunch of other cities and towns are headed down the exact same path.  Once we see the first major wave of municipal defaults, creditors will become much tighter with their money and that will cause even more municipalities to get into financial trouble.  This crisis could start spinning out of control at any time.

The frightening thing is that all of this is happening at a time when we are supposed to be having an “economic recovery“.

So what will things look like when the economy gets even worse than this?

If hundreds of cities, towns and counties are barely able to keep their heads above water financially right now, what is going to happen when the next recession hits?

That is frightening to think about.

The following are 10 signs that America is on the verge of a horrible municipal debt crisis….

#1 Moody’s has downgraded Detroit’s debt again.  The following is from the Detroit News….

The city received a downgrade to B2 from Ba3 for its $553.1 million in outstanding general obligation unlimited tax debt and also a downgrade to B3 from B1 for the $486.4 million in outstanding general obligation limited tax debt. Both ratings fell two points.

#2 The city of Indianapolis is facing an unprecedented 75 million dollar budget deficit in 2012.  City officials are warning that there may soon not be enough money to keep the streetlights on.

#3 Suffolk County in New York has declared a “fiscal emergency” after discovering that it is projected to take on a total of more than 500 million dollars of additional debt by the end of 2013.

#4 The city of Trenton, New Jersey is so broke that it has put off buying more toilet paper for city buildings.  At last report, there were a total of 15 rolls remaining and after that those that use city restrooms will be on their own.

#5 Some cities are slashing expenses dramatically in an attempt to stay afloat.  The following is one example from California….

Costa Mesa, a city of 110,000 south of Los Angeles, has slashed its payroll from 611 to 450. It is selling its police helicopters and has hired a neighboring city for air patrols. It’s also pursuing a controversial effort to convert to a charter city from a general law city, which would give City Hall more power to outsource more work, said councilman Jim Righeimer.

#6 In New York, state officials are deeply concerned that city and local governments are paying their pension obligations by borrowing from the state pension fund.  This is essentially like making your minimum monthly payment on a credit card by borrowing more money on that same credit card….

And now, their fears are being realized: cities throughout the state, wealthy towns such as Southampton and East Hampton, counties like Nassau and Suffolk, and other public employers like the Westchester Medical Center and the New York Public Library are all managing their rising pension bills by borrowing from the very same $140 billion pension fund to which they owe money.

Across New York, state and local governments are borrowing $750 million this year to finance their contributions to the state pension system, and are likely to borrow at least $1 billion more over the next year. The number of municipalities and public institutions using this new borrowing mechanism to pay off their annual pension bills has tripled in a year.

#7 Pension problems are catching up with a lot of cities all over the nation.  For example, CBS News reported recently that the city of Central Falls, Rh0de Island has been forced to declare bankruptcy because of pension woes….

For years, city officials promised robust union contracts and pensions without raising revenue to pay for them. Last August, the math caught up with them. Central Falls was broke, its pension fund short $46 million. It declared bankruptcy.

“My daughters grew up here, went to school here. It’s all gone,” said Mike Geoffroy, a retired firefighter.

He said he could not make the payments on his house after his pension was cut by $1,100 a month.

#8 Last November, Jefferson County, Alabama filed for the largest municipal bankruptcy in U.S. history.  At the time, they had accumulated a total of approximately 4.2 billion dollars of debt.

#9 Several other U.S. large cities have defaulted on their debts in early 2012 as a Bloomberg article recently reported….

The California cities of Stockton and Hercules, as well as Pennsylvania’s capital, Harrisburg, have opted to default on some of their insured debt in recent months.

#10 In all, there have been 21 municipal defaults so far in 2012.  The grand total of those defaults comes to 978 million dollars.

Of course a lot of state governments are experiencing massive budget problems right now as well.

For example, in California state government revenues for February 2012 were down by about 22 percent compared to February 2011.  The state government is quickly running out of money once again, and nobody is quite sure how to fix California’s rapidly deteriorating financial situation.

And we all know that the biggest debt problem of all is the U.S. national debt.

Professor Antony Davies of Duquesne University has put together a great YouTube video that shows how the U.S. national debt crisis could get wildly out of control if interest rates start going up by even just a little bit….

It is no wonder why so many Americans are so pessimistic about our future.

One new survey has found that 63 percent of all Americans believe that the U.S. economic model is broken.

Things did not have to turn out this way, but they did.

As a nation, we did not have to get absolutely addicted to debt, but we did.

Now we are going to pay the price and it is going to be extremely painful.

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  • John Balzer

    In New Jersey it is sad commentary that Prudential, number 64 on the Fortune 500 index would stoop to trying to appropriate funds that were meant to bring out of state business and jobs to NJ. Prudential made $3.5 billion last year in profit. Did they really need to suck up the incentive money that would have helped economically strapped cities in NJ? Shameful.

  • Bob-o

    Pay down debt and save $$ now. Your bank may not exist tomorrow, not that it is that dire yet however. Doubt me? Just watch a video or two about the great depression, and see how history is repeating itself

  • Georgiaboy61

    The municipal debt crisis is worse than the federal debt crisis insofar as while the feds can print money and monetize the debt, states and municipalities cannot do so at present. The former, while an unethical and dishonest “solution” to paying off crushing debt, at least preserves the appearance of functionality. The public pension crisis is especially bad, because many cities and towns no longer have the money to both pay for existing city services, and fund pensions. They are being forced to choose, and some ultimately are forced into bankrupcy. Defined-benefit pension plans have proven to be a financial WMD of sorts, because they promise a set level of benefits payout, regardless of the funds available. There’s no linkage between market performance and how pensions are funded. Regardless of the promises made, the math is simply unsustainable. What can’t go on forever, won’t. For municipal pension recipients, that means the checks may quit coming in the mail, in some places. Is that fair? Probably not, but who ever said life was fair? Welcome to the party….

    • Keith

      Life may not be fair all of the time, but you have to make it as fair as possible. Promoises shouldn’t have been made but they were and it is NOT fair that someone who worked for the municipality in good faith who cannot go out and get another job has the pension they need to survive cut. You’ll have to think of something else. If you can’t then don’t complain.

  • mark

    The question begs as to what will the courts findings be on how to cover many of the government pensions. If you rent , you can just move somewhere else where they don’t have a pension problem yet. If you own your home, can the courts stick you with the bill for the fraud commited by prior elected officals with public worker unions for their votes and financial support. In the end after working hard all your life and paying off your mortgage and preparing for the coming collaspe all be in vain. I am sure the public employees would be more than happy to take what you have so that they might be able to continue to collect their pension. Will the existing public employees spend their time on the clock working to create more ways to take more of what is out there. Maybe you are almost better off to live in a RV so that you can claim where you live based on the tax load and the amount of debt carried by a state or city.

  • Gary2wannabe

    I love when people scream about the high defense budget (which IS too high). That number is dwarfed by the “entitelments” we have promised to ourselves. The baby boomers have promised themselves a huge percentage of their grandchildren’s labor.

    Before all you boomers start attacking me, I must disclose that I was born in 1961. I don’t expect to EVER retire in the same sense that my father did. He once told my brother (born 1960): “The retirement age for people your age should be at least 75″. My father started collecting SS at 62. He is now 77.

  • Colin

    Any surprise most of these cities are from CA?

  • mondobeyondo

    Many local governments are unable to make ends meet, because of their retirement and pension plans.

    What’s going to happen to people who hold municipal bonds, if these cities default?? Well, they’ll be wiped out. If you have municipal bonds, and your town or city is in financial trouble, SELL THEM! NOW!!

    Our government is circling the drain. First, the municipal and state governments. Next, the federal government. Not a pretty scenario.

    ———————-
    Captain Kirk: “Bones – based on your vast medical knowledge, what does the future of America look like?”
    Dr. McCoy: “She’s dead, Jim.”

    • Benjik

      Captain Kirk: “Scotty, what’s the situation with the monetary printing presses in the Federal Reserve Control Room?”

      Montgomery Scott: “I’m givin’ it all she’s got Captain, if we push her any more she’s gonna blow!”

  • David Gurney

    States won’t default as they would never again be able to borrow at any rate of interest.Instead,they will squeeze the taxpayers as never before.NJ just nailed me for a deduction that I took-in 2008!

  • William

    As with the federal debt and deficit problems, these local and state budget problems are what the voters want. The state
    legialators, county councilmen, city councilmen, are where these problems start. These are elective positions. You get what you vote for. Be sure to reelect your incumbent US Senator and US Congressman/woman and the federal nightmare will go on……that is, until the failed Obummer who was not born in America declares martial law, and then America is DEAD.

  • knightowl77

    Superlative Sir…..and the video ought to explain to everyone why way back in 1992 Ross Perot & Ron Paul were correct…..and everyone thought them paranoid or delusional…

    95% of the population are sheep, 4% are wolves and the remaining 1% are sheepdogs trying to protect the flock…You Michael, are one of the 1% who fight to protect and warn the sheep that the wolves are on the prowl….They are coming…

    • Michael

      knightowl77:

      Thank you for the very kind words, and I want to thank you for the outstanding comments that you leave nearly every day. I always enjoy reading what you have to say.

      Michael

      • Nikita

        Thank you for your interesting blog Michael, I respect people who speak the truth. To exit from the crisis, more people need to know how politics and economics.

    • http://BuildProsperityNow.com Jeffrey White

      I agree with @knightowl77.

      • xander cross

        I bet you do and I bet you like Ron Paul, who is just another corporate politican that claims that he likes liberty. How sad.

    • xander cross

      @knightowl77 “The 12-term congressman told The Washington Times that while Mr. Romney has his faults, “it astounds me” that Republican presidential candidates would rip his work as a venture capitalist and said that “they don’t sound like they are Republicans.”

      “Bankruptcy and restructuring are very important principle in free markets.”

      >>>Ron Paul thinks corporate raiding (“restructuring’0 are very important principles.

      There is a reason he and Romney are cozy. They are both corporate candidates

      I still can’t believe that you all support Paul after he clearly supports Mitt Romney.

    • xander cross

      Oh, so Ron Paul and Ross Perrot was correct, but somehow, they enjoyed all of that money that they made from taxpayers and governmnet. You claim you are against taxes, but you support an actual politican, who takes in taxpayer money for his personal gain and he supports an candidate that hides money in offshore accounts and at the same time, claims he is against him. I sorry knightowl77, but you are one true hyprocrite. I give you that.

  • william S

    Come on now, it isn’t that bad. All we have to do is get Ben Bernanke to steal more money from the produceers by printing up more money and then get the mainstream media to continue lying about the truth and cheerleading and everything will be just fine—I know that because the mainstream media tells me every day that everything is wonderful. They also do not tell me about how the money printing steals my labor and that of my children, so as long as I don’t know about the criminal theft, corruption, and accounting fraud systemic throughout the entire U.S. economy, does it really matter?

    Come on people, don’t worry, be happy? Why let massive accounting fraud and corruption ruin your day?

  • Don Levit

    The federal employees’ retirement benefits are an explicit liability, the highest obligation for the government to fulfill.
    It is listed at almost $6 trillion on the balance sheet.
    Does this mean that almost $6 trillion needs to be available today to fund the benefits?
    Their pensions have been borrowed to pay for current expenses, as the amount is listed as part of the intragovernmental debt.
    Don Levit

    • Tim

      “Does this mean that almost $6 trillion needs to be available today to fund the benefits?”

      Yes. The Federal Employee and Veteran Benefits Payable line item on the Consolidated Balance Sheet is an estimate of the present value of future benefits. The line item consists mostly of pension and accrued benefits payable to civilian and military retirees–about $3 trillion as of 9/20/11. These pension benefits are financed through two government trust funds and are considered intragovernmental debt holdings. Treasury securities held in those two trust funds totaled about $1.1 trillion as of 9/30/11.

  • Piglet

    As Alfred E. Newman would say, “What, me worry?” Just a few days ago I heard on the news that the debt crisis in Greece had been solved (again?) and the US economy was not only improving, but in fact the recovery was accelerating! Woo-hoo! Happy days are here again… If you believe such nonsense. Come to think of it, it was THREE YEARS AGO that we were hearing about “green shoots” appearing, but all I’m seeing now are rapidly rising gas prices.

    • mondobeyondo

      Solving the Greek crisis is like solving a Rubik’s Cube.
      Remember those? Way back in the early 1980’s?
      All six sides of the cube have to be the same color, to solve the puzzle.

      The cute anchor girl on the evening news, will say “Rubik’s Cube Solved!!”, with a nice little graphic in the background. “ABCD-TV reports Rubik’s Cube is SOLVED!!”

      Fine. You’ve solved ONE SIDE of the cube. But you didn’t solve the puzzle. The other sides are still out of order!

      Sorry. Try again. And PLEASE HURRY! We’re running out of time!

      • mondobeyondo

        And no. To this day, I can’t solve the Rubik’s Cube puzzle.

  • seanipie

    Glad I just moved back to Suffolk.

  • http://BuildProsperityNow.com Jeffrey White

    Thank you for raising awareness about the debt problem.

    Indebtedness at all levels of government is so detrimental because it drags down the financial well-being and security of all citizens. A couple US Presidents warned against this situation:

    “Let every man, every corporation, and especially let every village, town, and city, every county and State, get out of debt and keep out of debt. It is the debtor that is ruined by hard times.” ~Rutherford B. Hayes

    “There are two ways to conquer and enslave a nation. One is by sword, the other is by debt.” ~John Adams

    The high level of debt is a drag on the economy, and is worsened with every instance of a default no matter whether it be by individuals, businesses, organizations, or government entities. Therefore, as a matter of both self protection and strengthening the national economy, paying off debts ASAP should be a priority with everyone.

    If you know of any local government entity that owes money on debts like amortized loans (i.e. not bonds)then I might be able to help them accelerate their payoff schedule twice as fast or better through leveraging. I do it all the time for individuals, families, and businesses so I would assume it can also be done for a local government body. I would like to have the opportunity to explore that possibility with them. I’m open to suggestions/recommendations.

  • Paul

    The video by Professor Davies really puts it all into perspective.

  • Groener

    Well, Tebow just got dumped to the Staten Island garbage mount.

    Guess that’s where american heroes all go.

    Apparently america needs scumbags, not heroes.

  • Gary2

    tax the rich and corporations===problems solved,

  • earl

    i really enjoy the thoughts of:).
    i died in a motorcycle wreck in 1982,went to the door of heaven and spoke with the one of the light,Jesus to me.
    i was told i had not done what i said i would do and must go back…
    How long is “and the”?
    In the beginning God created the heavens and the earth… , how long is “and the”?
    We are immortals wanting to experience death,so we created an illusion of mortality to experience;).
    It is just a movie folks and once your part in is over you go home;).promise.
    You can only do what you agreed to do to come here and play.
    you can not save what is not at risk,see?
    the never ending story;).
    no sin,no judgement,just home until we decide to play again.
    a day in heaven is a thousand years here.divide a thousand by twenty-four(hours;) and you will realize the time you are here.
    we as immortals wanted to experience something we can not in the real,Death;).so we created this playground just to experience death and fear and all the emotions we have here.
    hang on enjoy the ride and i will see ewe when you see me:).
    nothing more nothing less,enjoy your experience to the fullest then die and go home.
    again you can not save what is not at risk,your immortal soul!
    Hope you chose a cool movie;).

  • Hondo

    I followed the Suffolk county link and read the article. It said that suddenly, out of the blue, the city admitted to a 3 year $500 million debt. The article said nothing about who they owe the debt to. I’d guess that it is the public unions. If it was anything else the liberal writer would say.
    Now, two wealthy places, San Jose Ca and Suffolk county ny are looking at complete fiscal failure in one or two years. San Jose is expecting to go to 1700 public employees in two from now, down from 7500 employees two years ago. That’s nearly 6000 from 7500 in 4 years.
    But the union spokesman says there is no fiscal problem at all. It’s all made up to stiff the poor working stiffs, they say.
    Either the public unions give up alot no or get nothing in a few years.
    Hondo

  • Davey

    I have followed these end of the world scenarios for 25 years and the biggest problem is when. Some famous guy once said that this kind of stuff just goes on and on, one huge stress after another, and then it comes down like an avalanche. What to do, ordinary people, I have no idea, but this is going to happen. Central Falls, RI, good-or bad- example. People work 30 years in a public safety job, in a place that at one time was near the top in US drug transaction hubs, and then…their pension, guaranteed, is slashed! We are on the precipice, get a gun while you can afford one.

  • A Dodgy Bloke

    This is what happened when you have an overly distracted public, and political class to cowardly to make hard choices on the front end. The whole mess is gong to come tumbling down and either your going to be prepared or you are not. Government doesn’t care about you, you are a revenue source deal with it.

  • JStevens

    Baltimore is leasing dozens of buildings and historic landmarks because they no longer have the money to take care of them. The mayor’ office made a big stink about the media insinuating that the city was SELLING these properties. They pointed out there was a “big difference between leasing and selling”. Uh-huh. Sure.

    And the pot holes continue to multiply…

  • Guido

    I don’t believe your question was correct. You shouldn’t ask if we’re in a debt crisis. We are and have been for a long time. In fact, I remember in the 1980s we talked about debt being a serious problem. It has only gotten worse. The real question is how long can we put off the inevitable. I think the answer is not very long. There are dark, dark signs out there. Just read ZH for the day-to-day coverage of bad news. BTW-did anyone see the rumors of a possible coup attempt in China 2 days ago? I saw a brief mention, no lamestream coverage, and no info on the fallout. An eyewitness stated there were a ton of cops out in Beijing, but i haven’t seen anything else. Just curious…

  • Don Levit

    Tim:
    Thanks for your reply.
    Are the $1.1 trillion of Treasuries borrowed against, as in the Social Security trust fund? In other words, to redeem these Treasuries, must the government raise new general revenues?
    Are the trust funds having to be tapped, due to a cash flow shortage?
    Do you have a link where some of this information is provided?
    Thanks for any help you can provide.
    Don Levit

    • Tim

      Don,

      These are good questions.

      Some of the information in my comment above came from a GAO report entitled “Financial Audit: Bureau of the Public Debt’s Fiscal Years 2011 and 2010 Schedules of Federal Debt.” (I worked on the 2005 and 2006 audits of the federal debt when I was employed with GAO.) There is a page in that report with a list of intragovernmental debt holdings by trust fund as of 9/30/11. The Social Security trust fund is the largest, with $2.5 trillion in Treasury securities as of 9/30/11.

      The two trust funds that finance federal civilian and military retiree pensions are the Civil Service Retirement and Disability Fund (CSRDF) and the Military Retirement Fund (MRF). There is some information about these trust
      funds in the 2011 Financial Report of the U.S. Government. You can find the report at the Financial Management Service’s website. (www.fms.treas.gov) Look at the Notes to The Financial Statements, specifically Note 15.

      Federal government trust funds are basically just accounting mechanisms. Trust fund receipts are invested in special-issue Treasury securities, and the receipts go the general fund at the U.S. Treasury and are used to finance the federal government’s operations. When the Social Security program pays out more in benefits that it receives in taxes, as it has in recent years, securities held in the trust fund are redeemed. However, the government has to borrow this money as the cash has already been spent on other government operations. It’s unsustainable, and the day of reckoning is quickly approaching.

      I hope this helps.

      Tim

  • Don Levit

    Tim:
    That helps a lot!
    It is interesting to note that those special-issue Treasury securities turned out to be very ordinary.
    Instead of being used exclusively for Social Security beneficiaries, they were used to finance the general government’s operations.
    Don Levit

  • Keith

    That’s why the corporations sitting on 43 trillion (with a T) dollars in cash need to be forced to hire to get people backto work and paying taxes. Its not all on them, but their greed is fueling this in part.

  • Keith

    I meant $3 Trillion. Still a lot of money

  • marincountyman

    This is generational theft..pure and simple. This is not just a moral crisis of the first order, this is the moral crisis of our age. We are collectively endangering our children’s economic futures without giving them the slightest say in the matter. We are doing this systematically and with malice aforethought. Worst of all, we are pretending not to notice. Shame on the unions and their crony toadie union politicians that have sacrificed our children’s future by consuming future budgets for the next 30 years. Los Angeles is predicted to be BANKRUPT by 2014, San Francisco by 2016…San Jose is there now…as entire budgets are swept to pay the new $100k – 300k for life for folks retiring in their 50’s and on the take for 20 – 35 years plus free medical (that does a millionaire make and does not represent “middle class”) these unions have created the new elite – the new bourgeois – by clearly gaming and bribing the system to enrich themselves over our children and future. Pathetic….and shame on the politicians for enabling them and accepting the bribes.

  • http://www.setourchildrenfree.com/ Set Our Children Free

    In 1948 you could buy a gallon of gasoline for 20 cents – two silver dimes. That same amount of silver can buy a gallon of gasoline today, and silver is about $35 an ounce. In 1948 an ounce of gold could buy about 18 barrels of oil. An ounce of gold can still buy 18 barrels of oil. What does that tell you about the value of our dollar? And what does that tell you about what inflation will do to the price of everything if we keep printing money?

  • A. S. Mathew

    The housing crash has economically chocked the cities and counties all across the nation. In our small county, several hundred houses were built every year and the county used to get an avarage $ 1500-2500 property tax/year. Due to the crash in the housing industry, for the last four years, hardly nothing is built, so the income is plummeting. On the other hand, those people who used to pay $ 2500.00 as property tax began to fight with the county to reduce the taxes due to depreciated property value. Thus, from the already available income, there was a big drop in the county income. So, the county had to cut down on many projects, so more people were laid off. This circus is going on for the last four years, and it will hit into a point that the cities and counties by the hundreds would be declaring bankrupt. We are heading towards that day.

  • Hanna

    Well, it may be time to start the printing presses. It is better to have inflation and growth than no inflation and no growth! I lost my job and nearly lost my house and my familiy ( https://debtsblog.wordpress.com/ ) becaue this country no longer can keep ownership of its own industries as my company was bought and ripped apart by a Chinese investment co.