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OpenGov Voices: A Transparent Approach to Understanding Local Government Debt

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Disclaimer: The opinions expressed by the guest blogger and those providing comments are theirs alone and do not reflect the opinions of the Sunlight Foundation or any employee thereof. Sunlight Joffe_Headshot_1Foundation is not responsible for the accuracy of any of the information within the guest blog.

Marc Joffe is the founder of Public Sector Credit Solutions (PSCS) which applies open data and analytics to rating government bonds. Before starting PSCS, Marc was a Senior Director at Moody’s Analytics. You can contact him at marc@publicsectorcredit.org. Marc is also one of the winners of Sunlight Foundation’s OpenGov Grants.

High profile bankruptcy filings by Detroit and other cities, along with concerns about public employee pensions, are increasing borrowing costs for state and local governments. Higher interest payments to bondholders mean higher taxes and fewer services. However, with transparent data and analytics, local government bonds can get reasonable interest rates -- as this post will illustrate.

Over the last 70 years, municipal bond defaults have been rare. In a typical year, no more than one in 1,000 municipalities fail to make timely payments on their tax supported debt. Also, interest on municipal bonds is exempt from federal income taxes and usually free of state income taxes as well.

Because of their low risk and favorable tax treatment, municipal bonds have typically yielded less than US Treasury bonds – making it easy for states, cities, counties and school districts to finance new infrastructure. Time series data available from the Federal Reserve (a portion of which is depicted in the accompanying graph) show that yields on “munis” were lower than Treasuries from 1953 until the 2008 financial crisis. This discount returned briefly in 2010, but since Meredith Whitney predicted a wave of municipal bond defaults on 60 Minutes in December 2010, muni yields have exceeded Treasury yields – often by substantial margins.

Municipal and Treasury data

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City Finances Were A Story Before Detroit’s Bankruptcy

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The news is indeed big and deserving of attention: As of last week, Detroit is now the largest U.S. municipality to file for bankruptcy.

The news, however, is perhaps not as shocking as some would portray it. While national publications have only recently jumped on the story, Detroit's local media have long been keeping the public informed about the city's finances and the series of events that eventually led to filing for bankruptcy.

Accessing public records -- including details about the city's financial data, contracts, and many other datasets -- has enabled the media to shine a light over the years on the city's fiscal challenges. Outlets like Detroit Free Press, The Detroit News, Fox 2 News, and many others were on this story long before the news of bankruptcy woke up the media giants: capturing critical moments like when the city realized it was close to running out of cash in 2011 and press conferences by Detroit leaders in 2012 that described how allowing state intervention could help prevent bankruptcy. Continued coverage from the local media kept residents informed about what was happening, what events and politics had led Detroit to this situation, and what could come next. The potential of bankruptcy was no surprise to those who followed the process of state intervention in the city's finances.

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With a population of more than 700,000 people, Detroit is now the largest U.S. city to file for bankruptcy, but it is by no means the first large city to do so. Cities like Stockton (population: 296,000), Vallejo (population: 117,000), and San Bernardino (population: 213,000) have been there, too, and the stories out of those cities can help show what to watch for in Detroit. (And, if San Bernardino is any example, other cities can show some of the particular challenges to financial information disclosure that may appear during bankruptcy proceedings.)

No two places provide an exact apples to apples comparison, however. Each city has its own history, process, and paper trail -- and each needs an experienced scout to know how to traverse the political landscape and to help the public do the same. That's why it's so important to have access to public records (the key to understanding our political past and present) and to have watchdogs who use them to review the political process and show those in power that they will be held accountable for their actions.

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