Militant Unions Raise Muni Risk

Steve Malanga reports:

Meanwhile, Buffett worries that growing political pressure on elected officials—who are getting squeezed between irate taxpayers on the one hand and powerful public employee groups on the other—might prompt a few places to test the idea of reneging on their debt. That, he fears, could lead to a cascade of defaults that would overwhelm insurers who back these bonds: “If a few communities stiff their creditors and get away with it, the chance that others will follow in their footsteps will grow.”

Concerned about just such a gusher of bankruptcy filings, California’s state legislature is now considering controversial legislation that would require a municipality to get approval from a state commission to file Chapter 9, which is how governments go bankrupt. Muni investors can’t be heartened by the prospect of a rash of such municipal bankruptcies considering the way bondholders have been treated by government in the Chrysler and General Motors filings. I can just hear some politician browbeating muni holders about how they must do their part to help troubled cities out of their fiscal woes by taking 30 cents on the dollar.

For decades the claims of municipal bondholders have been considered the immovable obligations of government finance. But now their interests are in conflict with the new irresistible force of local politics, the public employee unions.

You'll want to read the whole article twice. It's that good.