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Buffett’s Exit From Muni-Bonds Signals Trouble Ahead for Local Govts

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Warren Buffett's Berkshire Hathaway ended its five-year bullish bet on the municipal bond market, The Wall Street Journal reports. The Omaha, Neb., company noted in a recent quarterly filing that it had canceled credit-default swaps insuring its $8.25 billion muni-bond market wager. The Journal said it was unclear whether Buffett's decision resulted in a profit or a loss and the 81-year-old Buffett declined to comment about the early termination of the contracts.

Does Warren Buffett's exit from the municipal bond market portend more financial hardships for struggling U.S. states and cities?

The Daily Ticker's Aaron Task and Henry Blodget say Buffett's move may very well signal his fear that more cash-strapped cities, states and municipalities will default on their debt. Local authorities have been making severe budget cuts (affecting both personnel and services) over the past two years to stave off bankruptcy but many are still short on funds.

Investors have generally remained positive on the $3.7 trillion municipal market, pouring $964 million into municipal-bond mutual funds last week — 18 straight weeks of inflows. Investor appetite may be stronger for municipal debt than U.S. government bonds, but the tide could be changing after the Berkshire Hathaway disclosure.

There have been six Chapter 9 municipal bankruptcy filings this year compared to 13 in 2011. Muni bankruptcies have totaled 268 since 1980, according to Reuters, with cities, villages and counties accounting for 49 of the filings.

Nebraska, California and Texas have experienced the greatest number of bankruptcy filings. Stockton, Calif., became the largest U.S. city to ever declare bankruptcy when city officials were unable to reach a deal with creditors. San Bernardino, Calif., filed its bankruptcy paperwork on Aug. 1, making it the third California city, after Mammoth Lakes, to seek bankruptcy protection.

Scranton, Pa., could be the next big city to go belly-up — its city business manager Ryan McGowan told the Scranton Times-Tribune that Scranton has just $133,000 in cash but owes vendors $3.4 million. The former industrial city also decided to slash public employees' hourly pay to $7.25 — firefighters, police officers and the mayor included — to stop hemorrhaging money. Public employees are not only experiencing job cuts and smaller wages — local authorities are under pressure to reduce benefits and pensions too.

The Pew Center for the States analyzed state retirement systems in a new report and the findings refute some of the commonly held beliefs on public employee pensions. Less than three percent of state budgets go toward employee pensions and two-thirds of the funds in pension plans are contributed by employees or earned on investments, meaning taxpayers barely subsidize public pensions.

Cities and states continue to face dire fiscal scenarios and Buffett's decision to pull out of the muni-bond market raises these concerns to a higher level.

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