More Cities on Brink of Bankruptcy - CNBC

Broke: The Plan to Restore Our Trust, Truth and Treasure

More Cities on Brink of Bankruptcy

Published: Wednesday, 26 May 2010 | 11:01 AM ET

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By: Kate Kelly
CNBC Reporter

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The possibility of a bankruptcy filing by the city of Harrisburg, Pa., the state capital, looms large these days—and it could be the first in a series, say some Wall Street traders.

Harrisburg, population 55,000, owes nearly $70 million in debt payments this year, and it's unclear where that money will come from.

Harrisburg now has one of the lowest credit ratings of any municipality in the United States.

Harrisburg Mayor Linda Thompson told CNBC Wednesday that she had assembled a group of bond stakeholders, the city council and other interested parties to work out the crisis "so that we don't become the poster child of the world in terms of bankruptcy."

Municipal bond underwriters are monitoring Harrisburg, which has struggled to contain the costs of financing a troubled incinerator project.

Kate Kelly
CNBC Reporter

In 2003, the city borrowed $125 million to expand and retrofit its incinerator, which officials thought would make money for Harrisburg. The incinerator re-opened five years later, but it's turned out to be nothing but a money drain.

On May 1, the city missed a $452,282 loan payment related to the incinerator.

Raising taxes or selling assets, like real estate or parking lots, are options for Harrisburg. So is a restructuring plan—either inside or outside of bankruptcy.

If Harrisburg does file for bankruptcy, it would do so under Chapter 9—which is employed by cities, but rarely. In one closely watched case, the city of Vallejo, Calif., has been in Chapter 9 since 2008.

About the Harrisburg situation, Jim Lebenthal, head of public affairs for the longtime municipal-bond underwriter, Lebenthal & Co., said that while filing for Chapter 9 would be a small matter in the scheme of things, it's "emblematic" of the larger economic struggles that cities face right now. "If it can happen in a state capital, my God, it can happen anywhere," said Lebenthal.

The overall problem is that the $2.8 trillion muni bond market, long considered one of the safest havens for investors, now faces a daunting level of debt, as cities from Los Angeles to New York struggle with an array of headaches, including less tax revenue and high labor costs.

According to remarks made by Harrisburg mayor Thompson in April, the city spends rought 70 percent of its annual budget on labor.

Cities can always raise taxes to fight a budget shortfall. But costly projects, fewer people in the workforce and more demand for city services can make budgets tough to square these days.

Financial firms underwrite bond offerings for cities and public-works projects, and the default rate on muni bonds has historically been quite low—less than 1 percent—compared to nearly 13 percent for corporate bonds, according to ratings agency figures.

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In that sense, the Street encourages investors to go long municipalities.

But investors and the Street can also short munis through credit default swaps, or CDS policies that pay out if an entity defaults.

The Markit MCDX, an index that tracks the cost of insuring against default of a basket of 50 municipalities, is on a recent high of $173,000 for $10 million of protection on a five-year bond—a point last reached near the beginning of this year. A swap that would pay out if the state of Pennsylvania defaults cost $112,000 for the same $10 million amount.

Jesse Bergman contributed to this story.

• Slideshow: Municipal Bonds at Greatest Risk for Default

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TOPICS:Economy (U.S.) | Regulations | Investment Strategy | Debt | Credit | Banking |Corporate Bonds | Municipal Bonds | Bankruptcy | New York City | Politics & Government

SECTORS:Financial Services | Banks

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15 Mayors Who Must Shred The Budget To Save Their Bankrupt Cities

Just as they bankrupted the Auto Companies, the Unions have now bankrupted the cities.
Broke: The Plan to Restore Our Trust, Truth and Treasure

Big Pharma's Latest Puppet - John McCain

DSSA Bill a Big win for Big Pharma?

The dietary-supplement industry is fighting a bid by U.S. Sen. John McCain to force it to disclose ingredients and register with the Food and Drug Administration.

Most of the industrialized world has incredibly restrictive laws governing supplements. People worldwide often purchase supplements from the U.S. because they are freely available at low costs. The Dietary Supplement Safety Act of 2010 would also strengthen recall authority of any dietary supplement the FDA finds to be hazardous.

Obviously, forcing small companies to go through the FDA's Billion Dollar drug approval process would be way too expensive for natural substances that can't be patented, and would drive up the costs of Natural Supplements substantially.

Tucson's Food Conspiracy Co-op on Fourth Avenue is urging visitors to its Facebook page to take action against the bill, warning it would "create administrative hurdles that small supplement companies could not take on, leaving only products from large pharmaceutical companies."

McCain, who is teaming on the bill with Sen. Byron Dorgan, D-N.D., held a press conference in early February to tout it, flanked by several athletes, including swimmer Kicker Vencill, who was banned from the Olympics after taking a tainted supplement. He successfully sued the manufacturer but missed out on the Olympics.

Strong Opposition to DSSA

Stung by rapidly escalating criticism about the bill's intent, McCain made a floor speech last week saying he introduced the legislation at the behest of Major League Baseball, the National Football League and the American College of Sports Medicine, along with several other sports organizations.

He recalled the case of Phoenix Suns' star Tom Gugliotta, who almost died in 2000 after taking a "sleep aid" that sent him into a seizure.

But McCain said the bill was also introduced for the half of all Americans who take some kind of supplement. "People have died from taking dietary supplements, including a young mother and wife who lived in my home state, and thousands have had to be hospitalized or seen by a doctor due to an adverse reaction from a dietary supplement."

Of course, McCain didn't introduce a bill to do anything about the more than 100,000 people a year that die from drug interactions from the Pharmaceutical industry.

He said it was about "truth in labeling," saying it only makes sense because Americans can get ingredients off the side of a cereal box or a container of yogurt.

McCain spokeswoman Brooke Buchanan said it's important for consumers to know ingredients, too, because some compounds may interact poorly with or nullify their prescription drugs.

Buchanan said the bill has been mischaracterized by opponents. The biggest misconception? "That John McCain is trying to take away people's vitamins. It's just not true. He wants to make is safer for you to take your vitamins."

All of this could change, however, if DSSA passes. DSSA would change key sections of the Federal Food, Drug, and Cosmetic Act (FD&C), undoing protections in the Dietary Supplement Health and Education Act (DSHEA) of 1994, effectively eliminating free access to supplements.

The importance of DSHEA
The passage of DSHEA resulted from millions of Americans who worked hard to reinforce their freedom to buy and sell supplements. At the time, the Food and Drug Administration (FDA) was alleging that nutrients like CoQ10 and selenium were dangerous and should be pulled from the market.

Of course, today we know that supplements like CoQ10 have can vastly improve human health, and there are studies that show that CoQ10 can be more beneficial than some of the expressive medications that have been approved by the FDA. In a way, CoQ10 is costing big Pharma Billions in additional profits!

Though weak in some areas, DSHEA established a foundation upon which free access to dietary supplements would be protected from attacks by drug companies and the FDA.

What prompted DSSA?
McCain's DSSA bill emerged in response to illegal steroid use among Major League Baseball players. Likely instigated by pharmaceutical interests, the bill is being posited as necessary to prevent supplement adulteration.

The FDA already has the power to pull supplements from the market that are contaminated but it has not been doing its job. DSSA is not only unnecessary, but it would actually reward the FDA for its failures. DSSA would also strip DSHEA and give full control of the supplement industry to the FDA.

Registration requirements
DSSA would mandate that all supplement companies register with the Secretary of Health and Human Services (HHS), which oversees the FDA. Any company that refuses to register and comply with HHS would be subject to hefty fines, the classification of its products as "adulterated", and their removal from the market. The new system would burden manufacturers with significant new costs that would cause supplement prices to increase. A new taxpayer-funded bureaucracy would also be created to conduct inspections and oversee compliance.

Reporting requirements
DSSA would require all "non-serious adverse events" received by supplement companies to be reported to the government, regardless of whether or not the events are related to the supplements for which they are submitted. Pharmaceutical companies would have access to these reports which they could use to petition the FDA to have supplements removed from the market. The FDA could also arbitrarily pull supplements from the market if it believes it has "reasonable probability" that there may be a problem.

FDA would decide which supplements are legal
Perhaps the most chilling aspect of DSSA is that it would allow the HHS Secretary to establish a list of permitted supplements. Reversing common law, which assumes all is legal unless restricted, DSSA would allow only what is permitted to be legal.

In a nutshell, DSSA would increase supplement costs for consumers, grant incredible new power over the supplement industry to the FDA, and drastically limit the availability of supplements. Drug companies could also use the bill to remove supplements from the market, patent them, and sell them as drugs!

It is absolutely critical to contact your Congressmen and oppose this bill. LifeExtension Magazine has a convenient "Action Alert" page in which to do so.

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