"The most significant threat to our national security is our debt," Admiral Michael Mullen, Chairman, Joint Chiefs of Staff, August 27, 2010


Friday, September 3, 2010

Municipal Bond Fraud

Any follower/reader/supporter/contributor to these pages knows that TheFundamentals has been adamant in its criticism of certain states fiscal policies with an emphasis on their very promiscuous and unnecessary pension programs. If you want to see the story told in startling facts and figures, click on this link to a recent article written by the governor of California: http://online.wsj.com/article/SB10001424052748703447004575449813071709510.html?mod=WSJ_Opinion_LEADTop 

There is just no local or state politician willing or able to vigorously represent the taxpayers in negotiating most remuneration/benefit or pension package with municipal and state public unions. The result is now a huge imbalance in pay scales between public and private employees and similar massive imbalances in their benefit programs and their pension programs. You can blame almost any of the responsible parties – greedy government employees; even greedier union representation; very weak political leadership and an electorate that either doesn’t care about the situation or has no idea what to do about the situation.

But that does not excuse the forces that still have responsibility for the mess in many of our larger cities, counties and states. Who or what are these forces you may ask? Well, they are numerous and they begin with the aforementioned parties. But after concluding that there is no real enforcement capability with any of the above parties, let’s look at others who also should be held responsible for fiscal promiscuity and terrible money management by government officials and employees.

Most government entities – cities, states, counties, school district and other local political subdivisions borrow money and are obligated to issue audited financial statements. These two facts bring them under the scrutiny of outside forces. These forces include laws, rules and reporting obligations that carry certain standards and deadlines for presenting accurate information independently reviewed, audited and certified. That process also includes penalty provisions for misstatement, deception and outright fraud. In many cases the penalties are civil in nature meaning a court of law may find a party guilty and require recompensation to correct a misdeed. In other cases, the penalties are criminal meaning the law will prosecute the case and may impose, upon findings of guilt, prison sentences as well as fines to the wrongdoers.

So, where is the accountability? Are the auditors of all the bond issuers demanding accurate financial reporting of all pension obligations and, more importantly, are they issuing opinions that accurately depict the circumstances of underfunded liabilities? Are they issuing opinions that would necessitate corrective action? We don’t know. We would like to hear from knowledgeable and interested parties about the fulfillment of this responsibility. Moving further on this topic, are the state auditors issuing accurate oversight reports about the financial condition of sub political units within their states? Are they determining that the public and the bondholders are receiving accurate financial information with full disclosure of all contingent liabilities as well as all recorded liabilities? We don’t know. We would like to hear from knowledgeable and interested parties about the fulfillment of this responsibility. Moving further on this topic, what about the Securities and Exchange Commission, the SEC, the outfit that missed Bernie Madoff, the outfit that missed FNMA and FHLMC and missed Citigroup and Bear Stearns and Lehman? Are they doing their job? Are they notifying the public about risk in the financial dealings of state and municipal entities and their liabilities and obligations, both known and contingent? We don’t know.

But here is one thing we do know. Quoting directly from the SEC press release issued recently: “Washington, D.C., Aug. 18, 2010 — The Securities and Exchange Commission today charged the State of New Jersey with securities fraud for misrepresenting and failing to disclose to investors in billions of dollars worth of municipal bond offerings that it was underfunding the state's two largest pension plans.” “The SEC's order further finds that New Jersey failed to provide certain present and historical financial information regarding its pension funding in bond disclosure documents.” You can read the entire press release at: http://www.sec.gov/news/press/2010/2010-152.htm  How much was involved you may ask? The release says $26 billion between August 2001 and April 2007. Just $26 billion! Anyone going to jail? Dunno. Anyone get fined? Dunno. Can’t find any suggestion that anyone even got fired.

So, in closing, we would like to be helpful. We don’t know who is telling the truth, the whole truth and nothing but the truth. We don’t know how accurate or inaccurate the bond filings are and how accurate and complete the financial statements are or whether the shenanigans that the SEC finally located in NJ are replicated in other locales. We just dunno. But, here is a suggestion; a clue; just a simple observation. If you are an accountant or an auditor or a regulator or a rating agency person, it just may be a remote possibility; there is an outside chance that some state or county or city or school board may not be sure just where they are going to get the funds to meet all their known and future obligations. And we think it’s about time you started getting that information out to the public. Or, to put it another way, we think it’s about time you started doing your job. That information should be made very public and very soon.

By the way, where is the FBI?  What is the US Justice Department doing?  Do they only concern themselves with citizens who don't tell the truth, the whole truth and nothing but the truth?  Do they just take a pass on governmental entities which fail to disclose the whole truth?  What is the responsibility of the "authorities" when a governmental entity could be the prevaricator?

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