Hurricane Irene And Municipal Bankruptcy

hurricane irene

[credit provider=”ap”]

As many media outlets are reporting this morning, Hurricane Irene is set to hit the East Coast, ramming into and unleashing untold destruction upon dozens of American cities, including New York City, Washington D.C., and Baltimore. And while I could certainly update you with breathless accounts of “The damage is upon us!” and “The humanity – my God the humanity!” (therefore indulging my former news anchoring and reporting ways), I shall instead leave the meteorological details (aka, doom-and-gloom) to the national media and local meteorological professionals. 

Instead, I lend my voice and opinion to the far less immediately sexy (and breathless) – but equally as economically relevant (and important-in-the-long-term) – issue of municipal finance.  And what financial doom-and-gloom Hurricane Irene – and other, not-yet-occurred (nor budgeted-for) natural disasters – could soon be bringing to the doorsteps of America’s troubled cities and counties.

Broadly speaking, many of America’s municipalities are, despite market interpretations and bond-purchasing price realities, teetering on the brink of bankruptcy.  And not “this-is-fixable-pending-a-few-financial-alterations” bankruptcy.  I mean” this-is-serious-someone-please-pay-attention-to-America’s-dire-economic-straits” bankruptcy.   And while I often feel like the lone voice crying “economic wolf” in the financial wilderness, I do sincerely believe America’s municipality market is headed for absolute disaster.

So what, you may ask, does Hurricane Irene have to do with all this?

Broadly speaking, America’s cities and counties are not, across the “economic board,” financially ready to deal with “unforeseen” external economic stresses.  Sure, they’re equipped to deal with the occasional snow-day and frozen water-pipe interruption, but, overall, America’s municipalities are currently living on and spending with a near-zero debit card: that is, everything’s financially ok.  Until it’s not.  And it’s the “it’s not” that is, in this case, the fickle beast: mother nature.  An external force which cannot be reckoned with.

As an example, let’s look  (BROADLY) at the example of New York City: while much of Mayor Bloomberg’s “botched” response to the 2010 snowstorm appeared sluggish, the snowy assault (regardless of your take on Bloomberg’s governing performance) on NYC drained a majority of the city’s “reserve” budget.  Now here, not more than 9 months later, comes Hurricane Irene.  Obviously, New York City is, as I type, gearing up to take on this impending disaster: but, with the city coffers already straining to sustain current city budget obligations, how much city (and county)-wide budget can be expected to “give?”  I’d say: not much.  Which leaves, of course, very little economic “wiggle-room,” heading into 2012.

And so it goes. 

Look, I’m not saying Hurricane Irene is destined to bankrupt the entire eastern seaboard: it is far too early and speculative (and irresponsible) to claim or assume any such thing.  But what I AM confidently stating is that, to those of us in the distressed investing municipal finance/turnaround space, Hurricane Irene offers a potentially deadly and economically sobering lesson: be ready for whatever mother nature may throw your way.  For however immediately important pension, bond, and voter obligations may seem, at the end of the day, local/muni government(s) does NOT exist SOLELY to service bondholder debt or pension obligations.

Rather, we, as Americans, look to our local (and, presumably, federal) government(s) to serve us, as citizens of the United States of America.  A message and calling often lost in today’s politically poisonous environment. 

Finally, a hopeful note to all those on the East Coast: please stay safe this weekend.  We here in the Midwest are hoping and praying for your health and safety.

Margaret Bogenrief is a partner with ACM Partners, a boutique crisis management and distressed investing firm serving companies and municipalities in financial distress.