Billionnaire Town East Hampton Floating Debt to Pay Bills

For all you municipal bond investors, cities and towns are having a hard time paying their bills. Most munis are probably safe but make sure you pay attention to what you are buying. Even "rich" towns like East Hampton are having trouble paying the bills.

East Hampton, NY a wealthy community on Long Island has to float $15 billion in bonds in order to cover a deficit.  Bloomberg reports that:

"The Long Island sanctuary for the rich, where lobster salad sells for $85 a pound, has been hit by a double whammy: a tripling in workers' health costs since 2003, which officials failed to anticipate, and a 43 percent drop in revenue from mortgage taxes related to real estate sales in the first half of the year from 2007. Town officials for the first time plan to reduce the deficit by borrowing, after winning state approval for a $15 million bond sale."

Is a rich town like East Hampton is suffering, imagine how other, less affluent towns and cities across the country are doing?  In East Hampton's case, there is plenty of money to pay for the shortfall.  They will issue bonds and raise taxes to pay for it and the residents will be able to afford it.  But what about cities and towns where houses are going into foreclosure and the municipality is losing its tax base?  If a city has invested invested in a capital project in the expectation of a certain tax base and then that tax base falls, what can the town do? 

Moody's, S&P and others are supposedly monitoring these municipalities but we know what kind of job they did with housing and the pricing of mortgage backed securities.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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