Law Review: Towns need to get tough with finances, bond lawyer says

Bill Rhodes, a municipal-bond lawyer at Ballard Spahr L.L.P. who has been laboring in the trenches of government finance for nearly two decades, says he has never seen things so dicey.

The Great Recession has reached the balance sheets of local governments, long insulated from economic storms by a reliable stream of tax revenue and fees, says Rhodes.

There was a time when fiscal problems were the recurring nightmares of only big cities.

Not anymore. Small cities and towns across Pennsylvania are having trouble making payroll, funding needed capital projects, and meeting their pension obligations. Most troubling, says Rhodes, is that few municipalities are doing the needed cost-cutting to get their financial houses in order.

As if to underscore the point, Pennsylvania's capital, Harrisburg, disclosed last week that it would skip a $3.3 million payment due its lenders because it didn't have the money. The city, which did not say when or even if it would make good on the obligation, has been contemplating the drastic step of bankruptcy as a quick fix.

Local governments are relying on fees and other nontax revenue sources such as asset sales, parking tickets, and fines. Ever wonder why the cost of your speeding ticket was roughly equal to the cost of a stay in a very nice hotel in Cape May? It's helping to pay local government salaries somewhere.

There is even a derivative charmingly called a "swaption" that enables strapped municipal governments to capture the gain from a bond refinancing before the bonds come due.

Rhodes calls these transactions risky and says the deck is inherently stacked against local governments and school boards that consider using them because public officials typically have less information than the investment banks on the other side.

Translation: They're in way over their heads.

"No one has seen this confluence of depressed real estate values, job losses, people going underwater on their houses, the stock market drop hurting asset values and pensions," Rhodes said. "It's dire."

Ballard Spahr, a national firm with headquarters in Center City, has at least 45 lawyers working in its municipal-bond group and dozens more who specialize in other aspects of government finance. There are several hundred municipal-bond lawyers statewide. So you might think that this turmoil would be good for business at a law firm that does a lot of municipal work.

But that is not necessarily so.