1. Defaults on Municipal Bonds
Eric Thammavong & Natalie Hooper

2. Overview Historical default rates (Munis vs. Corporates)
Robert Citron – Orange County Default
Washington Public Power Supply System (WPPSS) – Whoops!

3. Municipal Bonds Municipal Bonds High ratings Long history of repayment
1970s: municipal bonds have exhibited significantly lower risk of default than similarly rated corporate bonds

4. Default Rates: Munis vs. Corporates

5. Default Rates: Munis vs. Corporates
Standard & Poor’s Study (2001):
“A” rated municipal bond less than 1/10th as likely to default as A-rated corporate bonds

6. Recovery Rate: Munis vs. Corporates
Money recovered from defaulted municipal bonds:
66% of face value
FULL recovery
75% - 100% of par
Money recovered from defaulted corporate bonds:
42% of face value

7. Orange County Bankruptcy
December 6th, 1994
Robert Lafee Citron
Only Democratic Politician to hold office at the time
(24 years in Office)
Controlled the General Fund, Investment Pool, and the Treasury Commingled Pool ($7.6 Billion)
9% annual return

8. What led to the financial crisis?
Orange County FY94
12% of revenue came from Interest
3% of revenue from interest for Other Counties
Proposition 13
Lowered property tax by 57%
Proposed FY95
FY95 budget: Interest would account for 35% of county’s general fund revenue

9. The Scheme

10. Investments Federal Reserved raised interest rates from 3.5% to 5%
What goes up must come down
$2 borrow for $1 dollar deposited

11. Warnings John Moorlach
Republican candidate
“It doesn’t bother me he’s a Democrat. This is a person who has gotten us millions of dollars. I don’t know how the hell he does it, but he makes us all look good”
Then-Chairman of the Board of Supervisors

12. Bankruptcy November - $1.64 Billion $7.6 Billion (county funds)
County government, school districts, transportation, water, and sanitation agencies
$13 Billion (borrowed)
Total Loss $20.6 Billion
Robert Citron
Asked to resign in December 1994

13. Washington Public Power Supply System (WPPSS)
Created in 1957
Expected demand for electricity would double every ten years.
Plan to construct 5 nuclear power plants

14. WPPSS
Projects 1,2, and 3 supported by net billing Bonneville Power Administration (BPA)
Net billing:
pledged BPA’s revenues towards repayment of WPPSS borrowings
made the plants expected energy into a regional resource which spread the risk among all BPA’s customers
priced expensive new nuclear power below its marginal cost

15. WPPSS
Projects 4 and 5 financed through tax-exempt municipal revenue bonds
88 regional public utilities signed participants’ agreements for shares
“take or pay” agreements:
Commitment to pay for their share whether or not the plants ever generated a WATT of electricity

16. Skepticism Demand began to decline due to increased energy costs
1972 oil embargo
Conservation
High energy costs = conservation
Slowing economy
Electric growth rates fall
1% to 2% per year

17. Three-Mile Island
1979, nuclear plant accident in Middletown, PA, changing direction of entire nuclear industry.
Public confidence eroded
New safety requirements implemented
Nuclear Regulation Commission (NRC) devised list of 6,000 steps to improve plant safety

18. The Downfall
Construction delays, increased costs to meet safety standards, and mismanagement of the process drove the cost of the project to 3 and 4 times the original estimates.
Costs soared to $24 billion
NW population of 10 million, $2,400 burden on every man, woman, and child

19. Mismanagement
Mismanagement by WPPSS was the biggest cause of delays and cost overruns
no experience in nuclear engineering or projects of this scale
unable to develop a unified means of choosing, directing, and supervising contractors
For example: a pipe hanger was built and rebuilt 17 times
Delays were not widely reported

20. Whoops!

21. Whoops! Construction of projects 4 and 5 was terminated January 1982
1983 WPPSS defaulted on $2.25 billion in principal and approximately $5 billion in interest
88 participating utilities were faced with repayment
Washington and Idaho Supreme Courts invalidated obligations of those utilities

22. Question 1
What was the name of the treasurer who caused Orange County bankruptcy?
Robert Citron

23. Question 2 What was one of the causes of the WPPSS default?
Construction delays
Cost overruns
Mismanagement of project

24. Question 3
What type of agreement did the 88 public utilities enter into that committed them to pay whether or not the WPPSS plants ever generated a WATT of electricity?
Take or Pay

25. Question 4
What suggestions do you have that could help prevent future municipal crisis?