ADM 626- Public Budgeting and Financial Management Paper.
ADM 626- Public Budgeting and Financial Management Paper.
We will discuss and summarizes the crisis in New York City and Orange County, California. We detail the effects on the various governmental levels as well as other local government. Lastly we will discuss how the bond market has been directly affected.ADM 626- Public Budgeting and Financial Management Paper.
In the middle of the 1970s, New York City borrowed about 2 million dollars in short-term debt, and had incurred about half a million deficit (Knox & Levinson, 2009). Early 1975 with financial institutions unwilling to lend more money, New York City was at risk of defaulting on its obligations. Collectively the city, state and federal governments helped to rectify this default. The effects of the default were that state as well as local governments were now paying higher interest rates. The finance community is now required to make their disclosures more detailed.
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North Carolina for example due to the crisis has incurred around 400k on bonded indebtedness and over 5 million in added interest. Due to the crisis investors now want more fact to be disclosed about the community and its bonds. The New York State Legislature also implemented numerous laws. The major remedy of fiscal crisis was the development of the Municipal Assistance Corporation (MAC) and formation of Financial Control Board (Knox & Levinson, 2009).
Once considered one of the wealthiest local governments in the world Orange County, California defaulted on its general obligation bonds. The major and lasting consequence of the default is that local and state taxpayers are responsible for paying millions more towards the debt service, and will continue to for years to come. ADM 626- Public Budgeting and Financial Management Paper. The effect of Orange County are not as drastic of those in new York city due to the fact that a large number of the Counties bond managers were money market managers and knew the importance of buying and acquiring credit and portfolio insurance. On the brink of default these managers realized that the median income in this city was about 20% higher than the entire state so they sold their shares. Interest rates did not spike and investors so no need to abandon the municipal market.
In the future when a government realizes they may be facing financial instability there are several steps that can be implemented. The government must first be honest and admit there is a problem and communication the problem effectively. As mentioned in the reading the most common remedy is to eliminate the imbalance between revenues and expenditures (Lynch & Smith, 2004). This along with safeguarding against the misappropriating of short term funding can help alleviate financial ruins.
References
1. Knox, John and Levinson, Marc. “Municipal Bankruptcy: Avoiding and Using Chapter 9 in Times of Fiscal Stress“. Orrick, Herrington & Sutcliffe, LLP. 2009.
- Lynch, T. D., & Smith, R. W. (2004). Public budgeting in America. Upper Saddle River, NJ:ADM 626- Public Budgeting and Financial Management Paper.
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