How many times has the SEC taken action against state and local governments for misleading investors?
Seven (see table).
This information is from the SEC's "Report on the Municipal Securities Market," released last week. It's not comprehensive. These are just the major actions taken by the SEC's Office of Municipal Securities for disclosure violations. Over the decades, the Office has also taken dozens of actions for other violations, against individuals (such as Steven Rattner and Larry Langford, a former Commissioner of Jefferson County, AL), financial firms, various special districts and authorities, and small cities. (Comprehensive lists of actions taken by the Office of Municipal Securities may be found here).
Also interesting in this report is the discussion of so-called "conduit bonds" or "conduit revenue bonds," by which a public entity allows a private entity to access lower-cost, tax-exempt financing. This debt is backed by payments from the third-party borrower, not the issuer. Examples of private beneficiaries of conduit bonds include non-profits such as hospitals and multi-family housing, and for-profits such as utility companies, sports stadiums, a Hampton Inn in Boston, and United Airlines. Industrial development bonds are conduit bonds.
The problem: the vast majority of muni market defaults are conduit bonds, even though they represent only 10% of the total principal issued in recent years and about 20% of all bonds issued. Some studies have found that conduit bonds represent over 70% of all municipal defaults (see pp. 7, 24-6). It seems that state and local officials find themselves on shaky ground when they attempt to judge the prospects of projects backed by revenue streams other than taxes.
Whenever the topic of municipal bankruptcy comes up, it is often stressed that most bankrupt "municipalities" are not true municipalities (cities, towns or counties), but special-purpose entities. Implication: don't be concerned, nothing to see here. But this data from the SEC report shows why we should be concerned that so many non-municipal municipalities default and wind up in bankruptcy.
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