Muni Defaults

Washington Public Power Supply System, 1983

Dave Kirk, BA 543

Muni Bonds

• Municiple Bonds: Securities issued by state and local governments and by their creations, such as “authorities” and special districts. (Fabozzi)

• Default: The failure to promptly pay interest or principal when due. In the case of muni bonds, failure to make coupon (interest) payments due to general insolvency.

Muni Bond Types

• General Obligation Bonds: Backed by the issuer, and usually guaranteed by the issuers vast taxing authority.

• Revenue Bonds: Backed by future or current revenues, such as tolls or fees associated with a specific service.

Washington Public Power Supply System (WPPSS)

• Organized in 1957 as municipal corporation• Chartered to guarantee electric power to

Northwest homes and businesses• Focused on nuclear power plant construction• 17 member utilities, including Seattle City

Light

First Project• Packwood Lake Dam

– Constructed 1957– 27 Megawatt– $10.4 million ($76.7 million today), 7

months behind schedule

Build, Build, Build…

• WPPSS projected electricity demand to double every 10 years - hydro capacity insufficient.

• N-Reactor– In operation 1963-1987– Produced steam & weapons-grade plutonium– 860 Megawatts

….Build, Build, Build

• Bonds issued to finance the construction of 5 additional new nuclear power plants

• 1971: Three plants were proposed at Hanford and two at Satsop.

• Twin plants were to be built at each location, in theory reducing design and construction costs

Columbia Generating Station

• 1,150 Megawatt• Permit issued: 1973• Commercial operation began: 1984

Project Problems

• Costs 3-4x original estimates• Builders got ahead of designers in

construction schedule• Nuclear Regulatory Commission safety

changes• Incompetent contractors• Quality control issues not addressed

1970’s Turmoil

• Arab oil embargo of 1973 contributed to sense of upcoming energy shortages.

• Low Washington snow pack in 1973 caused shortage of hydroelectricity

The Times They Are A Changin’

• 1962: Rachel Carson, The Silent Spring• 1974: Seattle City Light “Kill-a-Watt” program• 1975: Seattle City council votes against

participation in Nuclear Plants 4 & 5• 1979: Three mile island scare

WPPSS Default

• 1982: Construction of Plants 4 and 5 halted• $2.25 billion in revenue bonds with no

projected revenue• Largest municipal default in history• 1988: 75,000 bondholders settle for $753

million, netting between 10 and 40 cents on the dollar.

Default Analysis

• Cato Insitute: The spending and borrowing of off-budget enterprises (OBEs) such as WPPSS do not appear in the budgets of the governmental entities that created them. OBEs raise funds not by direct taxation but by issuing revenue bonds that are not approved by voters. Consequently, OBEs such as WPPSS are detached from the scrutiny and control of taxpayers (at least until serious financial problems arise),and are exempt from many of the checks and balances that exist for other firms in the public and private sectors. The lack of incentive that plagues public enterprises generally because the profit motive and other market constraints are absent is amplified in OBEs because of the further lack of political market constraints.

WPPSS Today

• 1998: renamed Energy Northwest• 2002: Nine Canyon Wind Project– Kennewick, Washington– 96 Megawatts

• 2002: White Bluffs Solar Station– Richland, Washington– 0.04 Megawatts

Are Municipal Bonds a Good Investment?

Average Default Rates of Moody’s-Rated Bonds 1970-2009

Additional Resources

• Daniel Pope, Nuclear Implosion: The Rise and Fall of the Washington Public Power Supply System, 2008

• http://www.hanford.gov/page.cfm/NReactor• http://www.energy-northwest.com• http://money.cnn.com/2012/10/01/investing/

muni-bond-default-risk.moneymag/index.html

• http://www.cato.org/sites/cato.org/files/pubs/pdf/pa028.pdf

Questions???