The financial pain inflicted by the Great Recession has been compounded in some broken cities by ill-advised budget decisions that involved honest mistakes.
Then again, not all of those decisions were honest.
Look no further than Miami-Dade County, Florida, a sprawling patchwork of dozens of suburban governments clustered around the city of Miami—a financial and trade hub to much of South America, a tourist magnet and home to a glittering glass skyline of pricey real estate.
Amid those multiple blessings, South Florida is also a hotbed of shady municipal finance deals that recently brought the region national notoriety in a flurry of fraud and corruption charges.
In September, the board that governs Miami-Dade's public hospital system settled Securities and Exchange Commission charges that it misled investors about its deteriorating finances when it sold $83 million in bonds in August 2009. The Public Health Trust, which runs the aging public hospital system, didn't admit or deny the SEC's findings.
In July, the SEC charged the city of Miami and its former budget manager, Michael Boudreaux, with running a "shell game" with city funds to hide a multimillion-dollar shortfall in vital reserves used to prevent the city budget from running aground. As the Great Recession ate into local revenues, authorities say, Boudreaux transferred funds to hide mounting deficits in advance of three bond offerings totaling $154 million in 2009.
(Boudreaux's attorney told the Miami Herald his client did nothing wrong and that there isn't "a scintilla of evidence of bad intent or fraud on his part." In a statement, the city said the SEC was "trying to transform political and budgetary decisions with which it disagrees unto securities violations." Last month, the city and Boudreaux asked a federal district court to dismiss the charges.)
(Read more: SEC charges city of Miami with fraud)
The agency also is looking closely at a controversial deal to build a new stadium for the Miami Marlins baseball team—paid for mostly with city and county bonds that left local taxpayers on the hook for over $1 billion for decades. The project was supposed to help attract more tourist traffic, boost the local economy and generate tax receipts. Instead, after three straight seasons in the basement of the National League East, the Marlins played their 2013 home games in a half-empty stadium.
The City of Miami and Miami-Dade County confirmed that they have received subpoenas.
The wider crackdown
The Great Recession inflicted one of the sharpest drops in local revenues on U.S. cities since the Great Depression. That put a historic budget squeeze on city halls nationwide, forcing widespread layoffs and deep service cuts.
That ebbing economic tide also revealed some of the worst municipal finance swindles in decades, according to a series of interviews with academic researchers, independent consultants and federal regulators.
The recent discovery of widespread fraud and corruption in local government finance should come as no surprise, they say. Public finance, long overdue for a regulatory crackdown, has been one of the murkiest corners of the financial services industry.
"For a long time—predating 2008—there's been a concern at the SEC regarding the opaque nature of this market in terms of disclosure, in terms of pricing, that it is really unregulated," said Elaine Greenberg, who ran the enforcement division of the SEC's Municipal Securities and Public Pensions unit.
"And the only way to get a handle on regulating the market is through enforcement," said Greenberg, who entered private practice in June after more than 25 years with the agency.
The lack of regulation governing disclosures is especially harmful to unsophisticated investors, who are often attracted to the income tax exemption reserved for municipal bonds, say public finance experts.
In response to evidence of a wave of public finance fraud, the SEC set up a task force three years ago to crack down on the most egregious offenders. The effort has begun to pay off in a batch of high-profile cases:
In 2010, New Jersey became the first state ever accused of violating federal securities laws when the SEC alleged it misled investors who bought 79 separate bond offerings totaling $26 billion over six years ending in April 2007. The state falsely claimed it could cover pensions for teachers and state workers without raising taxes or cutting services, according to the government. New Jersey agreed to settle the case, without admitting or denying the findings or paying any penalties.