Not in the News

So are state finances falling off a cliff?

Four months ago some analysts made headlines by predicting a financial cascade in municipal bond land. With the expiration of the stimulus package, the Federal government was due to stop making transfer payments to the states. To preserve their own budgets, the states in turn would slow or stop support payments to local municipalities. The resulting credit squeeze would produce 50-100 bankruptcies totaling hundreds of billions of dollars

How’s that working out? Well part of it is. The Federal government is indeed reducing its transfer payments on schedule. Moreover, the expiration of the Build America Bond program reduced a significant source of financing to the muni market. But this hasn’t resulted in a wave of bankruptcies. In most cases increased tax receipts have more than compensated for the reduction in Federal transfer payments. In California, revenues have gone up $5 billion over the past 8 months, or 9%. In Illinois, revenues are up 6%. Local assistance payments have gone up, not down.

And so far in 2011 so far we have seen … one Chapter 9 bankruptcy filing. Boise County, Idaho, has filed for bankruptcy protection on their $70 million in debt. The US economy is improving and filing for bankruptcy is too expensive. Government finances are a lagging factor in the economy—so in a recovery their revenues don’t turn positive until later in the cycle.

Now that’s happened. And the fiscal reforms sparking debate around the country should strengthen municipal finances. The sky is not falling. At least, not yet.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-11T13:54:26+00:00 March 25th, 2011|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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