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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