What’s Not To Like?

What don’t you like about munis?

It’s a fair question. I’ve spent so much time defending them that some people might think that I’ve never met a muni that I didn’t like. Not so.

It’s true that municipal default and bankruptcy are exceedingly rare. The most common source of default, though, has been small projects funded by special fees. For one thing, their funding source is narrow; for another, the consequences of default are limited. The universe just doesn’t care about an obscure wireless internet project in eastern Montana.

But big projects go bust, too. The Las Vegas Monorail filed last year, partially because Nevada is in a financial funk, but mainly because the project was ill-conceived and poorly executed, linking second-tier casinos via slow, unreliable transportation.

And then there are the auditors. When auditors find problems, it’s good to take notice. Auditors are just as conflicted as rating agencies—they get paid by the parties they examine. There is such a thing as professionalism, however. The Detroit School District had 75 findings in its last operational audit, 23 of them repeat offenses. That’s bad.

Finally there’s cash. Some places never have enough. Even though it’s one of the wealthiest counties in America, Nassau County on Long Island just can’t seem to balance its books. I know there are disputes between the County officials and the State, but one thing isn’t in dispute: their cash balances have been declining for a decade.

But specific problems don’t mean there’s a systemic crisis. The muni market is a diverse agglomeration of towns, water districts, and convention centers. Each has its own profile. The key is taking the time to look.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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direct: 603-252-6509
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