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Q

While I wholeheartedly agree that “fear sells,” and I would like to have confidence in the municipal bond market, the question remains, “Can we trust our government to bail everyone out no matter what?” I would hope that municipalities would be on the front burner — way ahead of banks and corporations. I think the government owes every citizen/taxpayer at least that much. If the government doesn’t make sure that municipal bonds are backed and repaid on time, I think they will have a huge rebellion on their hands. The municipal bond market is not where the ball should be dropped.
L.J., Colorado

No less a personage than Newt Gingrich has said that he would support legislation allowing states to declare bankruptcy to escape unbearable union contracts. This, of course, strikes fear in the hearts of people like me, with a long and successful career behind me (I’m 80) and a lot of my sizeable savings invested in New Jersey munis. It would helpful to know what steps states would have to take to declare bankruptcy so I can judge how probable it might be. If it’s probable, I’ll probably join in what will become a run on munis. That’s the issue people like me are dealing with, and prudence would dictate that we get some really solid answers before beginning to sell millions in munis.
J.S., New Jersey

A

James A. Klotz responds:

With all due respect to Newt Gingrich, the former House speaker has never been considered an authority on municipal finance.

In our opinion and in the opinion of most state officials, bankruptcy is not a viable option.

As California Treasurer Bill Lockyer said in a release: “States didn’t ask for it. We don’t want it.  We don’t need it.” Other state officials expressing similar sentiments include Illinois State Treasurer Dan Rutherford, Connecticut Gov. Daniel P. Malloy and Florida’s Director of Bond Finance Ben Watkins. They know that the consequences of a state bankruptcy would be disastrous for the future funding of any municipal needs throughout the state.

Ironically, the threat of bankruptcy by governors and legislators has provided a powerful new tool for squeezing concessions from defiant public employee unions. As a New Jersey resident, you have witnessed the implementation of these tactics under Gov. Chris Christie, who has vowed to bring the state’s fiscal deportment under control.

Unfortunately, one of the side effects of this strategy is to frighten municipal bond investors like you.

There are currently a number of options available to state officials to achieve their cost-cutting goals and get municipal unions in a frame of mind to face certain inevitable realities. These include the threat of mass layoffs and freezing or cutting wages unilaterally through involuntary furloughs, as California and other states have done recently.

There are other legal remedies available to most states since the bargaining rights of state and local governments fall under the framework of state law. A number of governors have already threatened to eliminate their state’s bargaining statutes if unions are unwilling to make necessary concessions.

Interestingly, in New Jersey, Gov. Christie is making the difficult decisions that most politicians have avoided in recent years.

Other politicians have noticed that rather than diminishing his popularity, his “the party is over” stance has been met with overwhelming support (other than in municipal employee unions), in New Jersey and elsewhere.

We think financial responsibility is taking hold throughout the country. We would emphatically encourage you not to sell your New Jersey bonds at this time.

If you hold any particular credits that concern you, please contact us to discuss them in further detail.