The apocalypse in the muni bond market will have to wait.
That’s according to municipal bond experts who testified at a congressional hearing last week on the health of state and local government budgets.
Amid the hysterics of fear mongers predicting a wave of defaults, the House Oversight and Government Reform subcommittee heard from analysts and others on state and municipal debt, the first in a series of such hearings.
Challenges, yes; tsunami, no
Yes, many experts acknowledged escalating health care and pension obligations are playing a big role in squeezing government budgets. But a wave of defaults that will torpedo the economy does not appear to be on the horizon.
Iris Lav, of the Center on Budget and Policy Priorities, said states’ budget woes are cyclical, according to The Wall Street Journal. She said states are addressing their challenges, that for the most part, they are borrowing only to pay for infrastructure, not operating expenses. Lav noted that since the 1970s, default rates have been less than one-third of one percent of the $2.9 trillion municipal bond market.
To be sure, these experts said spending must be reduced. Unfunded long-term pension liabilities faced by state and local governments are substantial, according to Eileen Norcross, a research fellow at the Social Change Project at George Mason University.
Of course, perspective is also important.
As one congressman called for more transparency on the condition of local finances, Lav and Nicole Gelinas, a fellow at the Manhattan Institute for Policy Research, said muni bonds are different than the toxic subprime securities, which many investors unwittingly held in their portfolios, and aren’t likely to be a “bad apple” in individual mutual funds or money market funds, according to the Journal.
Governors reject bankruptcy
Inevitably, the idea of enabling states to declare bankruptcy was mentioned, a proposal the nation’s governors and budget officials resoundingly reject, (“State officials seeking fiscal discipline“).
“The nation’s governors strongly oppose federal proposals to provide states with bankruptcy protection,” the National Governors Association said in a statement.
“Allowing states to declare bankruptcy is not an authority state leaders have asked for nor would they use. The mere existence of a law allowing states to declare bankruptcy only serves to increase interest rates, raise the costs of state government and create more volatility in financial markets.”
Although the governors’ statement didn’t warrant the sensational headlines accorded the doomsayers, investors can nevertheless take heart from this thoughtful analysis.