Bonds

Munis Rally as States Slash Spending


Florida is firing 1,300 workers. New York is cutting education funding and freezing public employee wages for three years. Arizona is slashing Medicaid coverage. And municipal bondholders are having their best year since President George H.W. Bush was in the White House. Says Mark Stockwell, director of municipal research at PNC Capital Advisors, which has $7 billion in municipal assets under management: “The governors and legislatures are making the tough decisions.”

Bank of America (BAC) Merrill Lynch’s Municipal Master Index, which measures price changes and interest income, has returned 4.45 percent since Mar. 31. That’s the most since the index of tax-exempts gained 4.47 percent in the first quarter of 1992, according to data compiled by Bloomberg. So far in 2011 there have been 25 defaults on $752 million in municipal debt, down from 60 defaults on $2.87 billion in the first half of 2010, according to Jack Colombo, editor of Distressed Debt Securities Newsletter.

Over the past six months governors and lawmakers in California, New Jersey, Wisconsin, and other states have balanced their fiscal 2012 budgets and protected their credit ratings by reducing the benefits of public employees and coverage for Medicaid recipients and by cutting city and school spending. State government employment is down to early 1999 levels. In terms of employees per 1,000 population, it is at its lowest level since 1976, according to a June 13 report from RBC Capital Markets. “There is definitely some pain in those budgets,” says Justin Hoogendoorn, managing director of the strategic analytic group at BMO Capital Markets.

The pain isn’t over. States are going into the budget year facing continued economic uncertainty, the loss of federal stimulus dollars, and tax collections that remain below prerecession levels. Total general-fund revenue remains 3.6 percent below prerecession highs, even though several states have increased taxes, according to the National Governors Assn. and the National Association of State Budget Officers. “There’s no question there will be some austerity coming out of the federal government, and that’ll hit the states,” Hoogendoorn says. “Even if we do get a bit of a recovery in revenues, I don’t see it going back to peak revenues for some time.”

The bottom line: With revenues 3.6 percent below prerecession highs, states are firing workers and cutting expenditures to meet debt obligations.

Jones is a reporter for Bloomberg News in Chicago.
Varghese is a reporter for Bloomberg News.

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