Oct. 12 (Bloomberg) -- State-government bonds, which have underperformed local debt by the most in 14 months, may be poised to pull ahead as flagging property-tax revenue threatens budgets in U.S. cities and counties.
That may benefit Virginia’s sale of $167 million of bonds this week. It’s the state’s first general-obligation issue since Moody’s Investors Service placed its top credit rating on review on July 19 because of dependence on federal spending.
U.S. states’ revenue jumped 10 percent in the second quarter from a year earlier, driven by personal-income and sales taxes, the Census Bureau said last month. It was the most since 2006 and the sixth straight gain. Property-tax collections, the main income source for localities, dropped 1 percent.
“Total-return performance potential for larger, liquid state names offer better prospects, given the recent data,” James Ahn, who manages $1 billion of short- and intermediate- term municipals at JPMorgan Chase & Co. in New York, said in a telephone interview.
States can also pass on reductions in federal aid and shift responsibility for services to local governments to close budget deficits, said Howard Cure, director of municipal-credit research for Evercore Wealth Management LLC in New York, which manages $2.9 billion of municipal debt.
California, which cut spending on schools and the poor this year to erase a $26 billion projected budget deficit, plans to move thousands of criminals from state control to county lockups under a plan by Governor Jerry Brown.
“States have to balance their budgets,” Cure said in a telephone interview. “They’re going to do it to a large extent on the backs of local governments.”
Bonds sold by cities, counties and municipalities returned 6.86 percent from April 11 through Oct. 10, while state-level debt produced 5.88 percent, according to a Bank of America Merrill Lynch index that tracks prices and interest income. That’s the biggest six-month outperformance for localities against states since the similar period ended Feb. 10, 2010.
Virginia is one of 15 states with Moody’s top credit rating. A general-obligation bond sold by the state in October 2009 and maturing in June 2028 traded Oct. 4 at an average yield of 3.12 percent.
That’s 45 basis points less than an index of AAA general- obligation debt maturing in 17 years and unchanged from the last trade before Moody’s July announcement of a possible downgrade. A basis point is 0.01 percentage point.
Moody’s gave Virginia and four other top-rated states -- Maryland, South Carolina, Tennessee and New Mexico -- a negative outlook because federal spending drives a large part of their economies. That makes them vulnerable to actions of a Congressional supercommittee charged with finding $1.5 trillion of U.S. budget savings over the next decade.
The effects on Virginia and the other states won’t be taken into account by investors until the committee issues its recommendations, set for Nov. 23, Cure said.
“I don’t think people are that concerned about it yet,” Cure said. “It will come into play more once they get a sense of what’s going on with attempts to balance the federal budget.”
Moody’s said Oct. 4 it will analyze Virginia’s “available financial resources to offset risks related to the U.S. government.”
Governor Robert McDonnell announced on Sept. 15 that August was the 17th month of 18 where Virginia’s tax collections rose from a year earlier. The Republican said on Aug. 18 that the commonwealth ended fiscal 2011 with a $545 million budget surplus. He proposed using $30 million of it to help alleviate potential U.S. spending cuts.
Proceeds from this week’s bond sale will finance a residence hall at Virginia State University and dormitories at the College of William and Mary and at George Mason University, according to the preliminary offering statement. Dormitory fees will repay the debt, Evelyn Whitley, Virginia’s director of debt management, said in a telephone interview from Richmond.
Following are descriptions of pending sales of municipal debt:
CALIFORNIA plans to sell $2 billion of general-obligation bonds as soon as next week to finance capital projects and refund existing debt. Goldman Sachs & Co. and JPMorgan Chase will lead a team of banks on the deal. The transaction is rated A1, Moody’s fifth-highest grade. (Added Oct. 12)
HUDSON YARDS INFRASTRUCTURE CORP., which finances development of a district west of midtown Manhattan, plans to sell $1 billion of bonds as soon as next week to help pay for extending the No. 7 subway line to the neighborhood. The sale is rated A2, Moody’s sixth-highest grade. JPMorgan Chase is senior manager. (Added Oct. 7)
COLORADO HEALTH FACILITIES AUTHORITY, which issues hospital debt, will sell $309 million of revenue bonds as soon as Oct. 12. Proceeds will finance capital projects for Catholic Health Initiatives, part of the CHI Credit Group, a multistate health- care provider. The sale is rated AA, S&P’s third-highest grade. JPMorgan Chase will underwrite the deal. (Updated Oct. 12)
CITY AND COUNTY OF HONOLULU will sell $232 million of wastewater-system revenue bonds as soon as Oct. 13 to finance capital improvements and refinance debt. The utility system serves about 640,000 residents across 600 square miles. The bonds are rated AA, Fitch Rating’s third-highest grade. Bank of America Merrill Lynch will underwrite the deal. (Added Oct. 12)
--With assistance from William Selway in Washington and Michael B. Marois in Sacramento. Editors: Jerry Hart, Pete Young
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