Tuesday, March 30, 2010

Payback Time - States’ Debt Woes Grow Too Big to Camouflage - NYTimes.com

Today's New York Times carries an ominous front-page article on the perilous state of public sector finances. Much of this has been covered elsewhere (does anyone not know the states have financial woes?) but it does highlight some of the unpleasant decisions that municipalities will be facing in the years to come.

However, from an investment standpoint, the most important part of the article comes near the end, when the author notes the very low level of municipal debt default that historically occurs, even in the most strapped municipalities:

Goldman Sachs, in a research report last week, acknowledged the pension issue but concluded the states were very unlikely to default on their debt and noted the states had 30 years to close pension shortfalls.

Even though about $5 billion of municipal bonds are in default today, the vast majority were issued by small local authorities in boom-and-bust locations like Florida, said Matt Fabian, managing director of Municipal Market Advisors, an independent consulting firm. The issuers raised money to pay for projects like sewer connections and new roads in subdivisions that collapsed in the subprime mortgage disaster.

The states, he said, are different. They learned a lesson from New York City, which got into trouble in the 1970s by financing its operations with short-term debt that had to be rolled over again and again. When investors suddenly lost confidence, New York was left empty-handed. To keep that from happening again, Mr. Fabian said, most states require short-term debt to be fully repaid the same year it is issued.

Some states have taken even more forceful measures to build creditor confidence. New York State has a trustee that intercepts tax revenues and makes some bond payments before the state can get to the money. California has a “continuous appropriation” for debt payments, so bondholders know they will get their interest even when the budget is hamstrung.

Payback Time - States’ Debt Woes Grow Too Big to Camouflage - NYTimes.com