Who Would've Thought? Municipalities Running Surpluses, Paying Down Debt

A couple of years ago, in December 2010, famed Wall Street analyst Meredith Whitney appeared on the CBS news program 60 Minutes.

Ms. Whitney had made her reputation based on her correct assessment of the dire straits of the US banking system in 2007.  She had subsequently started her own firm.

In 2010 she had turned her attention to a study of the municipal bond market in the United States, and she didn't like what she found.

Here's what she told Steve Kroft of 60 Minutes on that December night:

"You could 50 to 100 {municipal bond} sizable defaults, {maybe} more...It'll be something to worry about within the next 12 months"

The municipal bond market was rocked on the Monday following her appearance.  Investors sold in troves based largely on Ms. Whitney's comments, and municipal bond yields soared.

As it turned out, however, the municipal market was relatively complacent in 2011, and actual default activity declined last year.

News reports released yesterday indicated that rather than plunging further into debt, a number of states and local municipalities reported significantly improved finances.

In fact, more than half of the 50 states are now projected to show budget surpluses for their fiscal years, which end June 30. 

States and local governments did exactly what you might expect they would do - reduce costs - and as the economy improved, tax revenues moved nicely higher.

Here's how Reuters reported it this morning:

The National Conference of State Legislatures reported that 29 states and the District of Columbia project their fiscal 2012 revenue will exceed budgeted obligations by $9.1 billion. For most states, the fiscal year ends June 30....


..."Spending requirements have been relatively stable, and revenues continue to grow, and in some cases have returned to pre-recession levels," it added.

http://www.reuters.com/article/2012/05/03/usa-states-budgets-idUSL1E8G3FB920120503 

The Reuters report goes on to say that while many local governments remain cautiously optimistic,  most remain concerned about the continued rapid growth of Medicaid. 

In addition, huge legacy municipal pension and health care obligations continue to loom large in the future, so it is too early to issue the "all clear" on concerns on municipal credits.

However, for now, at least, the trend in municipal credit quality seems to be going in the right direction.