Tuesday, January 18, 2011

State Finances and the Muni Market

60 Minutes (12-19-2010)
State Budgets: Day of Reckoning (14 minutes long)

With tax receipts falling and bills piling up, many states and local governments are facing a severe fiscal crunch. Meredith Whitney and others are sounding the alarm about bond defaults.  However, no state in the U.S.  has ever defaulted. Even on the rare occasions when local government have defaulted, 90% of the debt is typically recovered (see CNN article below).

The WSJ suggests that the panic may create good investment opportunities for the astute investor.  Investors must do their homework - and perhaps not rely too much on the rating agencies. The rating agencies did a terrible job measuring the risk of housing financial instruments before the financial crisis - and have yet to earn back investors' trust.

Even if defaults don't increase - big adjustments are ahead for state and local taxation and spending. Pension reform looks inevitable.

Muni Bonds Run Wild Money.CNN.com (1-14-2011) - includes short video clip

"Municipal Bonds: What Investors Should Do Now", WSJ (1-15-2011)

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