Why the little guys can be on top

August 10, 2011

Here is a brilliant map from the Tax Foundation (via WPRI.com). The percentages on the map indicate the amount of each state’s annual budget that goes to pay off interest on their debt. Massachusetts leads the pack in this statistic with 9.58% of their budget going towards interest payments, much higher than the average. It’s important to note that this is not a map of relative ranking of debt loads as that would look quite a bit different and have California in the lead.

After seeing this map, S&P’s announcement that cities and states can keep their AAA rating despite the U.S.’s downgrade makes more sense. The National League of Cities said the following in response to Standard & Poors’ statement:

Standard & Poor’s announcement that cities and states may keep their AAA bond ratings despite the recent downgrade of the U.S. federal government demonstrates the difference between U.S. federal debt and the municipal bond market.

Unlike the federal government, municipal debt is typically not used to finance day-to-day operations. Local and state governments use municipal bonds to finance infrastructure projects. Nearly all local and state borrowing is longer-term (20 or 30 years) and debt service payments are predictable (usually the same amount each year). Additionally, local and state debt levels are low, about 16 percent of GDP, and usually representing a relatively small portion of local and state budgets, about 5 percent on average.

Reuters: Some munis can have higher ratings than US – S&P

Bond Buyer: S&P Report Says States, Locals Can Be Rated AAA

Bloomberg: S&P Plans No Added Muni-Rating Cuts Until U.S. Budget Details Are Complete

The Baltimore Sun: Md. treasurer: S&P sees ‘no action’ on state credit rating

Municipal closed end funds trading at big discount

I’m not allowed to offer investment advice on this blog (and I let my Series 7 brokerage license expire years ago anyway). But I do suggest you watch this video of Sangeeta Marfatia, director of closed-end research at UBS Securities LLC, as she talks about closed-end muni funds and the municipal bond market. She is highlighting some interesting dislocations in pricing.

@Twitter Talk

@munilass: 35 defaults in the muni market so far this year, totaling $946 million. (Bloomberg)

@StatesAndCities: Harrisburg Mayor Plans to Risk City Payroll to Pay Debt Service Next Month – Bloomberg bloom.bg/qOzy3a

@Fixedology: BABs helped grow cross-over buyers by bringing in global sov. wealth funds and pension funds to the muni mkt — Very large buyers

@alebenthal: S&P Plans No Added Muni-Rating Cuts Until U.S. Budget Details Are Complete – Bloomberg bloom.bg/pbMTMA

Follow me on Twitter @cate_long and the hashtag #muniland

+Good Links

Moody’s: US Debt Ceiling Agreement to Yield Half-a-Trillion or More in Defense Budget Cuts

ProPublica: Could Unspent Stimulus Money Be Used to Fend Off a New Recession?

Bloomberg: Muni-Bond Issuers Should Face Disclosure Penalties, Regulator Advises SEC

Goodwin Proctor: Public Finance Update – July 2011 Bond Market Snapshot

Council of State Governments: Trends in State GDP: 2010

Council of State Governments: Unemployment Insurance Trust Funds

Birmingham News: Jefferson County officials ask for less debt forgiven

Bloomberg: California Risks ‘Drastic’ Cuts as Receipts Miss Forecast, Controller Says

Bond Buyer: Vallejo, Calif., Bankruptcy Exit Plan Gets Judge’s Green Light

Wall Street Journal: High Taxes Don’t Drive Out the Rich, Study Says

Bloomberg: Pennsylvania’s Muni Oversight Law Falls Short as Workers Doubt Paychecks

Bloomberg: Los Angeles City Council Approves Anschutz-Backed Stadium Deal for NFL

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Top Ten States (highest debt) Voted for Obama
Bottom Ten States (lowest debt) – Voted for McCain

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