Muniland holds steady

September 20, 2011

Municipal bond ownership has remained relatively steady over the past year, according to the Federal Reserve’s latest Flow of Funds data, which was released yesterday (Fed’s L.211 Municipal Securities and Loans page 92). The data paints a different picture than the one we typically hear from the media of large outflows from retail investors and mutual funds following Meredith Whitney’s prediction of massive municipal defaults. Essentially the whole municipal bond market has increased slightly in size, growing from $2.842 trillion in 2Q 2010 to $2.886 trillion in 2Q 2011. Ownership for all categories has remained pretty steady.

The puzzling part is that the Federal Reserve continues to maintain that muniland is about $2.8 trillion in size. Back in June my colleguage Daniel Berger of Thomson Reuters Municipal Market Data kicked up a dust storm when he began to question the overall size of the municipal bond market. George Friedlander of Citigroup got on the story too and wrote the following:

After considerable conversation with Federal Reserve staff and recalculation based upon separate sources, we have concluded that the Fed’s data dramatically understates the amount of outstanding municipals. We now estimate that there is a sum total of roughly $3.7 trillion in state and local debt outstanding, in comparison with the $2.925 trillion reported by the Fed for year-end 2010. While the Fed may modify its data at some point, we felt that it was important to present this modified picture of the size and mix of holdings on a timely basis.

It would be useful if the Federal Reserve was able to verify the size of the muni bond market, especially as President Obama and the Congress make proposals to alter the tax treatment of these bonds. It would certainly help policy-making if there were accurate baseline data.

Moodys: Defaults and bankruptcies to remain “rare”

Reuters reports that the rating agency Moodys continues to see stress on state and local government finances but predicts few defaults or bankruptcies for municipal bonds. From Reuters:

Even though the recession officially ended more than two years ago, the still-weak U.S. economy and a pullback in federal support means the outlook for states and local governments remains negative, Moody’s Investors Service said on Monday.

The two sectors of the $3.7 trillion U.S. municipal bond market were originally branded with negative outlooks by Moody’s in 2009 as tax revenue tanked.

The rating agency noted that revenue collections have improved, but not enough for states to completely replace federal stimulus funding that ended in June. Another reduction is expected as Congress wrestles with ways to reduce the U.S. deficit.

Still, states have the flexibility to deal with financial strain and support their ratings, Moody’s said, adding the median state rating was Aa1.

A muniland myth debunked

Benjamin Landy writes eloquently in his Blog of the Century about the outstanding work being done by the Project on Government Oversight (POGO). POGO calculated the cost differential between work done by government workers versus private contractors, and the data is strinking. It may be time to rethink the conventional wisdom that says outsourcing equals cost savings. Here is the money quote and graph:

Instead of focusing on the public-private pay differential, POGO examined the actual cost of the contracts auctioned to private businesses compared to the estimated cost of the same job being done in-house by public employees. After looking at 550 contracts across 35 different sectors and agencies, they found that in 94 percent of cases, the average billing rate of the contractors was nearly double what the government would have paid to do the job itself.

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