What do muniland insiders think?

October 5, 2011

When the mainstream press pays attention to muniland, often it’s the most colorful and misinformed voices — think Meredith Whitney — that dominate coverage. So it was great to get some interesting data today on how municipal insiders view the market from the muni team at RBC Capital Markets. They did a survey of 116 municipal market professionals at the recent Bond Buyer’s California Public Finance Conference. Respondents included officials from federal, local and state governments; bankers; and other municipal finance professionals in attendance.

The key findings, shown in the chart above, are that industry participants worry most about the low level of bond issuance, headline risk and federal budget issues. Headline risk and federal budget problems are out of the control of everyone in the municipal space. But low issuance is a puzzler. Certainly these professionals have had their trade reduced as fewer bond issues come to market and as municipalities face harsher credit constraints than they are used to.

Another terrifying data point reported by RBC is the length of time respondents thought that it would take for state and local government revenues to return to pre-crisis levels.

# of years % responses
> 2 yrs 8%
3 years 24%
4 years 24%
5+ years 44%

The majority of survey responders think it will take four or more years before municipal revenues return to 2007 levels. We are looking at very hard times for muniland given that demands on state and local governments are likely to increase as more people seek Medicaid coverage and other support programs. Given this outlook it’s easy to predict that municipal bond issuance will remain very flat. State and local governments don’t have the fiscal space to easily take on more debt.

It’s hard times ahead but industry participants don’t seem overwhelmed by conditions. Chris Mauro, who heads the RBC municipal research team, said:

The interesting take-away from the recent California Public Finance Conference was that the percentage of respondents who feel that municipal defaults will be less in 2011 than 2010 has been going up while at the same time, the percent of respondents who believe that it will take four years or more for state revenues to return to pre-recession levels has also been increasing.

This reflects the growing confidence on the part of industry participants in the ability of state and local governments to manage through the current difficult fiscal environment but while at the same time, acknowledging that US economic weakness will limit the organic growth in state tax revenues.

Ultimately these are the professionals who manage the finances of state and local governments. I’m sure that they worry everyday about tough conditions.

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