The 30,000-foot view of muniland

October 18, 2012

The Bond Dealers of America, an organization representing national middle-market bond dealers, held its national conference in Chicago last week. I did not attend, unfortunately, but the agenda was a good mix of regulatory and legislative perspectives from the buy-side (mutual funds, insurance firms, asset managers) and electronic trading platform executives.

What interested me most was a presentation by Amy Laskey, managing director of the Public Finance Group at Fitch Ratings, who provided a 30,000 foot view of the current state of muniland. These are the best sections that present a mixed-to-positive picture:

Review of Recent Rating Actions

• Average local government general obligation rating remains ‘AA’ but trending towards ‘AA-’

• 12% downgrade rate YTD

• Upgrades scarce

• Multiple downgrades

• Increasing divide between strong and weak credits

• Expect more isolated cases of default, bankruptcy

Revenue vs. Spending Trends

• Moving in opposite directions

• Flat to declining recent revenue performance

• Property tax

• Sales tax

• State aid

• Natural spending growth

• COLAs [cost of living adjustments], step increase

• Inflationary growth

• Pension, health care increase

Sound Reserve Levels

• Reserves remain strong for most local governments despite some declines during the downturn

• Once the prolonged nature of the downturn became clear most managers turned to recurring budget solutions

• Unrestricted reserves at the end of fiscal 2011 average well over 20% of spending for governments rated in the ‘AA’ category

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