A year ago, I approvingly cited research by Wall Street analyst Meredith Whitney who predicted a wave of municipal bond defaults by state and local governments. (See “The Next Train Wreck: Failed States.”) There have been a handful of spectacular flame-outs — most notably the city of Harrisburg, Pa., and Jefferson County, Ala. — but they are exceptions that prove the rule, concludes a paper by the National Association of State Budget Officers, “Municipal Bonds in 2011: An Update on State and Local Borrowing.”
Write the authors:
Municipal defaults continue to be a very small percentage of both the number of issuers and the aggregate dollar value of outstanding tax-exempt debt. There were no defaults on state general obligation bonds and none had been expected. In the first nine months of 2011, there were 42 municipal defaults totaling $949 million, falling from the 79 defaults experienced in 2010, amounting to $2.89 billion. The declining number of issuers defaulting, and the decreasing dollar value of those defaults indicates that local governments and municipalities are better able to meet debt obligations this year than in 2010.
Further, the overwhelming majority of defaults were on bonds issued by hospitals, industrial development organizations, and housing development
projects, not general obligation bonds tied to cities, counties, and states with taxing authority. The Harrisburg and Jefferson County bankruptcies can be traced to monumental human error, not systemic conditions. Conclude the authors: “Trends in the municipal markets suggest state and local governments will continue to have access to capital for years to come.”
In the post I wrote a year ago, I feared the possibility that the federal government would be moved to bail out irresponsible states and municipalities. Fortunately, as financial conditions for the states gradually improve and as states from Wisconsin to California make tough choices, no federal intervention has been necessary. As the failure of the Congressional super-committee to craft a budget-fighting agreement drives home, the biggest systemic threat to governance in this country remains the federal government itself.
— JAB
