Local Governments Downgraded by Moody’s
Kurt Brouwer April 8th, 2009
It is not exactly news that municipalities are hurting these days. But, this move by Moody’s is a bit surprising. This New York Times’ piece spells out the surprising news that Moody’s just downgraded all local governments [emphasis added]:
Muni Bonds May Face Downgrade (New York Times, April 7, 2009, Mary Williams Walsh)
Moody’s Investors Service assigned a negative outlook to the creditworthiness of all local governments in the United States, the agency said Tuesday, the first time it had ever issued such a blanket report on municipalities.
The report signaled how severely the economic downturn was affecting towns, counties and school districts across the nation.
…The report suggests that the ratings of many governments could be downgraded in the coming months, something that would make it more expensive for them to borrow money to finance their operations.
In the most extreme cases, municipalities might default on some of their obligations, as Jefferson County, Ala., has been threatening to do for a number of months.
Vallejo, Calif., declared bankruptcy last year and is being closely watched to see if it will set a legal precedent that other towns could follow. (see California City On Verge Of Bankruptcy)
…In a special report made public on Tuesday, the agency cited revenues that are falling almost everywhere as a result of the economic downturn. But it also discussed the problems some municipalities had created for themselves by using complex financial products that seemed to be saving money at first, only to send costs soaring during the credit crisis see (New York Times–Risky Deals).
…The report suggested conflicts ahead between taxpayers struggling to keep their own households afloat and elected officials charged with balancing budgets, making their payrolls and protecting their credit ratings.
“Taxpayers, worried about their own financial condition, are more resistant than ever to increasing property or other local taxes,” the report observed.
The report’s publication coincided with the downgrading by Moody’s of the credit of the State of Illinois to the A level from double-A. Moody’s said Illinois was having difficulty managing its cash, and in recent weeks had been trying to push its scheduled pension contributions into the future. The state pension fund is already seriously underfunded.
…The bond markets took the Moody’s report in stride on Tuesday, apparently because institutional investors were already familiar with the problems described. New York City brought bonds to market on Tuesday and ended up selling much more than initially planned.
“New York City is potentially a poster child for economic woe, but that didn’t seem to bother investors,” said Thomas G. Doe, president of Municipal Market Advisors…
There really is not any hard news behind Moody’s report, just a general trend toward rising costs and lower tax revenues for cities and towns across the land.
For investors, the good news is that paying interest on municipal bonds is generally one of the highest obligations a municipality has. And, recent fully-subscribed bond issuances by the State of California and New York City suggest that investors believe the money is good and thus are happy to get the high tax-exempt yields. The NYC offering was for $883 million in bonds, the longest of which mature in 2036 and carry 5.5% yields.
Nonetheless, this is a trend well worth watching. It also suggests that it pays to be diversified in your tax-exempt bond holdings. Investing in a municipal bond fund is probably the best way to go for most people.
- Economy , Geopolitics , Investing , Money , Mutual Funds , income taxes
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