U.S. States' Financial Woes Aren't the Next Greece, Samson Capital Says

U.S. states and municipalities struggling with mounting budget deficits “are not in the same precarious financial condition as Greece,” Samson Capital Advisors said.

The cost of protecting U.S. municipal bonds surged this year as investors bought insurance on U.S. state obligations after global stocks tumbled and Europe’s debt crisis worsened. New Jersey Governor Chris Christie told members of the Manhattan Institute on May 25 that the state is “careening our way toward becoming Greece.” Even so, states aren’t on the verge of default and such comparisons distract from more serious issues, Samson Capital said in a July 8 report.

“The statement that any U.S. state is the next Greece, meaning a near default on their bonds, is not based on fact,” said Judy Wesalo Temel, a principal and director of credit research at Samson, which manages $7 billion. “Comparing the Greek debt crisis to state and local governments is not valid and is distracting from the real concerns about budgets.”

The median debt to gross domestic product of U.S. states is 2 percent, compared with Greece’s 113 percent, according to last week’s report by Samson Capital, a New York-based fixed income investment manager.

Equating Illinois, whose deteriorating financial position left it with about $4.7 billion in unpaid bills at the end of June, with the Mediterranean nation is “ridiculous,” Governor Pat Quinn said as the state prepared to sell $900 million in Build America bonds this week.

Bondholders Repaid

“Those who are investing in the market they know our bonds have always been repaid,” Quinn said in an interview. “We have provisions in our constitution that are very protective of those who purchase bonds. I have the power to step in and make sure all bondholders are fully paid.”

Financial credit-default swaps approached a record high in Europe last month amid concern that Greece, Portugal and Spain may be forced to restructure debt to narrow budget deficits that are more than three times the European Union limit.

The ability to balance operating budgets, rather than service debt, is the biggest difficulty states confront, Temel said. As tax revenue continues to fall in most states in the recession’s wake, they face greater political conflict and will have to tap funding from programs including education, health and transportation to help fund pension expenditures.

The median debt service as a percentage of state expenditures is 3 percent, “a fraction of Greece’s debt burden,” according to the report, while state pension contributions were “relatively small” at 2.9 percent in 2008.

Illinois Pension

Illinois “has done little to solve a significant budget gap and has the worst underfunded pension problem” and California “remains challenged,” Temel said. Texas, Colorado, Maryland and Virginia “remain stronger and better managed.”

“We understand we have major fiscal challenges,” Quinn said July 10 in an interview at the National Governors Association meeting in Boston. “Our economy is growing and we want to keep building on that growing economy to get the state budget back in order.”

Illinois shares an A1 debt rating from Moody’s Investors Service with California, the lowest among U.S. states. Illinois ended fiscal 2010 in “the worst fiscal position in its history” and its backlog of unpaid bills and fund transfers rose from $2.8 billion a year earlier, State Comptroller Dan Hynes said in a quarterly report.

State budget deficits will reach a record $140 billion in fiscal 2011, which for most states began July 1, the Center on Budget and Policy Priorities, a Washington-based research group, said in a June report.

To contact the reporters on this story: Esmé E. Deprez in New York at edeprez@bloomberg.net;

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