Default Is Dirty Word to America's Willing and Able: Joe Mysak
Municipal bond defaults are down.
There were 72 issues totaling $2.5 billion in default in the year through November, according to Richard Lehmann of the Distressed Debt Securities Newsletter. That’s down from 204 issues totaling $7.3 billion for all of last year, and from the record of 162 issues totaling $8.2 billion for 2008.
Municipal bankruptcies are down. There have been five Chapter 9 filings so far this year, down from 10 in 2009, according to James Spiotto, a partner at law firm Chapman & Cutler LLP in Chicago.
Surprised? I was. What is the municipal market telling us?
This: The governmental entities that make up most of the market are doing everything they can to repay their debts.
Their ability to pay may have been compromised by the recession. Their willingness to pay is as strong as ever, and that’s what counts when tax revenue falls. The nation’s states and municipalities have been cutting costs, firing employees and raising taxes and fees in order to honor their commitments.
That should be reassuring to bondholders and all those investors who have been thinking about buying municipals, and who have been barraged by speculation for the past two years that the market is on the verge of collapse.
Last to Go
To be sure, the federal government’s economic stimulus has helped. Most of that money remained with the states, where you shouldn’t look for defaults. None of the 50 has reneged on debt since Arkansas did so during the Great Depression.
Why? The results -- being shut out of the credit markets -- would be catastrophic. And, as a November report by Fitch Ratings said: “Debt service is a relatively small part of most budgets, so not paying it does not do much to solve fiscal problems.” States don’t even think about defaulting on bonds.
The nation’s cities and towns have been doing the cutting, and paying their bills (as well as their debt service). This is borne out by statistics on headcount. Since August 2008, states have fired 39,000 employees, or 0.7 percent of the 5.2 million they carried at the peak.
Localities, on the other hand, have fired 368,000 workers, or 2.5 percent of their peak number of employees, also reached in August 2008. By comparison, companies fired 8.5 million, or 7.3 percent of the 115.6 million they employed in December 2007. They have since hired 1.1 million, according to the Bureau of Labor Statistics.
It’s Called Governing
Remember, the last thing that local and state governments do is fire people. They exhaust every possibility before that step. Anyone who says government officials haven’t done anything to address their budget (and pension) problems, or that they’re just a bunch of feckless rubes, would be wrong.
The people who have bruited about this business of the imminent implosion of the municipal market are bad enough. Worse are those who have advocated that cities and towns should default on their debts and then embrace bankruptcy to avoid having to make the hard choices (like firing people, and raising taxes, and sitting down with labor unions to renegotiate pension and other retirement benefits) that go with governing.
Call me old school. I still think it’s a good idea to try and muddle through with all the incremental moves and compromises and givebacks that the process entails. Paying one’s debts is the right thing to do.
Very Bad Words
Default and repudiation are very bad words in the municipal market today. They are the reason for the creation of the bond counsel industry in the late 19th century, and why in the 20th such things as outright, mass repudiation became all but nonexistent. Bond lawyers ensure that the borrowing done by states, cities and towns is valid and complies with tax law. Put another way, it’s a lot harder now for municipalities to run out on their debts than it was in the 19th century.
As for Chapter 9, it’s not an easy out. For one thing, states can’t enter bankruptcy; 26 of them even prohibit their municipalities from filing. And the states that allow for municipal bankruptcy discourage its use.
The market right now is awash in inexpert testimony, the opinions of analysts who may know how to analyze stocks, but who are confounded by munis. It’s a big mistake to think about municipals in terms of equities, and to talk about them that way as well.
(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net
To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net
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