With state and local budgets in such bad shape, a recent stream of articles has raised concerns among municipal investors that there is an impending default crisis in municipal bonds. As has long been the case, much of the confusion stems from an attempt by market outsiders to apply corporate financial concepts directly to the municipal bond market, which can often lead to misleading conclusions. Even though a number of states undoubtedly have severe budgetary problems, MainLine West believes that state general obligation issues, in particular, possess credit strength that will protect them from default – even in the most extreme instances. A telling statistic is that in all states, debt service as a percentage of total state expenditures remains low – below 9 percent in most cases. In addition, it is important to acknowledge and understand the distinction between a budgetary crisis and a credit crisis at the state and local level. While the budgetary strains have, and will continue, to lead to cuts in the level of government services, they are not, except in rare cases, precursors of an inability to pay debt service on outstanding bonds.
While the situation may not be as dire as the media would have you believe, stringent credit analysis has taken on significantly greater importance in light of the recent economic challenges. Changes in credit ratings can impact the suitability of a bond for an investor’s portfolio. MainLine West remains committed to using its own credit research, flagging those issuers and deals that put principal at risk. In general, we recommend investors buy essential service bonds and unlimited taxing power, voter approved, general obligation bonds to continue to sleep well at night.