Local Debt Woes
Research for Online Investors

by John Dalt

12/20/10

There might a new breeze blowing through the halls of power next year.  Investors, politicians and now the media are aware of indebted states, underfunded pension plans and out of balance budgets.

Governor Chris Christie in New Jersey seems to be in the forefront telling it like it is, and it is not pretty. If you missed his interview on CBS 60 Minutes on 12/19/10, you can watch it here.

Imagine Governor Ed Rendell’s surprise earlier this month when Pennsylvania Auditor General, Jack Wagner, denied the issuance of $1 billion dollars in bonds.  He noted the state’s debt had risen 39% in the last eight years and currently sits at $8.4 billion or $927 per resident.

According to CBS, Arizona had to sell their state capital, supreme court and legislature buildings to investors to raise money.  The state now is leasing them back.  Illinois is behind on payments to most all of their vendors.  Nursing homes don’t get paid, unless they borrow all they can and then claim hardship status.

Meredith Whitney predicts 50 defaults in the next year in the municipal bond market.  Here are the worst states according to the Business Insider and CMA Datavision.

State--Probability of Default------CDS —Implied Credit Rating
                                                    10-year Bond
Illinois                    21%                      2.6%               bb-
California             20.9%                    2.6%               bb-
Michigan             18.8%                     2.37%             bb
New Jersey        17.1%                     2.10%             bb+
Nevada              16.7%                      2.05%             bb+
New York           15.9%                      1.94%             bb+
Rhode Island     12.4%                       1.49%             bb+
Massachusetts  11.2%                     1.35%             a+
Ohio                   11.2%                      1.34%             a+
Florida               10.8%                        1.3%             aa-
Pennsylvania     10.7%                     1.27%              aa-

There are numerous stories across the nation; some politicians still don’t get it.  The outgoing governor of Connecticut, M. Jodi Rell wanted to borrow $250,000 for a playground in her hometown.  This was buried in a $150 million dollar bond request she put before the State Bond Commission.  Luckily, enough members missed the meeting the governor couldn’t get a quorum to approve the debt.  Connecticut owes $19.6 billion in long term bonds, the highest per capita in the nation.

American cities and states have as much as $2 trillion in bond debt.  The problems are not limited to U.S. municipal governments.  The Guardian reports that European local and regional governments owe almost $1.7 trillion dollars in debt.  Bloomberg tells us that 619 local U.S. government bodies have declared bankruptcy since 1937.  Most of these bankruptcies were small water and other utility districts

If you still own fixed term investments; even after all of our warnings, you might want to check the list for your exposure.  Investors in these states and other local municipal bonds not only are at risk of declining values because of higher interest rates as the bond bubble deflates.  You may need to consider default risk.

To the mailbag:
Last night, 60 Minutes, the TV program, had a segment dealing with a number of States that are facing a financial meltdown.  The Governor of NJ was the main example and he pulled no punches.  He basically said that the State did not have enough money to continue paying out pensions to union members.  The piece also included the States of Illinois and California.  This whole thing looks like a train wreck about to happen.  Here is my question.  With the financial mess we are in, does it make sense to go back to cash and perhaps move our $$$$ to Canada?--- paid up subscriber J.P.

John’s reply:  I saw the story.  I like Gov. Christie.  I don't think we pull out of equities.  What I am trying to do is look at this issue, Iran nuclear, eurozone credit and N. Korea belligerence.  I am working to understand the ramifications of each and how to thread the needle with stocks or commodities that will either profit, or at least not get hurt, for our subscribers.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

MarketToday Archive

Back to Top