The pandemic is doing a number on state munis as their revenue streams are being slashed. The states are pleading for a Federal bailout even as Mitch McConnell has said he would prefer they go bankrupt. Well . . . . .
Unlike Uncle Sam the individual states cannot just print funny money. Nevertheless states do not go bankrupt per se. Instead they default on their bonds . . . . which you do not want to be holding at that point.
Forbes addresses the situation in this article from last Sunday. Each state is listed along with its current Moody’s rating. Some of them will surprise you. Even if you’re not holding state paper currently, you might be interested to learn how your state is rated.
Today’s rich people buy munis to escape taxation. Munis are worth less when taxes are (relatively) lower, more should taxation generally escalate. The secret is to anticipate what might lie ahead for taxes and buy your munis before prices rise . . . if they are gonna rise. For example:
I you think the pandemic is imposing a lot of extra cost everywhere, and if you believe Democrats will be successful in November, especially in Congress to where they gain control, then for some people this might be a time to consider munis. As taxes rise, if they do, your munis will be worth more.
Course the opposite is also true. When taxes fall munis are worth less. Given everything that’s happening out there, I’m not expecting taxes to fall any time soon. But you never know.
Broadly I agree this is an additional stress to state budgets, many of which were poorly managed to begin with largely stemming from over promising and under funding of pension benefits. For those states with poor finances, including but not limited to NY, NJ, CT, IL off the top of my head, I would definitely avoid their munis. The extra yield, even tax free should you be so lucky to be in a high tax bracket, seems unlikely to be competitive with chasing good bank accounts or CDs for example, and certainly not on a risk adjusted basis.
Muni bonds are like picking up pennies in front of a steamroller. If it comes down to screwing bondholders or screwing unionized public sector government retirees, the bondholders will get screwed.
People buying NJ and IL debt may get ultimately get bailed out by Uncle Sam. I think it will be a big mistake as it will create massive moral hazard, but I think it will happen. Buying these bonds and hoping for a bailout is not investing however, it is speculating.
So in that original article I go straight to Oregon and they say that we’ve got a pension shortfall of $62 billion.
Most recent data for Oregon is about a year old and at $26B.
So who knows where Forbes got their figures…
I see at Forbes it says: “Pension shortfall is an estimate of what the underfunding would be if obligations were discounted using recent U.S. Treasury rates.”
I don’t know what that means really. Sounds like Forbes is cooking up numbers on their own by applying a historically low interest rate.
Doesn’t matter too much in the end the OP point is still the same… state government budgets are in real jeopardy today and munis are at risk.
Back in my day people did not worry about state credits failing. And of course even now a large number of the states are fiscally responsible and highly rated. But it’s best now to pick and choose.
Years ago we had the Whoops bonds, four and five I believe it was (the others were dollar good), we had NYC but they were bailed out by the MAC, there was one city or county entity in California that defaulted I recall, rather than properly burden its own citizens, and of course you always worried about hospital bonds back then.
But states!! Heck, no. Most were very reliable.
I bought munis as I was coming up, lots of cats and dogs, small pieces I could pick up inexpensively. It was long before the internet. I used to call individual dealers I had cultivated and knew personally. When they had that annoying five or ten bond piece, priced right that nobody else wanted to bother with, I was there to help them unload it . . . . sort of like a garbage collector.
Kept track of everything on my computer at work. I controlled the entire system so it was easy after everyone else had left for the day to slip in my bond floppy (it was huge), update all my bond records, remove the floppy, and nobody ever was any the wiser. Great fun!
And back then I had a local bank which did not charge to process coupons. Yeah, actual PAPER coupons attached to the bonds and you went in and clipped 'em with scissors, put them into a special coupon deposit envelope, and deposited the money easy peasy . . . . and all tax free, of course.
Boy, those were the days; now long gone. But it was fun while it lasted.
Yeah, I really do not remember. It was such a long time ago.
I think that old computer might have had core memory. But, again, I don’t really remember. I do recall large interchangeable platters of some sort, which I think were our “hard disks”. You could either put work on one of those platters or on a floppy. My personal file was small. A floppy worked fine.