Meredith Whitney made waves in December when she predicted that 2011 would be the year of hundreds of municipal bond defaults. The backlash from her comments reverberated throughout the investment world. Several notable investors came out to say the claims were overdone and many others jumped on the bandwagon to spread fears of a European style budget crisis. In January I said Mrs. Whitney was wrong and that the muni bond crisis was overblown. Not 3 months later, the crisis thesis is already looking like it’s off the table.
The latest data from the Census Bureau on state and local governments shows a snap back in revenues. Total revenues are now just 2.3% shy of the all-time high. This is excellent news, however, the recovery is somewhat uneven. The WSJ highlights the discrepancy in state and local revenues:
“The latest tallies show a diverging trend in the fiscal health of state and local governments. While state tax revenue increased every quarter of 2010, including a 6.7% jump in the fourth period compared with a year earlier, local tax revenue fell in the first and fourth quarters"”in part because of slumping real-estate tax receipts.
While states are primarily funded by sales and income taxes"”which tend to grow along with an expanding economy"”the nation’s 89,000 cities, school districts and other local governments depend heavily on property taxes.
It typically takes a few years for falling housing prices to show up in property-tax receipts, and the latest Census figures suggest that is now happening.”
This should continue to be a headwind for local government’s as the lag in property taxes continues to put pressure on budgets. As recent housing data shows, we’re seeing continued declines in housing prices (I’ll be updating my housing outlook shortly). But on the whole we are beginning to see a slowing in the rate of property tax receipt decline:
More importantly, however, the overall picture is now stabilizing. Total receipts are now outstripping expenditures at 2.6% year over year growth. This by no means says the budget woes are over, however, there are definite signs of improvement. Austerity is likely to continue to kick-in at the state and local level and tax receipts should continue to move sluggishly higher under my weak recovery scenario. It’s not exactly a recipe for booming growth, but it’s also not setting the table for a European style crisis and economic doom and gloom that many have predicted.
http://www.ft.com/cms/s/0/9b325dfc-5965-11e0-bc39-00144feab49a.html
US Muni Bond demand slips into big freeze
A feared meltdown has yet to materialise. Instead, the US municipal bond market, blighted by concern that struggling states and cities could default on their obligations, has gone into a deep freeze. Sales of new bonds have plunged as retail investors, traditionally the biggest buyers of municipal debt, have fled. The first quarter of the year will record the lowest amount of quarterly new issuance in more than a decade. At $44bn, the amount raised will be less than half the new bonds sold by this time last year.[..]
“If we don't get smaller, then the solution is price,” Hector Negroni, co-head of muni sales and trading at Goldman Sachs said at a conference held by Sifma, the securities industry association. “Price usually solves everything.”
That’s great. While the financial picture for munis is actually improving Whitney scares investors away from the market….all that means is you and I will pick up the tab if large defaults ever become a concern….In other words, Americans will likely buy the bonds one way or another….But hey, at least MW got some publicity out of the whole thing….
Good article
This is a fairly incomplete view of the situation. The States in question are still in financial trouble, and have only taken short term steps to kick the budget problems down the road. The situation here in California is dependent on ever higher borrowing and the hope that voters will make permanent the temporary tax hikes. If the voters decide to reject the tax hikes, the budget panic will return. Nothing has been fixed at either the Federal or State level, and until it is, we are in danger of confidence crises at any time.
Do note the gap between the healthy & unhealthy states is like the household(private) income gap that’s been burgeoning for the past 20 years. Empirically, I can tell you that my real estate taxes here in Boston increased 50% y/y, which increased my overall mortgage payment by 20%. (The increase resulted from a 25% appreciation in the city’s appraisal of my homevalue, plus a 18% increase in the tax rate.) That can’t help the average household. If somehow our neighborhood avoids a redoubled round of foreclosures, the City of Boston will post some healthy revenue gains for fiscal 2011. I actually called City Hall because I thought that the increase was a bit excessive, so there must’ve been a mistake. It’s “across the board,” so they say. And, I looked back at historical real estate tax trends, which showed a similar kick in 2001. Trying to get my head around this.
On the other side of this argument …
Real Estate Crash Catches Up to Cities as Property Taxes Slide http://www.bloomberg.com/news/2011-03-30/real-estate-crash-catches-up-to-cities-as-property-taxes-slide.html
The real-estate crash is catching up to U.S. municipalities.
Cities, counties and school districts had been sheltered from the full impact of the slump because of the lag between when realty prices fluctuate and values are reset by local tax assessors. That's changing as property rolls are adjusted to the current market and residents push to have their taxes cut.
Local officials are now facing the consequences. Property- tax revenue dropped in the last three months of 2010 at the fastest pace since home prices slipped from their peak more than four years ago, the Census Bureau said yesterday. The decline may continue as values fall further, adding strains to cash- strapped localities that already fired workers, halted projects and cut spending because of the recession that began in 2007.
"The story had been a question about why property taxes weren't declining," said Christopher Hoene, research director for the Washington-based National League of Cities. "What the census is picking up is that's been happening and it's likely to keep happening for the next few quarters."
The decline for local governments contrasts with a recovery for U.S. states led by income and sales taxes. Their collections in the fourth quarter climbed by $13 billion to $177.8 billion, the biggest jump since 2006, according to the census data released yesterday.
"Cities are by no means out of the woods," Hoene said. "They have got another year or two of dealing with either declining revenues or pretty slow growth."
…
"This is the first year that most local governments are seeing a decline in their property-tax revenues," said Julie Beglin, a vice president with Moody's public finance group in New York.
Up and Down Wall Street TUESDAY, MARCH 29, 2011
Andrew Cuomo 1, Meredith Whitney 0 By RANDALL W. FORSYTH — BARRON’S
N.Y. Governor comes up with balanced budget, defying muni doomsayers.
“Pigs Fly!” blared Monday’s New York Post front page.
That’s how Barrons.com’s News Corp. tabloid cousin described the improbable event of New York State reaching a budget agreement. Not just any deal, but one that closes a projected $10 billion deficit. And, just as miraculously, the budget deal was hammered on time, ahead of the beginning of the new fiscal year on April 1.
I’d have bet on porcine flight ahead of all that happening, especially in Albany, one of the most dysfunctional state capitals between Providence and Sacramento. Especially since the $132.5 billion budget was balanced with a 2% cut in spending — $3.5 billion — something that hadn’t been done in 15 years.
Moreover, the proposed budget just as miraculously contains no new taxes. Indeed, a “millionaires” surtax will lapse on Dec. 31, which may deter a few hedge-fund managers who haven’t moved across the Connecticut border from doing so.
The budget deal is a major victory for New York’s freshman governor, Andrew Cuomo. He essentially got his way with the notoriously recalcitrant legislature, which has rarely passed a budget on time in recent years.
Just as remarkable is that Democrat Cuomo joins his Republican counterpart across the Hudson, Chris Christie, in getting their states’ budgets in order by cutting spending and not raising taxes.
Even New York Assembly Czar, er, Speaker, Sheldon Silver, under whom several governors have served, admitted “government had to tighten its belt.”
To be sure, New York’s fiscal deal did not come about painlessly. New York City will feel some of the brunt of the reductions, including the failure to restore $300 million of cuts imposed last year. School districts across the state will feel the pain of $1.2 billion less in state aid, which is a less severe reduction than the $1.5 billion originally proposed.
This may be less dramatic than the fight going on in Wisconsin, in which public-employee unions have been stripped of collective bargaining rights. But New York’s ability to balance a far larger budget without draconian measures is perhaps more significant.
It also flies in the face of predictions of a meltdown in municipal finances predicted for 2011 by analyst Meredith Whitney. “You could see 50 sizable defaults,” she asserted in a December interview with CBS News’ 60 Minutes. “Fifty to 100 sizable defaults. More. This will amount to hundreds of billions of dollars’ worth of defaults.”
The first quarter is almost over and there have been only a handful of municipal defaults totaling a few hundred million — not billions — of dollars.
The numbers are almost less important than the central point that the crisis in municipal finance — and make no mistake, it is a crisis — is totally different from the housing collapse. Indeed, it is the polar opposite.
Whereas complacent officials declared the housing problems “contained” and confined to the subprime sector, governors are being forced to deal with their fiscal problems. That runs across the spectrum of political ideology, from conservative Republicans in New Jersey, Wisconsin and Indiana, to liberal Democrats in California and New York. And it’s for one reason: they have no choice.
In war, defeat is not an option. Once it’s lost for state governments, default is not an option. Ditto for any major municipality that wants to maintain its vital access to the capital markets. Once its lost, the ability to regain the ability to finance its operations and capital projects typically means effectively a loss of sovereignty.
To get out of its fiscal crisis of the 1970s, New York City’s finances were effectively controlled by a state oversight agency, the Municipal Assistance Corp. MAC could borrow because it had first dibs on the Big Apple’s tax revenues and kept its spending in check. Life in Gotham was marked then by collapsing highways, broken-down subways, graffiti and crime.
But there were no defaults on New York City municipal bonds, even in those dire circumstances after Gotham’s other tabloid, the Daily News, aptly summed up in the response from the White House, “Ford to City — Drop Dead.”
Still, the effects of $28 billion of outflows from municipal-bond mutual funds since mid-November have taken their toll, although the drain from the funds has slowed to $500 million-$600 million per week.
Thus, even as states are being forced to get their fiscal houses in order, outflows from muni funds continue. That in turn is keeping muni-bond yields high, with 30-year top-grade munis yielding 4.76%, free of taxes, versus 4.48% on the 30-year Treasury. Would that Washington tackle its deficit as forcefully as the states.
http://online.barrons.com/article/SB50001424052970203560404576229664121223804.html?mod=BOL_hps_dc
Actually, I think Ms. Whitney accomplished her objective. Despite the fact that her comments were irresponsible and inaccurate (and could be seen to be so at the time),her remarks drove down the price of munis significantly. And I can’t help but believe she was in the market swooping up the best deals with her clients’ money.
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