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Forbes.com Blog - Sept. 1, 2010 - by Marilyn Cohen
Is the default of Harrisburg, Pennsylvania on it’s municipal bond payment the start of something big? Or, is it among a few isolated cases in an otherwise safe municipal bond sector?
First of all, Harrisburg’s financial woes with its ill conceived incinerator project, is not a one off situation. It’s a symptom of the massive state, county and city overspending throughout the country. Harrisburg’s headlines are jarring because it’s the capital of Pennsylvania.
Defaulted issues that have gone under the radar to the tune of $1.7 billion this year according to Richard Lehmann’s Distressed Debt Securities Newsletter. What’s the norm? About $1 billion of munis default a year. [ To get Richard's view on munis and Warren Buffetts, read Buffett Frets Over Municipals, So Should You.]
There are plenty of hospitals, nursing homes, toll roads, stadiums, small parking projects and school districts that are struggling to make their coupon payments. School districts that specifically entered into toxic interest rate swaps or high risk investments like the West Allis Milwaukee School District have not resolved their problems.
Special Offer: Some states and municipalities that seem like safe bets are really cooking their books. Don’t buy another municipal bond without clicking here for a special advisory issued by Forbes bond columnist Marilyn Cohen.
So with sales tax, income tax and property tax revenues declining, can we expect more defaults like Harrisburg, Vallejo and Central Falls Rhode Island? As long as the municipal bond market continues to be so forgiving and allow refinancing and new issuance to come so cheaply—and—as long as the retail feeding frenzy continues, then defaults will continue to be rare.
But if you are a worry wart then buy only essential service revenue and General Obligation municipal bonds. Make sure the issuers are large and frequent issuers so you can stay current on their finances. Here’s the but: if investors become saturated with municipal bonds and the weak issuers can no longer paper over their financial short falls then look out below! The default rate will definitely go higher.
Who is likely to default? Here is some pure speculation.
The City of Los Angeles - Former Los Angeles Mayor Richard Riodan has said in Wall Street Journal editorials that the only way out of its financial difficulties is for the City of Los Angeles to file for bankruptcy sometime in the future.
The Metropolitan Pier & Exposition Authority of Illinois has seen revenue deterioration and according to Moody’s is “no longer able to meet debt service requirements and has caused the authority to tap into sales tax revenues.” But all sales tax revenues throughout the county are deteriorating; that’s not a sure safety net.
San Diego, CA, – San Diego’s name continues to float in and out of the bankruptcy banter but always loudly protests.
Stay tuned.
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