S&P: We Do Not Believe States Face a Muni Debt Crisis
Muni-Madness is about to get under way on Capitol Hill. A series of hearings kicks off today with the Subcommittee on TARP and Financial Services' "State and Municipal Debt: The Coming Crisis?" In the background of these hearings is the question of whether Congress will step in in and bailout states who are often said to be teetering on the drink of default.
I spoke with Steve Murphy, Managing Director, State & Local Government Ratings at S&P, about the state of the states and their debt.
LL: What do you hope to hear out of the first hearing?
SM: The best thing that could come out of this hearing is getting a better understanding of the real risk in the market. We do not believe there are states that have a municipal debt crisis. They are not over burdened with debt. That being said, fiscal 2012 is very important. We remain watchful at this point and we are confident responsible actions will be taken. These will be very tough decisions—dealing with revenue expenses, products and services. This is what state's control.
These decisions sometimes have far reaching repercussions. If you cut jobs, you are cutting services that impact people. What we have seen recently, and in the past, is municipalities that will make these decisions at the latest possible moment because of these negative repercussions. You are seeing what Illinois has done both on the revenue and expense side. New York has a proposal that would not raise taxes or borrow to deal with their deficit, and in California—they are looking to do a combination of expenses and revenue enhancements.
These states are doing what we expect them to do in a situation like this. They all have pretty significant headwinds- stubborn economic recovery, persistent budget gap, stimulus expiration and the continuing difficulty in the housing market.
Even with these headwinds, we are confident they will make these tough decisions. Just go back to my tenure in this business, in the 70's we had energy crisis number two. In the early eighties we had the 20 plus prime rate, 1986, we had the oil price bust which affected several states significantly, in 1986 we also had the stock market crash, in 1991 and 1993 we had a severe real estate driven recession, in 2000 the dot-com bust, 2005- Hurricane Katrina, and then in 2008 we had the financial crisis.
So we have seen significant events before. Do the impacts vary? Yes. Do they come in different directions? Yes. We have seen governments react the way they have to. That's not to say that things are rosy and not to say the past is a precursor to the future because I have heard that many, many times. But history tells us that governments will make the very painful decisions.
LL: Former Florida Governor Jeb Bush and Newt Gingrich recently wrote an Op-Ed laying out a plan for a new chapter in the federal Bankruptcy Code that allow es for voluntary bankruptcy by states. Should Congress pass such a plan and allow a safe, orderly way under federal bankruptcy law for states to reorganize their finances? Would this impact your view on state governments?
SM: We don't have an opinion on whether or not this should be an option. Right now, states are prohibited from filing Chapter Nine, which is municipal bankruptcy. If this did happen, and we would not alter our view on state governments.
LL: Right now you have one of the country's richest municipalities- New York's Nassau County, suing to avoid being taken over by the State. Will we see more courtroom budget battles?
SM: Nassau and NIFA (The Nassau County Interim Finance Authority) is a unique case. We reaffirmed the A+ stable outlook on Nassau after the actions of the NIFA board. We don't think this will be the canary in the coal mine in the US courtroom battle.
LL: The range of municipality bankruptcies is very wide- from zero to Meredith Whitney's dire prediction of 50 to 100 municipalities. What's an investor to do? How many American cities are on the verge of default?
SM: I don't know why dire predictions are coming from anyone. What I can point you to is when you talk about the tax secured and appropriations secured ratings that we carry- on the 13,257 unique entitles, 76 of the rated entitles are non-investment grade which is Double B and below and 8 of them are triple C and below which are currently "vulnerable". So, if you do the math—eight divided by the 13,257 is .0006 percent of our current ratings we would consider to be vulnerable.
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."