The Muni Leverage Explosion

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Is the muni leverage explosion a statistical illusion?

Earlier today, I pointed out that municipal debt had almost doubled from 2000 to today, far outpacing the slower growth of total state and local government revenue. This has resulted in skyrocketing municipal leverage, indicating that muni debt is now far riskier than it has been historically.

Over at Business Insider, Joe Weisenthal argues that the comparison to 2000 is misleading. After all, that was a year in which the economy was booming. Many states were running surpluses. The amount of muni bonds issued in 1999 and 2000 had declined from years prior, as governments simply didn’t have to take on as much debt to meet their spending needs.

“It's easy to make the current situation look bad if you compare it to the biggest bubble year of all time, but this doesn't prove that from a historical perspective, things have gotten all that bad,” Weisenthal writes.

I'm afraid this just doesn't work.

The temporary decline in issuance in 1999 and 2000 didn't do much to reduce the overall indebtedness of our states and cities. To understand why you just have to look at the scale of issuance to outstanding debt. Last year saw $430 billion of issuance, compared to $2.7 trillion or so outstanding.

In 1995 there was $1.3 trillion in outstanding municipal debt. In 2000, the amount was slightly higher—$1.4 trillion. But what happened next is that muni debt exploded, climbing all the way up to $2.7 trillion.

Bottom line: regardless of when you begin to measure, the growth of muni debt and muni leverage in the last decade is out of line with historical trends. This makes all the complacent reliance on the historical trends of municipal default highly questionable.


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