Raw Finance

In a quarterly report on municipal bond credit, the Securities Industry and Financial Markets Association (SIFMA) said states, local governments and other municipalities have suffered plunging tax revenue and soaring social-services costs that might hinder their ability to pay off debt down the road. “Federal stimulus funds received were not sufficient to offset the decline in tax collections, and states were forced to make more budget and spending cuts,” SIFMA said.

In the Municipal Bond Credit Report for the third quarter of 2009, SIFMA noted that the length of the recession and the high unemployment rate have negatively impacted tax collections in every state but Vermont.  Vermont’s revenue growth was due chiefly to a one-time estate tax settlement.  Because the recovery of the two most important factors for state finances, employment and wages, is likely to lag far into the future, the credit rating of municipalities is likely to continue to decline, making it more expensive for them to borrow money.

On the positive side, investor appetites for municipal debt remain strong.  Build America Bonds remain popular, with $20 billion of the bonds issued in the third quarter, a 28.4 percent increase over the previous quarter.  As long as investors continue to pile into munis, yields will remain low, offsetting the usual higher cost of a debt rating downgrade.

To view the full report, please click on the following link:  Municipal Bond Credit Report, Vol. IV, No. 12.