Alles ist schön - Pittsburgh steht vor der Pleite
NextLevel : Alles ist schön - Pittsburgh steht vor der Pleite
Municipal Bond Outlook for 2004
>>>Municipal Bond Outlook for 2004 Is Anxious and Grim: Joe Mysak
Nov. 14 (Bloomberg) -- There's going to be a drumbeat of bad news about credit quality, the amount of bonds to be sold will drop off a cliff and state officials in general and treasurers in particular are going to be cranky.
That's the outlook for the municipal bond market in 2004. Come back in 2005.
Let's begin with the bad news. Every day there's some. This week the city of Pittsburgh asked for the state of Pennsylvania to take it over. The city asked to be declared a ``distressed city'' by the Department of Community and Economic Development.
If the department determines that Pittsburgh is distressed, a ``coordinator'' will be appointed to make some very hard financial decisions. The coordinator will also determine if the city should seek Chapter 9, municipal bankruptcy.
Moody's Investors Service responded by cutting the city's credit rating to Baa3, and offered this hardly cheering note: ``Moody's believes that the likelihood of bankruptcy is very remote.''
Are there any more Pittsburghs out there? We will find out in 2004.
Consider New York. Moody's certainly did, in its analysis of the $2.2 billion in tobacco bonds the state is selling today.
The analysis is almost unremittingly grim. New York, which Moody's rates A2, has ``a large debt burden that ranks New York fifth among states in debt per capita, a capital plan that is largely bond-financed, structural budget imbalance demonstrated by large outyear budget gap projections and severe liquidity problems.'' Translation: New York lives beyond its means.
One reason why: While the stock market was booming, retirement system assets rose in value. The state stopped making contributions to the system, and increased retirement benefits. Now the state has to put more money in the system to pay for those benefits.
Then there's the matter of all that debt, more than $40 billion worth. ``The structure of the debt has grown increasingly complex. The state issues few general obligation bonds, which must be approved by a vote of the people, and instead, primarily issues lease/purchase debt, which does not require voter approval, through different authorities,'' Moody's said.
The state, the ratings company concludes, is ``vulnerable to potential future economic stress scenarios.'' This doesn't sound good.
Governor George Pataki's administration doesn't like to read this kind of analysis, by the way, and hasn't paid Moody's to rate the bonds sold by its various authorities since 1998. The state does pay it to rate the GO debt.
Bad news comes in two forms. There's as much or as little as you like. Let's move on to the amount of bonds states and municipalities will sell in 2004.
This is the crux of the matter to Wall Street bankers, underwriters, bond lawyers, financial advisers, analysts and consultants -- all those people who help Main Street tap the credit market. The more bonds sold, the happier these people are.
For the last three years, they have been very happy indeed. In 2001, $288 billion in municipal bonds were sold, the third biggest year on record (second was 1992, when $292 billion in bonds were issued). A record $359 billion in bonds were sold in 2002. Through October, states and municipalities have sold $320 billion, according to The Bond Buyer newspaper.
Bust follows boom as surely as drought follows deluge. This may be a record year. Everyone's nervous about next year, despite the prospect of more bonds to paper over deficits and replenish rainy-day funds.
If those in the municipal bond business are anxious, everyone on Wall Street (which includes Chicago and Boston and San Francisco and all points in between, wherever securities business is done) should be nervous about 2004. State treasurers are going to be on the rampage.
Consider two recent incidents.
North Carolina Treasurer Richard H. Moore ordered a review of Alliance Capital Management Holding LP, which manages $7 billion for the state's $56 billion retirement system. Alliance is being investigated for improper mutual fund trading by New York Attorney General Eliot Spitzer.
Know Their Names
Across the country, in Washington state, Assistant Treasurer Michael Colleran called for the state Investment Board's private markets committee to postpone a decision to recommend investing $200 million of pension money into a new fund being put together by First Reserve Corp., a buyout firm specializing in the energy industry. Colleran was concerned about what he felt was inadequate due diligence on the part of investment board staff and consultants.
The committee approved a staff recommendation, pending ``an acceptable presentation to the board of the audit situation'' of Dresser Inc., which is one of the companies owned by First Reserve. Colleran voted against even this limited recommendation, and the story probably won't end there.
What do these two incidents have in common? State treasurers want to know more. And they're going to pound on the table until they get it. Most people probably don't even know the name of their state treasurer. That's going to change.
Last Updated: November 14, 2003 00:03 EST