![]() The recent package also extended the deadline for states to use the money that was allocated to them under the CARES Act. Indirectly, this will help the finances of many muni issuers via sales and income tax revenues. Notably, the recent package didn’t include direct aid to state and local governments, but it did include other measures that should be supportive of economic activity, like enhanced unemployment benefits, direct payments to individuals, the extension of Paycheck Protection Program, and direct aid to airports and transportation providers. The more recent COVID-19 relief package, passed in December 2020, also should provide support for many state and local government issuers. When the COVID-19 crisis began, Congress swiftly passed the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provided direct aid to states and some transportation issuers, authorized the Federal Reserve to create new facilities to help stabilize the market, and provided a number of other measures to financially support the economy. ![]() Roughly two-thirds of the muni market is AAA or AA-ratedįiscal and monetary stimulus have supported the muni market The inherent structure of most municipal issuers is a reason why a large portion of the municipal bond market is very highly rated relative to the corporate market, as illustrated in the chart below. They have options to both raise revenues and cut expenses, which is supportive of their strong and stable credit characteristics. Almost all state and local governments operate on a balanced-budget requirement, meaning revenues must match expenses. ![]() For example, most water and sewer issuers deliver an essential service with few or no other alternatives.Īlso, many issuers benefit from broad rate-raising ability and expense management. In addition to their relatively strong financial starting point, most municipal issuers operate in a monopolistic structure – meaning they don’t have to compete for “customers” to the same degree that corporate issuers do. This provided a cushion to soften the blow of the large decline in revenues. For example, heading into the crisis, state rainy-day funds were at an average all-time high of 7.6% of general fund expenditures, according to the National Association of State Budget Officers. One reason is the relatively strong starting point for most issuers prior to the crisis. ![]() You may be asking, “but given the declines in revenues that many issuers are experiencing, coupled with a slew of other issues like large unfunded pension plans, won’t that lead to more defaults in the future?” While this is an understandable concern, we don’t think so. The other 27 states that allow local governments to file for bankruptcy protection require the governments to overcome a series of legal hurdles first. The distinction is important to bondholders because a municipality may default without filing for bankruptcy protection, or it may file for bankruptcy protection but continue to pay some bondholders.įurther complicating matters is that states can’t file for bankruptcy protection, and local governments in 23 states can’t either. There are also “technical defaults,” where the issuer breaches a covenant, such as minimum debt service coverage, but the bondholder continues to be paid as usual.Ī bankruptcy, on the other hand, is a legal process that provides a financially distressed municipality legal protections from creditors while it develops and negotiates a plan for adjusting its debts. ![]() Although often intertwined, a default and a bankruptcy are not the same.Ī default is defined by Moody’s Investors Service as a missed interest or principal payment, an exchange where the bondholder received less than was originally promised, or a change in the payment terms. When discussing municipal credit quality, we often hear the concern that municipalities will file for bankruptcy or may default on their bonds. The COVID-19 crisis has had an uneven impact on state finances ![]()
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