Smart Money with Keith Springer Saturdays at 1PM and Sundays at 6AM on NewsRadio KFBK 93.1 FM and 1530 AM

Municipal Bond –Warning Will Robinson

Posted At : July 23, 2009 12:19 PM

Taxes collected by the 50 states dropped by 11.7 percent overall during the first quarter of 2009, compared to the same period a year earlier — the largest such decline in the 46 years for which quarterly data are available, according to the latest report on state finances from the Rockefeller Institute of Government. Overall state tax revenues fell to the lowest first-quarter level since 2005, according to the Institute, yet spending has not. The decline in personal income tax was particularly sharp as well, with an unprecedented decline of 17.5 percent, as the weakened economy continued to hammer state budgets. Forty-five of the 50 states experienced revenue drop-offs. Also, the peak unemployment rate will likely exceed 11% in 2010 as we reduce excess capacity for reduced spending. Such a large unemployment rate will have negative effects on labor income and consumption growth, it will postpone the bottoming out of the housing sector, it will lead to larger defaults and losses on bank loans (residential and commercial mortgages, credit cards, auto loans, leveraged loans), it will increase the size of the budget deficit (even before any additional stimulus is implemented) and it will increase protectionist pressures.

We have become accustomed to believing that municipal bonds are a safe place to invest. Sorry my friend, times have changed. States can’t print money like the Feds can, so they have to cut spending. In many cases they will have no choice but to file for bankruptcy protection. Some bonds will do fine while others will default, so you better be careful. This is a little too much to write about here, so call me if you’d like more info on this.

Regards – Keith Springer

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