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“A muni default has to be a really poor situation,’’ says Tom Weyl, director of municipal research for fund manager Eaton Vance . “There was a spike at the beginning of the recession due to project finance risk in community development districts in California and Florida. Most [issuers] that are going to default have already done so.”
Budget Crisis as Wake-Up Call
In fact, market watchers say state and local budget crises have served as a wake-up call for municipal issuers to get their financial houses in order. Pension reform and other spending cuts combined with an expected rebound in tax collections have most state balance sheets in their strongest financial shape since the start of the recession in 2007. California, for instance, is slated to spend the lowest amount as a percentage of personal income since 1973.
“States have done a much better job over last two to three years than in past economic downturns,’’ says Weyl. “Addressing the problems was already going on when the over-hyped [default] predictions came out.”
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