Are municipalities safer than perceived?

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Blue456
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Are municipalities safer than perceived?

Post by Blue456 »

March 2020 entire country shut down, states had essentially no income yet there was no massive municipalities defaults. Are municipalities really safer than what they are perceived to be?
AlwaysLearningMore
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Re: Are municipalities safer than perceived?

Post by AlwaysLearningMore »

Larry Swedroe has pointed out that municipalities (broadly speaking) have the capacity to raise additional revenue if necessary. Of course, not all. Vanguard seems to excel at ferreting out the wheat from the chaff.
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Re: Are municipalities safer than perceived?

Post by UpperNwGuy »

Blue456 wrote: Sun Oct 24, 2021 9:13 am March 2020 entire country shut down, states had essentially no income yet there was no massive municipalities defaults. Are municipalities really safer than what they are perceived to be?
1. States did indeed have income. Payroll and other taxes continued throughout. They also got Federal assistance under both Administrations.
2. I never perceived municipalities not to be safe. Were you listening to the alarmists on CNBC and the various financial websites?
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mrpotatoheadsays
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Re: Are municipalities safer than perceived?

Post by mrpotatoheadsays »

On Dec. 6, 1994, Orange County, CA declared bankruptcy becoming, at the time, the largest county in America to go bankrupt.
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Re: Are municipalities safer than perceived?

Post by AlwaysLearningMore »

mrpotatoheadsays wrote: Sun Oct 24, 2021 9:52 am On Dec. 6, 1994, Orange County, CA declared bankruptcy becoming, at the time, the largest county in America to go bankrupt.
Thankfully, such BK's are uncommon. If they were commonplace, muni funds would likely cease to exist.
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SnowBog
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Re: Are municipalities safer than perceived?

Post by SnowBog »

My munis dropped enough in March 2020 to remind me they aren't as safe as I had thought. They did recover, and as others pointed out, they can raise income.

But there's also the possibility of systemic issues. For example, many states were waiting to see if the federal government would bail them out. Or if one has a major default, others might follow suit.

I still hold my munis but I keep them to no more than 15% of my portfolio. If I recall, this was a recommendation on one of the early Bogleheads podcasts.
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Blue456
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Re: Are municipalities safer than perceived?

Post by Blue456 »

SnowBog wrote: Sun Oct 24, 2021 10:04 am My munis dropped enough in March 2020 to remind me they aren't as safe as I had thought. They did recover, and as others pointed out, they can raise income.

But there's also the possibility of systemic issues. For example, many states were waiting to see if the federal government would bail them out. Or if one has a major default, others might follow suit.

I still hold my munis but I keep them to no more than 15% of my portfolio. If I recall, this was a recommendation on one of the early Bogleheads podcasts.
To be fair corporates dropped too no?
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Re: Are municipalities safer than perceived?

Post by secondopinion »

Blue456 wrote: Sun Oct 24, 2021 9:13 am March 2020 entire country shut down, states had essentially no income yet there was no massive municipalities defaults. Are municipalities really safer than what they are perceived to be?
Define safer.

Default risk, they are very safe.

However, most municipal bonds are callable; this causes negative convexity and hence increases in interest rates will increase duration, and decreasing rates will reduce duration. In essence, you get the short end of the stick when rates change either way; that is "call risk". Same applies to MBSs.
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secondopinion
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Re: Are municipalities safer than perceived?

Post by secondopinion »

AlwaysLearningMore wrote: Sun Oct 24, 2021 10:02 am
mrpotatoheadsays wrote: Sun Oct 24, 2021 9:52 am On Dec. 6, 1994, Orange County, CA declared bankruptcy becoming, at the time, the largest county in America to go bankrupt.
Thankfully, such BK's are uncommon. If they were commonplace, muni funds would likely cease to exist.
They would exist; they just yield higher than they do right now.
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Re: Are municipalities safer than perceived?

Post by SnowBog »

Blue456 wrote: Sun Oct 24, 2021 11:14 am
SnowBog wrote: Sun Oct 24, 2021 10:04 am My munis dropped enough in March 2020 to remind me they aren't as safe as I had thought. They did recover, and as others pointed out, they can raise income.

But there's also the possibility of systemic issues. For example, many states were waiting to see if the federal government would bail them out. Or if one has a major default, others might follow suit.

I still hold my munis but I keep them to no more than 15% of my portfolio. If I recall, this was a recommendation on one of the early Bogleheads podcasts.
To be fair corporates dropped too no?
They did. But my naive assumption was munis were safer than corporates. I no longer have that naive assumption. Bonds can fall, just like stocks... They just fall less...

On the upside, I was able to do some TLH with my munis. Didn't expect that, but it happened.
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Re: Are municipalities safer than perceived?

Post by dbr »

SnowBog wrote: Sun Oct 24, 2021 12:08 pm
Blue456 wrote: Sun Oct 24, 2021 11:14 am
SnowBog wrote: Sun Oct 24, 2021 10:04 am My munis dropped enough in March 2020 to remind me they aren't as safe as I had thought. They did recover, and as others pointed out, they can raise income.

But there's also the possibility of systemic issues. For example, many states were waiting to see if the federal government would bail them out. Or if one has a major default, others might follow suit.

I still hold my munis but I keep them to no more than 15% of my portfolio. If I recall, this was a recommendation on one of the early Bogleheads podcasts.
To be fair corporates dropped too no?
They did. But my naive assumption was munis were safer than corporates. I no longer have that naive assumption. Bonds can fall, just like stocks... They just fall less...

On the upside, I was able to do some TLH with my munis. Didn't expect that, but it happened.
Default risk and duration (interest rate) risk are two different things. All marketable bonds have duration risk, but default risk is a whole different thing. Default risk can be diversified and rated away.
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Re: Are municipalities safer than perceived?

Post by MIretired »

secondopinion wrote: Sun Oct 24, 2021 11:40 am
Blue456 wrote: Sun Oct 24, 2021 9:13 am March 2020 entire country shut down, states had essentially no income yet there was no massive municipalities defaults. Are municipalities really safer than what they are perceived to be?
Define safer.

Default risk, they are very safe.

However, most municipal bonds are callable; this causes negative convexity and hence increases in interest rates will increase duration, and decreasing rates will reduce duration. In essence, you get the short end of the stick when rates change either way; that is "call risk". Same applies to MBSs.
Serious ? That I don't get.
Wouldn't rising interest rates then make munis 'virtually' non-callable?
,changing their total risks profile?

I think I just answered that by agreeing that the durations would increase, ie: more interest rate risk?
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Re: Are municipalities safer than perceived?

Post by JackoC »

Blue456 wrote: Sun Oct 24, 2021 9:13 am March 2020 entire country shut down, states had essentially no income yet there was no massive municipalities defaults. Are municipalities really safer than what they are perceived to be?
As long as it's perceived the federal government will bail them out. That was the obvious turning point in March 2020, corporates also. That the Fed would buy the issues if private buyers wouldn't, plus huge federal spending in aid to lower levels of government. As long as it's the perception/reality the federal govt would always choose to do that in a like situation, and the crisis itself never arises out of loss of confidence by the market in the Federal govt's limitless ability to bail out everything else with its own additional borrowing, then there isn't risk to basically exogenous shocks that make a large % of municipal issuers fail at once. People can have different views how much risk to let ride on that assumption of endless willingness and ability for the Federal govt to bail, though OTOH it's not easy to get away from that risk even if you're not comfortable with it.

It does not mean IMO though that there couldn't be a more draw out systemic endogenous muni credit problem primarily due to pension/medical for their employees. Those issuers could muddle through and if not the solution might also be federal bailouts at no cost to bondholders. But bondholders might be asked to pitch in 'their fair share', and the assumption 'muni's are basically as safe as treasuries or CD's' might not turn out correct. But I'm distinguishing that from a big wipe out caused by national/world issues beyond municipal issuers' control like the 2020 situation. And, various municipal issuers here and there will fail for their own reasons as they always have, but not adding up to a lot of bps on a whole high grade muni fund.
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Re: Are municipalities safer than perceived?

Post by secondopinion »

MIretired wrote: Sun Oct 24, 2021 12:19 pm
secondopinion wrote: Sun Oct 24, 2021 11:40 am
Blue456 wrote: Sun Oct 24, 2021 9:13 am March 2020 entire country shut down, states had essentially no income yet there was no massive municipalities defaults. Are municipalities really safer than what they are perceived to be?
Define safer.

Default risk, they are very safe.

However, most municipal bonds are callable; this causes negative convexity and hence increases in interest rates will increase duration, and decreasing rates will reduce duration. In essence, you get the short end of the stick when rates change either way; that is "call risk". Same applies to MBSs.
Serious ? That I don't get.
Wouldn't rising interest rates then make munis 'virtually' non-callable?
,changing their total risks profile?

I think I just answered that by agreeing that the durations would increase, ie: more interest rate risk?
It does make them non-callable in effect for rates to rise greatly; however, the lack of duration is priced into the bond at the present because the interest rate risk is low for small changes. Although the "call risk" is priced in, so is the low duration to counter it. As a result, there is tail risk. After a certain point, it would behave like a normal bond with its maturity; but at that point, you have already sustained above normal losses than what the duration suggested. If rates drop too far, you are essentially holding cash.

Think about call options on stocks and you will see a similar relationship.
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Re: Are municipalities safer than perceived?

Post by am »

SnowBog wrote: Sun Oct 24, 2021 10:04 am My munis dropped enough in March 2020 to remind me they aren't as safe as I had thought. They did recover, and as others pointed out, they can raise income.

But there's also the possibility of systemic issues. For example, many states were waiting to see if the federal government would bail them out. Or if one has a major default, others might follow suit.

I still hold my munis but I keep them to no more than 15% of my portfolio. If I recall, this was a recommendation on one of the early Bogleheads podcasts.
They dropped because the market froze up. Not because munis defaulted. That’s different. There were very few defaults.
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Re: Are municipalities safer than perceived?

Post by dukeblue219 »

Blue456 wrote: Sun Oct 24, 2021 9:13 am March 2020 entire country shut down, states had essentially no income yet there was no massive municipalities defaults. Are municipalities really safer than what they are perceived to be?
Property taxes didn't change. Income taxes didn't change for most people who pay the bulk of income taxes. Sales taxes, especially certain travel/entertainment surcharges, would have fallen but never anywhere near zero.

Even with everyone stuck at home in late Mar 2020 there was still substantial economic activity happening.
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Re: Are municipalities safer than perceived?

Post by MIretired »

I see. The train has already left because of mark-to-market.
Funny about zero interest rates on munis.
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Re: Are municipalities safer than perceived?

Post by JoeRetire »

Blue456 wrote: Sun Oct 24, 2021 9:13 amAre municipalities really safer than what they are perceived to be?
Depends on the municipality.
Depends on your perception.
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Re: Are municipalities safer than perceived?

Post by SnowBog »

am wrote: Sun Oct 24, 2021 1:20 pm
SnowBog wrote: Sun Oct 24, 2021 10:04 am My munis dropped enough in March 2020 to remind me they aren't as safe as I had thought. They did recover, and as others pointed out, they can raise income.

But there's also the possibility of systemic issues. For example, many states were waiting to see if the federal government would bail them out. Or if one has a major default, others might follow suit.

I still hold my munis but I keep them to no more than 15% of my portfolio. If I recall, this was a recommendation on one of the early Bogleheads podcasts.
They dropped because the market froze up. Not because munis defaulted. That’s different. There were very few defaults.
But they still dropped by more than I would have expected, especially if the premise of the OP is they are "safer than perceived."

Ultimately, bonds are still "safer" than stocks. But I'm not sure I believe muni bonds are "safer" overall.

On many fronts they probably are, but if we have another massive nationwide event like another pandemic, I think they showed they have a risk of systemic failure. Which is why I'll limit my munis to 15% of my portfolio.
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Re: Are municipalities safer than perceived?

Post by MIretired »

SnowBog wrote: Sun Oct 24, 2021 1:37 pm
am wrote: Sun Oct 24, 2021 1:20 pm
SnowBog wrote: Sun Oct 24, 2021 10:04 am My munis dropped enough in March 2020 to remind me they aren't as safe as I had thought. They did recover, and as others pointed out, they can raise income.

But there's also the possibility of systemic issues. For example, many states were waiting to see if the federal government would bail them out. Or if one has a major default, others might follow suit.

I still hold my munis but I keep them to no more than 15% of my portfolio. If I recall, this was a recommendation on one of the early Bogleheads podcasts.
They dropped because the market froze up. Not because munis defaulted. That’s different. There were very few defaults.
But they still dropped by more than I would have expected, especially if the premise of the OP is they are "safer than perceived."

Ultimately, bonds are still "safer" than stocks. But I'm not sure I believe muni bonds are "safer" overall.

On many fronts they probably are, but if we have another massive nationwide event like another pandemic, I think they showed they have a risk of systemic failure. Which is why I'll limit my munis to 15% of my portfolio.
Yes. It's just that munis, corps, and HY are not flights to safety. But still higher risk because that the game is risk-off.
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Re: Are municipalities safer than perceived?

Post by MrBeaver »

Blue456 wrote: Sun Oct 24, 2021 9:13 am March 2020 entire country shut down, states had essentially no income yet there was no massive municipalities defaults. Are municipalities really safer than what they are perceived to be?
My personal view is that munis have an under-appreciated long-tail systemic risk of being dependent on one-time revenues of development impact fees to balance current budgets, and future tax base growth to pay for increased debt service. Most municipalities have more ‘authorized’ (by voters) debt than they have issued, which means their long-term debt service will very likely be higher than it is today.

On top of that, government institutions do not report future maintenance and capital replacement of assets necessary for their operation (and therefore tax revenues) as a liability because GASB standards differ from GAAP standards. Check out this primer for an explanation, but recognize the risk is even higher than discussed because once infrastructure fails, you must pay to replace it. The alternative is to force everyone in a portion of the municipality to move away and make their private property worthless which is not politically tenable, so it is guaranteed to increase borrowing in the future if necessary to pay for replacement of existing infrastructure. This is specifically governed by GASB statement 34, which provides an alternate method of accounting to reduce these risks, but very few municipalities use this alternate method, presumably because it would make their books look really bad and hamper their ability to… issue more bonds:

https://www.gasb.org/cs/BlobServer?blob ... tion%2Fpdf

https://www.researchgate.net/publicatio ... ond_Market

With that said, this risk is not the type of risk that is very correlated with an economic downturn as evidenced by minimal drawdown in March 2020, likely because many revenues are property tax based rather than business cycle based. I have chosen to not over-weight munis because I fear a long-term risk where the majority of munis in suburban-growth areas of our country are negatively impacted by long-term trends that slow geographical growth of urban areas and slowed population growth. But I don’t think that risk is particularly correlated with other macroeconomic risks.
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Re: Are municipalities safer than perceived?

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I only know what I read in the paper.

7/14/21 - www.whsv.com/2021/07/14/virginia-ends-f ... on-surplus

"Virginia ends fiscal year in record-breaking $2.6 billion surplus"
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Re: Are municipalities safer than perceived?

Post by user9532 »

Aren't some of the munis insured by bond insurance, or is that a thing of the past?
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Re: Are municipalities safer than perceived?

Post by secondopinion »

am wrote: Sun Oct 24, 2021 1:20 pm
SnowBog wrote: Sun Oct 24, 2021 10:04 am My munis dropped enough in March 2020 to remind me they aren't as safe as I had thought. They did recover, and as others pointed out, they can raise income.

But there's also the possibility of systemic issues. For example, many states were waiting to see if the federal government would bail them out. Or if one has a major default, others might follow suit.

I still hold my munis but I keep them to no more than 15% of my portfolio. If I recall, this was a recommendation on one of the early Bogleheads podcasts.
They dropped because the market froze up. Not because munis defaulted. That’s different. There were very few defaults.
It sure did freeze, and I did not sneeze. I glad bought stuff up. It was a wonderful time to rebalance (or overbalance if one is speculating to exploit the volatility of the freeze). This is one time that I was glad that I had treasures and cash.

Yes, municipals are more subject to market risk because people are not wanting to take risk at all during bad times. It has little to do with reality of how risky they really are in default terms.
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Blue456
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Re: Are municipalities safer than perceived?

Post by Blue456 »

user9532 wrote: Mon Oct 25, 2021 7:12 am Aren't some of the munis insured by bond insurance, or is that a thing of the past?
They are but during systemic collapse the insurers are likely to go bankrupt too.
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Re: Are municipalities safer than perceived?

Post by secondopinion »

Blue456 wrote: Mon Oct 25, 2021 10:41 am
user9532 wrote: Mon Oct 25, 2021 7:12 am Aren't some of the munis insured by bond insurance, or is that a thing of the past?
They are but during systemic collapse the insurers are likely to go bankrupt too.
So why pay for the insurance? I only pay for insurance when it is rather independent of the market; that way, the default is not occurring at the time I need it most likely.
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Re: Are municipalities safer than perceived?

Post by am »

secondopinion wrote: Mon Oct 25, 2021 10:38 am
am wrote: Sun Oct 24, 2021 1:20 pm
SnowBog wrote: Sun Oct 24, 2021 10:04 am My munis dropped enough in March 2020 to remind me they aren't as safe as I had thought. They did recover, and as others pointed out, they can raise income.

But there's also the possibility of systemic issues. For example, many states were waiting to see if the federal government would bail them out. Or if one has a major default, others might follow suit.

I still hold my munis but I keep them to no more than 15% of my portfolio. If I recall, this was a recommendation on one of the early Bogleheads podcasts.
They dropped because the market froze up. Not because munis defaulted. That’s different. There were very few defaults.
It sure did freeze, and I did not sneeze. I glad bought stuff up. It was a wonderful time to rebalance (or overbalance if one is speculating to exploit the volatility of the freeze). This is one time that I was glad that I had treasures and cash.

Yes, municipals are more subject to market risk because people are not wanting to take risk at all during bad times. It has little to do with reality of how risky they really are in default terms.
National investment grade muni fund has little risk because defaults are far and few between and the fed will step in if market freezes. We just had the ultimate stress test
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Re: Are municipalities safer than perceived?

Post by secondopinion »

am wrote: Mon Oct 25, 2021 11:29 am
secondopinion wrote: Mon Oct 25, 2021 10:38 am
am wrote: Sun Oct 24, 2021 1:20 pm
SnowBog wrote: Sun Oct 24, 2021 10:04 am My munis dropped enough in March 2020 to remind me they aren't as safe as I had thought. They did recover, and as others pointed out, they can raise income.

But there's also the possibility of systemic issues. For example, many states were waiting to see if the federal government would bail them out. Or if one has a major default, others might follow suit.

I still hold my munis but I keep them to no more than 15% of my portfolio. If I recall, this was a recommendation on one of the early Bogleheads podcasts.
They dropped because the market froze up. Not because munis defaulted. That’s different. There were very few defaults.
It sure did freeze, and I did not sneeze. I glad bought stuff up. It was a wonderful time to rebalance (or overbalance if one is speculating to exploit the volatility of the freeze). This is one time that I was glad that I had treasures and cash.

Yes, municipals are more subject to market risk because people are not wanting to take risk at all during bad times. It has little to do with reality of how risky they really are in default terms.
National investment grade muni fund has little risk because defaults are far and few between and the fed will step in if market freezes. We just had the ultimate stress test
Right. I mean how not risky they are with default risk.
Last edited by secondopinion on Mon Oct 25, 2021 11:54 am, edited 1 time in total.
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Re: Are municipalities safer than perceived?

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xyzzy
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Re: Are municipalities safer than perceived?

Post by RockyR »

I worked for a county for the past few years (just retired). When Covid hit they anticipated a large decline in property tax revenue (similar to 2008-2009). They gave every employee a 2 week unpaid furlough. However, property values in general increased (with the exception of retail malls). In addition, a shift in consumption from services to goods led to a sales tax revenue increase. Certain sources (parking garage fees, hotel bed taxes and dining in taxes) declined but were offset by the increases. When the increase in revenue was added to the stimulus money from congress, municipalities are now in good financial shape (with a few exceptions).
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Re: Are municipalities safer than perceived?

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Re: Are municipalities safer than perceived?

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xyzzy
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Re: Are municipalities safer than perceived?

Post by Shorty »

So they’re being both underpriced and overpriced?
mary1492 wrote: Tue Oct 26, 2021 2:52 am Personally, I like purchasing munis that are near or past the call dates. Pricing becomes very attractive, as many will be priced close to 100.0 in the market, with the expectation that it can/will be called "soon". If you buy and the call does not happen for a month or two, you will be in the black and collecting a very nice yield going forward. Worst case, it does get called in that first month or two, and I may see a loss of $20 to $100 tops (on a $5000+ investment). Recently, as demand in munis has continued to be very high, I've actually sold a number of those bonds which are past their call date, because the premiums being offered were pushing the equivalent of a year worth of interest payment. One month or two month, possibly even three months premium is one thing, 9 months or more is ridiculous.
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Re: Are municipalities safer than perceived?

Post by Valuethinker »

MrBeaver wrote: Sun Oct 24, 2021 2:05 pm

With that said, this risk is not the type of risk that is very correlated with an economic downturn as evidenced by minimal drawdown in March 2020, likely because many revenues are property tax based rather than business cycle based. I have chosen to not over-weight munis because I fear a long-term risk where the majority of munis in suburban-growth areas of our country are negatively impacted by long-term trends that slow geographical growth of urban areas and slowed population growth. But I don’t think that risk is particularly correlated with other macroeconomic risks.
These observations seem to be very astute.

I am not US based and far away from being a specialist.

But just as suburban growth has propelled infrastructure growth in the USA since the late 1940s, this form of urban landscape has low density. Thus relatively high infrastructure needs in terms of miles of roads, bridges, streetlights, sewerage etc & relatively high cost to maintain.

Suburbs were once entirely middle class -- poor people lived in densely populated inner city areas.

I don't believe that is true in a number of American cities, now. That means that many older suburbs have both the higher costs associated with aging infrastructure *and* less well off ratepayers (potentially).
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Re: Are municipalities safer than perceived?

Post by Valuethinker »

andypanda wrote: Mon Oct 25, 2021 6:38 am I only know what I read in the paper.

7/14/21 - www.whsv.com/2021/07/14/virginia-ends-f ... on-surplus

"Virginia ends fiscal year in record-breaking $2.6 billion surplus"
US States and municipalities very hugely in their fiscal challenges.

With the DC area to its north, Virginia is probably in a real "sweet spot" in terms of revenues from all sources. DC area keeps growing, people move further out, a lot of that development is in northern Virginia?
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Re: Are municipalities safer than perceived?

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Re: Are municipalities safer than perceived?

Post by Wricha »

Over 30 years ago I started buying individual muni bonds. I did not know anything. I only bought AA or AAA bonds later some A. I think it was around 2011 Meredith Whitney predicted that muni bonds would default and their value fell like a rock. I was in shock! Around the same time I was at a Boglehead conference and I was late for a session. I waited outside in the hall for a break in the talk. Jack Bogle came down the hall and waited with me before going in to speak. We started talking about everything (what a gentleman) including finance. I told him I was very concerned about the muni bonds that I had accumulated. He asked me how many bonds did I have? I said around 120 individual bonds he looked at me and said how in world did I get so many (with a smile). I then said Meredith Whitney is…. He interrupted me and said Meredith Whitney knows less than nothing if that is possible. You will be fine with your muni bonds but next time look into bond funds. Of course he was right and I still have 60 left they keep getting called with no defaults.
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Re: Are municipalities safer than perceived?

Post by andypanda »

"Virginia ends fiscal year in record-breaking $2.6 billion surplus" - me
__
"US States and municipalities very hugely in their fiscal challenges.

With the DC area to its north, Virginia is probably in a real "sweet spot" in terms of revenues from all sources. DC area keeps growing, people move further out, a lot of that development is in northern Virginia?"
__

True, but it goes to show that talking about municipals is too broad a subject even when looking at just the solvent states. Sort of like when people talk to me about "investing in stocks."

- Virginia is a large state. It's a 7-hour drive from Northern Va to far southwest near the Cumberland Gap - 450 miles by road. Speaking of federal money, don't forget the 75 ships based in Norfolk plus the planes, and the immense Norfolk Naval Shipyard. And Newport News Shipbuilding is the largest industrial employer in Va. And the CIA installations :)

And agriculture has an impact of $70B and 334,000 jobs.

"Virginia’s agricultural production is one of the most diverse in the nation. Many Virginia commodities and products rank in the top 10 among all U.S. states. These include leaf tobacco, 3rd; apples, 6th; grapes, 8th; peanuts, 9th; fresh market tomatoes, 10th. Livestock rankings based on number of head include turkeys, 6th in the nation, and broilers, 10th."

Heck, even poor little old Richmond has 7 Fortune 500 companies. :)

- North Carolina ended up with a $6.5 Billion surplus
- California ended up with either the $38B some people claimed or the $76B the governor claimed. And then there's the $25B from the feds to account for.

And moving inland:

- "Gov. Justice reported today that the State of West Virginia ended Fiscal Year 2021 with a $413 million revenue surplus, despite the effects that the COVID-19 pandemic has had on the State's economy.Jul 1, 2021"

Another cup of coffee and I may begin looking at all the state budgets. ;)
MIretired
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Joined: Fri Sep 06, 2013 12:35 pm
Location: Midwest, US

Re: Are municipalities safer than perceived?

Post by MIretired »

mary1492 wrote: Tue Oct 26, 2021 2:52 am
MIretired wrote: Sun Oct 24, 2021 12:19 pm
Serious ? That I don't get.
Wouldn't rising interest rates then make munis 'virtually' non-callable?
,changing their total risks profile?

I think I just answered that by agreeing that the durations would increase, ie: more interest rate risk?
It depends on outlook and what the issuer does.

Look at what is happening now. We have very low interest rates, about as low as they can/will go. I receive calls on my high yield munis monthly. There are some which are not being called, but I believe it's only a matter of time - they are all financially healthy and capable of refinancing. However, depending on the size of the bond issue, and how long until maturity, it may not be worth the time/effort/cost to call and possibly refinance.

Rising interest rates would make munis virtually non-callable once new-issue rates begin to come "close" to rates on existing debt. For many, the gap is still quite wide, even if rates began to move higher from where they are today.

Personally, I like purchasing munis that are near or past the call dates. Pricing becomes very attractive, as many will be priced close to 100.0 in the market, with the expectation that it can/will be called "soon". If you buy and the call does not happen for a month or two, you will be in the black and collecting a very nice yield going forward. Worst case, it does get called in that first month or two, and I may see a loss of $20 to $100 tops (on a $5000+ investment). Recently, as demand in munis has continued to be very high, I've actually sold a number of those bonds which are past their call date, because the premiums being offered were pushing the equivalent of a year worth of interest payment. One month or two month, possibly even three months premium is one thing, 9 months or more is ridiculous.
Interesting, for individual bonds, and how funds do.
sschoe2
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Joined: Fri Feb 24, 2017 3:42 pm

Re: Are municipalities safer than perceived?

Post by sschoe2 »

I live in Illinois and can't understand how they haven't defaulted yet. They are a financial wreck, if the state and muni's were a person they'd be calling Dave Ramsey.
mary1492
Posts: 716
Joined: Thu Oct 17, 2019 3:02 am

Re: Are municipalities safer than perceived?

Post by mary1492 »

xyzzy
Last edited by mary1492 on Wed Oct 05, 2022 1:27 pm, edited 1 time in total.
hudson
Posts: 7119
Joined: Fri Apr 06, 2007 9:15 am

Re: Are municipalities safer than perceived?

Post by hudson »

Blue456 wrote: Sun Oct 24, 2021 9:13 am March 2020 entire country shut down, states had essentially no income yet there was no massive municipalities defaults. Are municipalities really safer than what they are perceived to be?
In a panic, all bets are off.
For me it's all about the holdings. Most Vanguard muni funds are about 90% AAA/AA/A. That works for me.
I won't go over 30% of my holdings in munis because there is risk. I'll use treasuries or the equivalent for the rest.
Before a government issues munis, they have to jump through hoops, have good balance sheets and financial reserves. Some or all are insured...not sure about this. Governments don't want to default because they can't borrow any more. In NC, they have to get approved by a state commission. If they fail to pay, the state commission can take over a city government, raise taxes and pay the bills.
Of course it doesn't work that way everywhere.
I vote that Vanguard mostly does their homework and buys safe munis.
mary1492
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Joined: Thu Oct 17, 2019 3:02 am

Re: Are municipalities safer than perceived?

Post by mary1492 »

xyzzy
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