North Dakota, Wyoming and Utah rank as the best states for investors who want secure municipal bond holdings, while Illinois and New Jersey are two of the worst.
Those states represent the broad range of investments among the $518 billion of state-supported debt that is “probably the best slice of the $3.7 trillion municipal-bond market,” according to a report in Barron’s this week.
“U.S. states represent one of the most secure areas of the global bond market, typically benefiting from low debt levels relative to the size of their economies, and the ability to cut spending and raise taxes during tough times,” the newspaper said.
North Dakota has a solid credit rating with high economic growth, a large cash pile and the lowest unemployment rate in the country, 2.7 percent, because of the energy boom.
Utah has a low jobless rate, little debt and the second-highest median household income, adjusted for the cost of living, behind Virginia. Wyoming’s economy is healthy while its cash pile is large enough to support its budget for four years, even as the state has no income tax.
Illinois and New Jersey are at the opposite end of the scale on credit quality as the only two states rated below double-A by Moody’s Investment Services, a debt evaluation company. Meanwhile, a sluggish economy and weak pension funding weighs on Connecticut.
“Illinois, New Jersey, and Connecticut aren’t fully funding their pension obligations, have thin financial reserves, are structurally imbalanced, and are using one-time revenue sources to balance budgets,” said Jim Evans, a portfolio manager at Eaton Vance, an investment manager with a specialty in municipal bonds, according to Barron’s.
Illinois has the worst-funded pension plan among the 50 states, at 30%, while its total unfunded pension liability of $168 billion also is the second worst in the country behind California. In addition, Illinois has one of the highest rates of unemployment at 8.4%.
New Jersey’s fiscal woes could have political implications if Republican Gov. Chris Christie enters the 2016 presidential race, according to Barron’s. Persistent underfunding of public-worker pensions has plagued the state, despite reforms he enacted three years ago.
California has gone from having huge budget gaps after the 2008 recession to a surplus in the latest fiscal year after raising taxes, while New York has managed avoid serious budget trouble on the strength of New York City’s economy.
Puerto Rico is considered a financial basket case with high bond yields, a dismal economic situation and underfunded pensions. It also has high electricity costs, population loss, and a looming budget gap in the current fiscal year, according to Barron’s.
Meanwhile, Detroit’s bankruptcy settlement highlighted the biggest risk facing municipal bond investors. As a result of this month’s ruling in U.S. Bankruptcy Court, holders of the city’s unlimited-tax general obligation bonds will get 74 percent of the $388 million they’re owed, according to Bloomberg News.
The losses challenge the assumption that bond issuers would raise taxes as high as needed to pay debt, the newswire said. The case also highlighted that the demands of public-worker pensions may supersede bondholder claims.
“Bondholders in many cases are going to be junior to pensioners,” said Peter Hayes, head of munis at BlackRock Inc., according to Bloomberg News. “The lesson is that politics trump law.”
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