I’ve had growing concerns over the looming pension liabilities that so many local and state governments face and the recent Detroit bankruptcy could be changing things… It now appears likely that the Michigan courts will rule in favor of the pension/benefit obligations, knocking the “senior” General Obligation (GO) muni bonds down a peg.
GO muni’s have long been considered some of the safest muni bonds because they’re backed by the municipality’s ability to tax. Need money? Raise taxes. Depending on how this bankruptcy plays out, we could have a new precedent that many other troubled cities/counties follow, which could ultimately mean losses to the holders of these “safer” GO muni bonds. It has also been assumed that a state wouldn’t let a major city, like Detroit, not make its GO muni bond payments – meaning they would step in to bail them out. Detroit is proving this not to be the case, making it very important to analyze each municipality based on its own finances.
Municipal bonds have been beaten up a bit harder than Corporates and Treasuries this summer, partially because it’s only a retail investment market making it more sensitive to fund withdrawals, but more likely because the market is pricing in the higher credit risk on GO’s. I think these higher spreads are here to stay until this Detroit bankruptcy is decided…and probably far beyond that.
As a side note, did anyone see: Spain proposes a tax on the sun? Spain wants to impose a tax on sunlight (solar power) because it’s cheaper than buying electricity from the Spanish grid. If you’re caught collecting photons of sunlight for your own use, you can be fined up to $30 million Euro (about $40 million US dollars). I can’t help but laugh at how ridiculous this is.
Thanks for following!
Nick