WASHINGTON — State governors meeting in Washington this weekend criticized federal lawmakers for talking about possible legislation to allow states to file for bankruptcy and urged them to stop, warning the talks are hurting state finances.
They issued the warnings at the National Governors Association’s Winter Meeting, saying the mere discussion of state bankruptcy has increased state municipal borrowing costs.
“We want to stop the discussion,” Gov. Christine Gregoire, a Democrat from Washington state, said Saturday. Federal bankruptcy legislation “is not something we’ve asked for or want to hear in any way, she said.
Talks about bankruptcy are “some of the most dangerous discussions that we’ve had,” Gov. Dan Malloy, a Democrat from Connecticut, said on Saturday. They are “threatening the entire municipal market,” he said.
A House Judiciary subcommittee earlier this month held a hearing to discuss the possibility of state bankruptcy protection. While most lawmakers roundly rejected the need for legislation, the mere discussion sent borrowing costs higher, the governors said.
Washington’s interest rates earlier this year jumped “100 basis points” in just a few days as the bankruptcy comments swelled, Gregoire said.
The need for state bankruptcy protection was advanced earlier this year by former House Speaker Newt Gingrich and some Republican lawmakers who feared states facing severe fiscal distress would seek federal bailouts.
Governors need to take a tough stance against the bankruptcy rhetoric, said Thomas G. Doe, chief executive of Municipal Markets Advisors. He said the bankruptcy comments from Gingrich and others were “irresponsible” and the motivation behind their comments was not in the states’ interests.
Speaking Sunday on a panel about state economies and finances, Doe told governors they need to “stay in the forefront of this debate” over bankruptcy concerns.
Investors, he said, are “uninformed” about the protections for bondholders guaranteed in state constitutions.
When investors do not have all the information, “they will move like a herd,” Doe said.
Municipal mutual funds have reported $38.7 billion in outflows in the last 14 weeks, according to Lipper FMI. The wave of selling has been partly attributable to the bankruptcy concerns. Investors also moved out of municipal bonds after the Bush-era tax cuts were extended and as the stock market has posted strong gains.
The state bankruptcy concerns “were a paper tiger,” Gov. Beverly Perdue, a Democrat from North Carolina, told The Bond Buyer. Perdue said “we feel very comfortable that the terms 'bankruptcy’ and 'states’ should not be used synonymously.”
The municipal bond defaults that have occurred during the economic downturn have been “on the fringes” of the municipal market, Doe said. No general obligation bonds defaulted during the economic recession, he said.
Doe highlighted investor interest in the Illinois’ general obligation bond sale last week as evidence that bond markets “do have confidence in you.” Illinois, one of the lowest-rated states, sold $3.7 billion of taxable GO bonds in a deal that was oversubscribed.
The improving economy may help alleviate the budget pressures governors face in fiscal 2011. States are facing a combined $175 billion budget shortfall in fiscal 2012, Gregoire said Saturday.
Mark Zandi, chief economist at Moody’s Analytics Inc., said states could see tax revenues increase 6% to 7% in the months ahead. Businesses have a clearer understanding of the health care and tax liabilities following last year’s federal legislation, he said. As businesses start to hire, the unemployment rate will drop below 9% by the end of 2011, he said.
Still, the threat to consistent economic growth could be interrupted, notably by events in the Middle East.
“There is nothing more threatening to our economic prospects than high oil prices,” Zandi said.
Even without the higher energy prices, state and local economies pose a headwind to national gross domestic product in the next 18 months, he said.
Zandi estimated there will be 250,000 state and local job losses over the next 18 months, at a pace of about 15,000 to 20,000 per month.
Spending cuts at the state and local level will subtract 1.0 percentage point from national GDP growth in 2011, he estimated.
