DALLAS — Issuers with strong credits should take advantage of current low interest rates despite the crisis atmosphere.
“If I were a municipal issuer, I’d get what I could while I can get it,” said Edmond G. Hurst, senior managing director with Crews & Associates Inc. in Little Rock, Ark. “I can’t imagine rates will be this low again as we move forward.”
Hurst said it is still uncertain how or when Standard & Poor’s downgrade of the United States to AA-plus from AAA would affect municipal finances.
“There’s bound to be a ripple effect across all municipal finance credits, but that is yet to be seen. Right now, we’ll just have to wait and see what happens,” he said. “People are still flocking to Treasury notes and tax-exempt bonds, so there’s no sign yet that the S&P action is going to affect borrowing costs for local government in the near term.”
The New Mexico Finance Authority, which as of Monday afternoon had managed to hold onto its AAA rating from Standard & Poor’s, is going ahead with a competitive sale of senior-lien public project revolving fund revenue bonds on Thursday.
New Mexico was among five states placed on review for possible downgrade by Moody’s Investors Service along with U.S. Treasury debt. Unlike Standard & Poor’s, Moody’s did not downgrade the United States. New Mexico’s general obligation bond rating from Moody’s remained Aa1. The outlook on the NMFA’s $826 million of parity debt remained stable.
In Texas, former Moody’s analyst and Texas Public Finance Authority executive director Dwight Burns, now with the consulting firm TKG & Associates, said the U.S. downgrade should have mainly short-term effects.
“So far, the only states, cities, and other issuers affected have been those with a substantial presence of federal civilian employment and contractors,” Burns said. “For local economies that are not affected directly by disputes in Washington over fiscal policy, the rating agencies should continue to focus squarely on the willingness and ability of those local governments to repay their debts.”
Oklahoma Treasurer Ken Miller called the stock market’s negative reaction to the Standard & Poor’s downgrade “a double-edged sword.”
“While we’re concerned about our return on investments in the falling market, the lower interests available now will give us more options for bond refinancings,” Miller said. “We don’t like to see this environment, though.”
Miller said he discussed the situation Monday morning with state bond advisor Tim Martin.
“Our advisor does not believe Oklahoma’s double-A category rating will be lowered,” Miller said. “It is just a matter of waiting to see what will happen to the economy.”
Miller said the most significant effect could be the losses suffered by state pension funds that rely on investment income to meet their obligations.
“This is not a good time for any investor,” he said Monday afternoon. “The drop in the market will hurt our return on investments, but the Legislature made good progress on reforming the state pension plans earlier this year. Those plans are still not where we want them to be, but there has been progress.”
Joelle Mevi, chief investment officer of the New Mexico Public Employment Retirement Association, said that even before the U.S. downgrade she felt like she had been “through the wringer.” After becoming less optimistic about the U.S. economy, Mevi said she decided, uncharacteristically, to double the $11.6 billion fund’s cash reserve to $200 million.
Louisiana Treasurer John N. Kennedy said the indirect effects of the U.S. downgrade won’t come until later, but they will be significant.
“We’re in uncharted waters,” Kennedy said. “Our state bonds are well protected, but S&P was very clear in saying the U.S. had too much debt. The solution is to cut spending or raise revenues, and it is clear that Congress has no appetite at all for raising taxes.”
The political reality is that federal spending will be curtailed significantly over the next few years, Kennedy said, and that will hurt states and local governments.
“When you’re a state like Louisiana that relies on federal dollars for 50% to 60% of your $25 billion annual budget, then you are going to have to look at every program that gets federal funds to figure out how to be more efficient,” he said.
The market is hard to judge at this point, Kennedy said.
“There’s a lot of emotion, a lot of turmoil, a lot of panic,” he said. “We’re just going to have to wait to see what happens.”
“A tax increase right now would hurt this economy dramatically,” Kennedy said. “I know some will disagree with me, but I think the deficit can be erased through spending cuts without raising taxes.”