CHICAGO — The political landscape of fiscally stressed governments is an increasingly important factor as analysts assess a credit’s risk, a panel of municipal analysts said in here last week.
“Political stability is one of the most important factors for lower default expectations,” said Richard Ciccarone, managing director and chief research officer at McDonnell Investment Management LLC and one of three panelists to discuss issues facing the municipal market at a meeting of the Chicago Municipal Analysts Society here last Thursday.
Political support — and the legal protections that often go along with it — can strengthen credits, Ciccarone said.
It can mean help for pressured governments, such as in the case of the federal stimulus aid to states or Michigan’s new emergency management law aimed at helping local governments avoid default.
“We are looking at these things more closely,” Ciccarone said in a later interview. “Politicians’ willingness to come to political solutions is important when distressed.”
A lack of political support in hard fiscal times can mean a loss of support for debt service obligations, and can extend to the legal protections associated with bonds.
“A distressed situation could challenge some of those prime security provisions,” Ciccarone said. “Nobody is talking about that — we’re not that distressed yet. But when you have to choose between keeping a fire department or teacher and debt service, you destabilize the system.”
Moody’s Investors Service is also paying closer attention to politics, particularly as politicians debate controversial structural changes to pension and benefit plans, said Moody’s Robert Kurtter, managing director of U.S. public finance. “It’s going to become a more important factor in our ratings,” he said. He added that politically unpopular choices can threaten bondholders and that politicians have to be willing to make tough decisions.
“When the pain of cutting benefits to constituents is greater than the pain of losing your market access, that’s when the political process comes in,” Kurtter said. “Market access has sustained governments for years, and if the market access issues change, it’s a huge risk.”
In cases like those in Harrisburg, Pa., and Menasha, Wis., failing enterprise projects coupled with fiscal woes and political tensions can create a kind of perfect storm.
“We are most concerned about a political situation that leads to a lack of solution-making,” said Chris Mier, a municipal strategist at Loop Capital Markets.
Harrisburg has struggled to meet debt payments and required state help while Menasha defaulted on an appropriation pledge it put behind bond anticipation notes for a steam plant project.
In Harrisburg, political infighting threatened to destabilize the government. “Thank goodness the state stepped in,” Mier said. “This could have been a nightmare situation of butting heads.”
Looking ahead at issues facing the municipal market, the trio dismissed mainstream predictions of large-scale defaults sweeping across the sector.
But while playing down the likelihood of state defaults, the analysts agreed that local governments and other sectors are heading into a tough two- or three-year period during which defaults will likely rise.
Kurtter predicted that local government defaults in 2001 could reach two or three times the levels of 2008.
Mier said sectors like airports, state general obligation bonds, transportation, and water and sewer are doing “reasonably well,” but he is less bullish on local governments — particularly school districts.
The analysts agreed districts face a tougher road as pressured local governments withdraw fiscal support to relieve their own fiscal challenges.
“This is like a rolling tide. The states will be less in the news, and the locals will be more in the news,” Mier said. “The news is going to be bad, but the locals will get through this.”
