So-called headline and political risk, notably in Pennsylvania, could further complicate an already difficult municipal bond investing environment, according to a commentary by PNC Capital Markets.
"Mixed messages, especially those including inaccurate information, can confuse the market, erode investor faith in security pledges and compel investors to second-guess issuers' willingness to pay," PNC managing director and municipal strategist Tom Kozlik said in a commentary.
Kozlik cited last week's warning by Red Lion Area School District Superintendent Scott Deisley that should Pennsylvania's fiscal 2016 budget impasse linger, the district could file for bankruptcy by year's end. School districts say the delayed budget has forced budget cuts and triggered excessive borrowing in the absence of aid.
Red Lion "is not a distressed school district at this time," said Kozlik. "The district's financial position is not even structurally imbalanced." The district, he added, has produced operating surpluses since 2005 and Moody's Investors Service assigned an Aa3 underlying rating two months ago.
In addition, according to Kozlik, the commonwealth probably would have intervened had Red Lion developed serious problems. "Further, Pennsylvania school districts are not eligible to file a bankruptcy petition under current state law," he said.
Pennsylvania's budget stalemate is nine months old. Gov. Tom Wolf vetoed roughly $6 billion in basic education aid from the $30.2 billion lawmakers presented him in December. Wolf, a Democrat, wants the Republican-controlled legislature to increase its basic education funding package.
Lawmakers this week may consider an amended spending plan that would involve no tax increases.