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How Scary Are Municipal Finances?

  08/23/10 09:31, by Len, Categories: Investment Management, Risk Management

Articles by Miriam Sjoblom in Morningstar Fund Spy

About the Author:
Miriam Sjoblom is an associate director of fund analysis at Morningstar.

"Not as scary as you think, but scary enough to be picky. There's more to muni-credit research than scanning the morning paper. The argument for keeping your muni exposure broadly diversified and outsourcing the bond-specific research has never been stronger. And when it comes to choosing funds, it still pays to do your homework."

You don't have to look hard to find a reason to worry about municipal finances these days. Reports of a looming day of reckoning in the municipal-bond market from a wide array of commentators are ubiquitous. Former Los Angeles mayor Richard Riordan took to the Wall Street Journal's editorial pages to predict that the country's second-largest city would declare bankruptcy before 2014. Testifying before the Financial Crisis Inquiry Commission in June, Warren Buffett sounded alarms about the "terrible" financial distress facing many state and local governments in coming years. Buffett's muni insurer, Berkshire Hathaway Assurance Corp., has scaled back its activity substantially, guaranteeing only $40 million worth of muni bonds in 2009 compared with nearly $600 million the year before.

Given the severity of the Great Recession compared with prior downturns and the tenuous nature of the recovery, there's little comfort in the argument that muni defaults will remain rare just because they always have. But even though state and local governments continue to struggle through the worst economic climate in decades, many of the specific concerns getting attention in the media appear overblown. Some of the worst news stories involve isolated municipalities that made reckless moves well before the downturn, and many muni researchers can and did anticipate their troubles in advance.

Read the whole article here.

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