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Q

Although The New York Times may not be a great financial reporting organization, their recent article says municipalities are having great difficulty, all of which is not news. They view this as trouble ahead. Any comment?

A

James A. Klotz responds:

As you mentioned, the fact that state and municipal budgets have been strained by the recession is not news. The dire “gloom and doom” predictions, however, are dramatically overstated.

Many in the financial media misunderstand the recent dip in muni prices and would have the public believe that states, cities and local municipalities throughout the country are hurtling toward bankruptcy.

Putting aside the media’s penchant for sensationalism, the facts clearly reflect the contrary.

Over the last 10 years, less than 1% of municipal bonds actually defaulted, and the default rate has even improved in 2010. Additionally, most of the defaulted bonds were not issued as general obligation debt or for essential services and rarely carried investment-grade ratings.

States and municipalities, by law and as a practical matter, are being forced to find other remedies to lessen their budget challenges and reduce spending in areas where excesses exist. Additionally, financing municipal services requires the ability to borrow. Bonded debt is the last area discussed as a place to cut.

We invite you to read our most recent commentary,“Muni Bond Opportunity Gaining Notice,”, which discusses some of the technical factors causing the volatility in the market today. You may also want to visit our “Bond Forum,” where we respond to similar concerns raised by Meredith Whitney on “60 Minutes.”