Thursday, November 21, 2024
Hawai'i Free Press

Current Articles | Archives

Tuesday, August 28, 2012
Barron's: Hawaii Bonds Risky, Not Rewarding
By Selected News Articles @ 5:22 AM :: 4924 Views

State of the States

Long considered the best issuers in the municipal bond market, states are under a lot of strain. Mounting pension shortfalls and high debt are upping the risk for state muni-bond investors.

by Andrew Bary, Barron’s August 26, 2012

States have long been considered the best group of issuers in the municipal bond market, thanks to modest debt levels and ample taxing power. That's still the case, though many states, including Illinois, Connecticut, New Jersey and Hawaii, are bedeviled by large unfunded pension liabilities stemming from weak investment returns and inadequate state contributions to the plans. Adding to the strain are huge and growing unfunded liabilities for post-retirement health care for state employees.

That strain was brought into sharper focus recently with Berkshire Hathaway's disclosure that it had terminated $8 billion of municipal derivatives contracts. Those contracts were effectively bullish bets on state finances. Berkshire CEO Warren Buffett is bullish no more. The company's $30 billion bond portfolio is light in munis, and Buffett is warning about rising municipal bankruptcies and of the risks of insuring tax-exempt debt. "The stigma probably has been reduced when you get very sizable cities like Stockton and San Bernardino to do it," Buffett told Bloomberg television last month, referring to the bankruptcy of the two California cities. The fiscal pain -- and credit risk -- is more pronounced at the local than state level.

For municipal bond investors, it all boils down to this: The risk of investing in the debt of some of the country's least financially sound states, compared with the most sound, is not always reflected in the price of their bonds.

By the measure we use, which looks at the combined debt and unfunded pension liabilities relative to GDP in each of the 50 states, South Dakota comes out on top. The state has a strong agricultural economy and a low jobless rate of 4.4%, about half the national average. Debt and unfunded pensions add up to just 1% of GDP. Connecticut, which ranks at the bottom of the list, has a combined score of 17%. Yet the bonds in both states are priced alike, at 28 basis points above the 10-year AAA-rated benchmark, which yields around 1.8%. A basis point is one-hundredth of a percentage point.

Granted, the risk of Connecticut -- or any state, for that matter -- defaulting on its debt is small, but investors are not being rewarded for taking any risk at all.

The ratings agencies, which take a state's economic strength, wealth and taxing power into account, show somewhat different results. Moody's Investors Service sets the average credit rating for all 47 states at a strong Aa2; 15 states have triple-A ratings. It doesn't rate South Dakota, Nebraska and Wyoming because they have virtually no debt.

The two states with the lowest credit ratings, Illinois and California, are still at single-A, comfortably within the investment-grade category, though Illinois muni debt is priced dramatically higher than the other 49 states, at 157 basis points above the AAA benchmark.

Puerto Rico is off the charts in every metric.

High-quality 30-year muni bonds carry yields in the 3% to 3.5% range. And here, too, with little differentiation being made among the states, investors can benefit by purchasing debt of the better-run states at similar yields to some of the worst. Many individuals from high-tax states admittedly only buy debt from their own states because out-of-state debt is subject to their state's income taxes. Yet many pros advise some state diversity in holdings, especially if munis make up a large portion of an individual's portfolio.

WHICH STATES LOOK BEST? In addition to South Dakota, Iowa, Tennessee and North Carolina are at the top of the list. (Our ranking is based on analysis from Eaton Vance, a leading manager of municipal funds, that measures state debt and unfunded pension liabilities.) The bottom-ranked states are Connecticut, Illinois, Hawaii and Kentucky.

read … State of the States

SA: Report: Hawaii unfunded pension liability a risk to investors

 

Links

TEXT "follow HawaiiFreePress" to 40404

Register to Vote

2aHawaii

Aloha Pregnancy Care Center

AntiPlanner

Antonio Gramsci Reading List

A Place for Women in Waipio

Ballotpedia Hawaii

Broken Trust

Build More Hawaiian Homes Working Group

Christian Homeschoolers of Hawaii

Cliff Slater's Second Opinion

DVids Hawaii

FIRE

Fix Oahu!

Frontline: The Fixers

Genetic Literacy Project

Grassroot Institute

Habele.org

Hawaii Aquarium Fish Report

Hawaii Aviation Preservation Society

Hawaii Catholic TV

Hawaii Christian Coalition

Hawaii Cigar Association

Hawaii ConCon Info

Hawaii Debt Clock

Hawaii Defense Foundation

Hawaii Family Forum

Hawaii Farmers and Ranchers United

Hawaii Farmer's Daughter

Hawaii Federation of Republican Women

Hawaii History Blog

Hawaii Jihadi Trial

Hawaii Legal News

Hawaii Legal Short-Term Rental Alliance

Hawaii Matters

Hawaii Military History

Hawaii's Partnership for Appropriate & Compassionate Care

Hawaii Public Charter School Network

Hawaii Rifle Association

Hawaii Shippers Council

Hawaii Together

HiFiCo

Hiram Fong Papers

Homeschool Legal Defense Hawaii

Honolulu Navy League

Honolulu Traffic

House Minority Blog

Imua TMT

Inouye-Kwock, NYT 1992

Inside the Nature Conservancy

Inverse Condemnation

July 4 in Hawaii

Land and Power in Hawaii

Lessons in Firearm Education

Lingle Years

Managed Care Matters -- Hawaii

MentalIllnessPolicy.org

Missile Defense Advocacy

MIS Veterans Hawaii

NAMI Hawaii

Natatorium.org

National Parents Org Hawaii

NFIB Hawaii News

NRA-ILA Hawaii

Obookiah

OHA Lies

Opt Out Today

Patients Rights Council Hawaii

Practical Policy Institute of Hawaii

Pritchett Cartoons

Pro-GMO Hawaii

RailRipoff.com

Rental by Owner Awareness Assn

Research Institute for Hawaii USA

Rick Hamada Show

RJ Rummel

School Choice in Hawaii

SenatorFong.com

Talking Tax

Tax Foundation of Hawaii

The Real Hanabusa

Time Out Honolulu

Trustee Akina KWO Columns

Waagey.org

West Maui Taxpayers Association

What Natalie Thinks

Whole Life Hawaii