Municipal Industry Professionals Expect Long Road to Recovery
for State and Local Government Revenues:
RBC Survey
However, majority do not expect increase in municipal defaults in 2011
NEW YORK, October 29, 2010 — Municipal
revenue growth could be hindered for years to come according
to a new survey of municipal industry professionals conducted
by RBC Capital Markets. However, despite the negative outlook
for municipal revenue growth, those surveyed expect a relatively
low rate of defaults on U.S. municipal securities in 2011.
Among the more than 100 municipal industry professionals
surveyed, nearly half (46 percent) expect another five years
or more will pass before state and local government revenues
return to pre-crisis levels. This compares to 29 percent and
22 percent that expect it will take four and three years,
respectively. Only three percent see a rebound in revenues
occurring within two years.
Driving concerns about revenues beyond the lingering recession
is the fact that nearly half (49 percent) of respondents expect
the level of federal assistance for state and local governments
to decline over the next three years, while another 27 percent
anticipate no change in the level of federal assistance. This
compares to 24 percent that expect an increase.
Default Concerns Overblown
While municipal industry professionals anticipate pressure
on municipal revenues to linger, they do not expect it to
lead to an increase in municipal bond defaults in the coming
year. Defaults on U.S. municipal securities totalled $8 billion
in 2008, $6.9 billion in 2009 and $1.6 billion in 2010 year-to-date,
according to the Distressed Debt Securities Newsletter. When
asked to forecast the level of defaults on municipal securities
in 2011, 55 percent expect to see less than $2 billion in
defaulted debt. This compares to 31 percent that expect defaults
between $2-$5 billion, 11 percent that expect defaults between
$5-$10 billion and 3 percent that forecast more than $10 billion
in defaults.
"While state and local governments have seen steep declines
in revenues, the risk of defaults on bonds issued by these
municipalities generally remains well below similarly rated
corporate debt," said Chris Mauro, director of Municipal
Bond Research at RBC Capital Markets. "Despite that fact
that municipal credit quality has deteriorated in this recession,
the public perception that municipal bonds have become a riskier
asset class to own relative to corporate debt is simply not
true."
In fact, 81 percent of those surveyed believe public perception
of the credit quality of the municipal market is too negative.
Most Pressing Needs for Municipalities
Almost half (47 percent) of municipal industry professionals
cite infrastructure and transportation as the most pressing
financing need for municipalities. By comparison, pensions
were cited by 32 percent as the most pressing financing need
and education came in third with 13 percent. Only eight percent
of respondents said that healthcare was the top financing
need.
"There is broad national consensus that many of our
nation's roads, bridges and tunnels need to be replaced or
significantly repaired," said Chris Hamel, head of U.S.
Municipal Finance at RBC Capital Markets. "Given the
severity of the recession, it is clear that an additional
funding source is necessary to maintain, let alone upgrade,
our nation's infrastructure."
Other Findings: Impact on California of Proposition 25
In California, budget issues are front and center as voters
weigh in next month on Proposition 25, a ballot measure that
allows lawmakers to pass budgets more quickly with a simple
majority. California is currently one of only three states
that requires a supermajority vote of the Legislature to pass
a state budget (Arkansas and Rhode Island are the others).
Six-in-ten municipal industry professionals believe Proposition
25 will increase the efficiency of the California state budget.
About the Survey
The survey of 103 municipal industry professionals was conducted
by RBC Capital Markets at The Bond Buyer's 20th Annual California
Public Finance Conference in San Francisco, held from October
6-8, 2010. Respondents included federal, state and local officials,
bankers and other municipal industry professionals who attended
the conference.
About RBC Capital Markets' U.S. Municipal
Finance Group
RBC Capital Markets' U.S. Municipal Finance Group provide
products and services annually to hundreds of municipal issuers
across a broad range of sectors including healthcare, higher
education, student housing, education, public power, special
districts, student loans and transportation. The firm is one
of the most active underwriters of municipal bonds in terms
of total number of senior managed issues, underwriting hundreds
of issues annually.
About RBC Capital Markets
RBC Capital Markets is the corporate and investment banking
arm of the Royal Bank of Canada (TSX: RY; NYSE: RY) and is
active globally in debt and equity origination, sales and
trading, foreign exchange, infrastructure finance, and structured
products across a number of industry sectors. Its North American
platform includes a significant U.S. investment banking franchise
and leading equity and fixed income underwriting, sales, trading
and research businesses.
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Media contacts:
Kait Conetta, RBC, (212) 428-6409,
kait.conetta@rbc.com
Kristina Ferrari Baldridge, CJP Communications,
(212) 279-3115 x235, kferrari@cjpcom.com
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