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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,

Kristina Ferrari Baldridge, CJP Communications,
(212) 279-3115 x235, kferrari@cjpcom.com



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10/29/2010 10:37:25