Tax Receipt Increases May Be Too Late

On August 30th, the Rockefeller Institute of Government reported that tax receipts increased 2.2% in the second quarter.  While this is the second straight quarterly gain, the previous five quarters, ended December 2009, saw significant declines.

A portion of the quantitative easing package has always been earmarked for the eventual troubles of municipalities.  We may have just witnessed the beginning of this deterioration.  This comes from a letter obtained by Dow Jones Newswires:

Harrisburg, Pa., will skip a $3.29 million payment on its general obligation refunding bonds, series D and F of 1997, according to a letter obtained by Dow Jones Newswires.

“Unfortunately, the City’s current financial situation precludes us from making any transfer to fund for these debt service payments at this time,” wrote the city’s interim chief of staff and business administrator, Robert Kroboth, in a letter dated Aug. 30 to the bond trustee, Bank of New York Mellon.

The debt payment, which carries insurance from Ambac Assurance, is due Sept. 15.

Kroboth wrote that the city, which is struggling from $288 million in other debt that is related to an incinerator project, is developing a “comprehensive plan to meet its debt obligations in the near future.”

Clients and advisors have found themselves reaching for yield in this low return environment.  After calculating the tax-equivalent yield, municipal bonds were some of the highest yielding investments.  It is unfortunate that the trend of reaching for yield has ignored the risk associated with these investments.  Municipalities do default.  Governments do default.
Based upon this default, the risk premium for holding municipal debt obligations just went up.  As with a previous post, it is imperative to be able to dynamically adapt your portfolio structure.

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