[Congressional Record (Bound Edition), Volume 157 (2011), Part 4]
[Extensions of Remarks]
[Page 4758]
[From the U.S. Government Publishing Office, www.gpo.gov]




        ``AN UNJUSTIFIED ASSAULT ON STATE AND LOCAL GOVERNMENT''

                                 ______
                                 

                           HON. BARNEY FRANK

                            of massachusetts

                    in the house of representatives

                       Wednesday, March 30, 2011

  Mr. FRANK of Massachusetts. Mr. Speaker, very few financial 
instruments in American history have had the extremely high degree of 
reliability as full faith and credit, general obligation bonds issued 
by states or local governments. The rating agencies themselves have 
acknowledged that there are virtually no defaults of such bonds, and 
even for those bonds that are funded by particular dedicated revenue 
sources, and are somewhat less solid, as Iris Lav notes in the New York 
Times last week, ``The leading rating agencies estimate the default 
rate on rated municipal bonds of any kind at less than one-third of 1 
percent; in contrast, the default rate on corporate bonds reached 
nearly 14 percent during the recession and hovers around 3 percent in 
good times.'' I note here, Mr. Speaker, that while I am skeptical of 
the predictive abilities of the rating agencies, I do not doubt their 
ability to count what has happened and that is what we are referring to 
here.
  Despite this extraordinary solid record of repayment, there are some 
in the investing community who are promoting uncertainty by predicting 
that there will be, in an unprecedented way and quite contrary to the 
fiscal facts--an outbreak of defaults. This is not only without any 
factual basis; it is one more assault on the ability of state and local 
governments to provide for the needs of the people who live in these 
jurisdictions. Transportation facilities; sewer and water projects; 
public safety and health and education facilities--all of these are 
funded by bonds, and the record, as Ms. Lav makes clear, is that those 
who invest to help build these are always paid back as promised.
  In her op-ed article in the New York Times, Iris Lav, of the Center 
on Budget and Policy Priorities, decisively refutes this effort to 
drive up the interest rates that state and local governments have to 
pay, requiring them either to raise taxes at the state and local level, 
or to diminish important projects that both support employment and 
provide necessary public facilities.
  Mr. Speaker, I ask that Iris Lav's thoughtful and irrefutable 
argument be printed here.

                           Unbreakable Bonds

                            (By Iris J. Lav)

       Washington.--Late last year a well-known financial analyst, 
     Meredith Whitney, predicted that ``50 to 100 sizable 
     defaults'' by state and local governments, amounting to 
     hundreds of billions of dollars, were just around the corner. 
     Since then that fear has produced a near-panic, with 
     municipal bond markets down significantly and some even 
     calling for a law to let states declare bankruptcy.
       But this fear of an imminent bond crisis reflects a 
     profound misunderstanding of the differences between the 
     short- and long-term challenges facing state and local 
     governments, and what these governments can do to address 
     them. Indeed, such talk hurts those governments in the long 
     run by undermining investor confidence and raising their 
     borrowing costs.
       Municipal bond default is actually quite rare: no state has 
     defaulted on a bond since the Depression, and only four 
     cities or counties have defaulted on a guaranteed bond in the 
     last 40 years. A few minor bond defaults do occur each year, 
     usually on debt issued by quasi-governmental entities for 
     projects that didn't pan out, like sewers for housing 
     developments that never were occupied.
       Indeed, last year's total defaults amounted to just $2.8 
     billion--a drop in the bucket compared to the nearly $3 
     trillion in outstanding municipal bonds. The leading rating 
     agencies estimate the default rate on rated municipal bonds 
     of any kind at less than one-third of 1 percent; in contrast, 
     the default rate on corporate bonds reached nearly 14 percent 
     during the recession and hovers around 3 percent in good 
     times.
       So why are so many people afraid of a looming wave of bond 
     defaults? The confusion is rooted in a failure to distinguish 
     between cyclical budget problems and the longer-term 
     soundness of state and local borrowing.
       State and local budget deficits need to be understood in 
     context. These governments always have trouble balancing 
     their budgets during economic downturns, and this downturn 
     has been worse than most. The 2007-2009 recession and the 
     slow recovery, along with housing foreclosures, caused a big 
     drop in state and local revenues; state revenues remain an 
     estimated 11 percent below what they were before the 
     recession.
       Meanwhile, state spending on public services has risen, 
     driven in part by increases in the numbers of unemployed and 
     newly poor residents. The result has been huge and 
     continuing, but understandable, deficits.
       Such deficits make for frightening headlines because these 
     days, most governments are legally required to balance their 
     budgets each year, and they have been closing those gaps by 
     cutting programs and raising taxes, neither of which sits 
     well with voters.
       But these operating deficits are cyclical: as the economy 
     picks up, demand for social services will decline and tax 
     revenues will increase, just as they have after previous 
     recessions.
       To be sure, states also suffer from longer-term 
     ``structural deficits'' because their revenues are not 
     growing as quickly as their costs of providing services even 
     during good economic times. These structural deficits, which 
     states must address, make it harder for them to meet their 
     responsibilities each year.
       However, that doesn't mean their bonds are in trouble. 
     Bonds are a long-term obligation. They finance projects like 
     bridges, highways and school buildings--not, with very few 
     exceptions, annual operating costs. And by law most state and 
     local governments must pay bond interest before financing any 
     public services.
       True, state and local governments do have to make annual 
     interest payments on their bonds, but these payments 
     represent a modest 4 percent to 5 percent on the whole of 
     current spending--no more than in the late 1970s. And while 
     total state and local bond debt has risen slightly over the 
     last decade as a share of the economy, it is no higher today 
     than it was at times in the 1980s and 1990s.
       On the rare occasion when a local government faces the risk 
     of default, the state typically steps in and creates a 
     control board or other mechanism to straighten out its 
     finances and assure that bondholders get paid; New York did 
     so when Nassau County's finances deteriorated in 2000 and 
     again this year. Pennsylvania gave the same assistance last 
     year to Harrisburg, which had issued bonds for an overly 
     ambitious trash-to-energy project.
       Some doomsayers liken today's municipal bond market to the 
     mortgage bond market before it burst. But that's a false 
     comparison: state and local governments haven't changed the 
     frequency or quality of bonds issued, as occurred with 
     subprime mortgage bonds.
       Nevertheless, the fear of imminent defaults has led some 
     politicians to call for a federal law allowing states to 
     declare bankruptcy. That's a solution in search of a problem 
     that doesn't exist--and a dangerous solution at that, since 
     it likely would undermine investor confidence and thereby 
     increase state borrowing costs for necessary capital 
     improvements.
       None of this is to say that the country's finances, whether 
     at the federal, state or local level, aren't without serious 
     problems. But it's one thing to talk reasonably about long-
     term difficulties, and another to spread fear about a bond-
     default apocalypse. Doing so might win political points, but 
     it makes finding real solutions much harder.

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