ICMA, along with 10 other organizations representing state and local government leaders, recently issued “Facts You Should Know” to set the record straight on state and local bankruptcies, municipal bonds, and pensions. 

The associations make it clear that state and local governments do not want nor require any federal intervention, noting that even the Congressional conversation about bankruptcy can increase interest rates on municipal bonds. “Facts You Should Know” was developed to address the misinformation and false claims surrounding state and local government fiscal conditions.

Among the key findings:

• State and Local Bankruptcy. The national conversation now under way about whether Congress should enact preemptive authority for states to file for bankruptcy is treacherous because of its unintended consequences. The mere existence of a federal law allowing states to declare bankruptcy would only serve to increase interest rates, rattle investors, raise the costs of state government, create more volatility in financial markets, and erode state sovereignty under the 10th Amendment to the U.S. Constitution. National Governors Association (NGA) leadership issued a preemptive statement on January 25, and again in a February 4 joint leadership letter with the National Conference of State Legislatures (NCSL) that declared opposition to any congressional legislation that would permit states to file for bankruptcy protection.

• Municipal Bonds. There are approximately 1.5 million municipal bonds outstanding, totaling $2.9 trillion, 70% of which are owned by individual investors. Nearly 12,000 issuances are completed each year.  Predominantly issued by state and local governments for governmental infrastructure and capital needs purposes, municipal securities are considered to be second only to Treasuries in risk level as a safe investment instrument.  Notably, since 1970 there have only been 54 defaults in the municipal sector—less than 1/3 of 1%, compared to a corporate default rate that exceeds 10%.  In the largest municipal bankruptcy in recent times—Orange County, California, in 1994—the county paid its investors and did not default on its municipal bonds.

• State and Local Pensions. Public pension plans are not in a current crisis. In fact, most state and local employee retirement systems have substantial assets to weather the economic crisis. There is currently $2.7 trillion already set aside in pension trusts for current and future retirees.  State and local employee retirement systems do not seek federal financial assistance and one-size-fits-all federal regulation is neither needed nor warranted and would only inhibit recovery efforts at the state and local levels.  More state and local governments enacted significant modifications to improve the long-term sustainability of their retirement plans in 2010 than in any other year in recent history.

“State and local governments are balancing their budgets, as painful as that is,” reports Elizabeth Kellar, deputy director of ICMA and president and CEO of the Center for State and Local Government Excellence.  “Fear mongering has created market turmoil because investors have pulled out of the bond market in large numbers.  Words matter.  When high profile advisors go on national television and say there will be sizeable defaults—with no basis in fact—investors sell, which drives up interest rates.”

“Facts You Should Know” was developed by ICMA, National Governors Association, National Conference of State Legislatures, Council of State Governments, National Association of Counties, National League of Cities, U.S. Conference of Mayors, National Association of State Budget Officers, National Association of State Auditors, Comptrollers and Treasurers, Government Finance Officers Association, and National Association of State Retirement Administrators.