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State bankruptcy debate unsettles muni market

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Kai Ryssdal: For the second time this week, we're gong to dip our toe back into the world of municipal bonds. And you can just stop right there with your yawning. Because the usually mundane muni market is anything but right now.

As you know, state and local governments don't have a whole lot of cash on hand. There's talk of possible defaults, which no matter how you spell it, is a four letter word that gets investors nothing less than completely spooked. And now Congress is talking about just letting states declare bankruptcy.

Marketplace's Heidi Moore reports.


Heidi Moore: Cities and counties can go belly up. States aren't allowed to go bankrupt -- for good reason. Investors need that confidence in order to buy the bonds that keep hospitals and schools running and roads paved.

James Spiotto, a partner with law firm Chapman & Cutler, says states have had a great track record.

James Spiotto: There is a long history of paying their debts, doing almost anything to pay to maintain the ability to borrow cheaply. They don't want to lose that ability, and they certainly don't want the price to go up.

No states are even close to bankruptcy. All they have to pay is $1 out of every $20 to cover their debt.

So why do some in Congress keep talking about a federal law that would let states go bust? Because those advocates don't want a federal bailout. States have been borrowing from their pension funds to stay afloat. Now it's budget season again and there is a looming pension crisis. Advocates of state bankruptcy believe the mere threat may force union leaders to accept lower benefits. Instead of changing federal law, one solution is for states to balance their budgets: they can either earn more or spend less.

Chris Mauro is an analyst with RBC Capital Markets.

Chris Mauro: We think it's going to be a very, very difficult budget season but we think it's one that states will manage their way through.

In fact, Arkansas was the last state to default on its bonds, and that was in 1933. It was back on its feet two years later.

States now are facing an ugly budget fight, but a short one: the fiscal year ends on June 30, and their budgets have to be in by then.

I'm Heidi Moore for Marketplace.

About the author

Heidi N. Moore is The Guardian's U.S. finance and economics editor. She was formerly the New York bureau chief and Wall Street correspondent for Marketplace.

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