Concerns about the ability of US states and municipalities to meet their debt obligations are resurfacing as the threat of a double-dip recession heightens. After the 2008 crash and subsequent US economic recession, state and city revenues came under increasing pressure, leading some analysts to predict defaults on debt. However, although states and cities have struggled with budget shortfalls and have had to implement cost-cutting strategies and tax increases, those concerns seemed exaggerated.
Three years later, however, with a second recession looking increasingly likely, concerns have returned. Lisa Washburn, managing director at municipal bond research firm Municipal Market Advisors Research in Concord, Massachusetts, says many municipalities have not had a chance to recover. "We were just beginning to see a rebound in state revenues earlier in the year, and many states factored improving income and sales taxes into their 2012 budgets," she says. "If those come off projections, then there will be some pressure." Washburn says there also has not been enough time for local municipalities to fully recover and that, unlike in 2008, this time they do not have the cushion that preceded the first recession. "The housing market is still severely depressed and local governments get about 75% of their tax revenues from property taxes," she says.
