CNBC’s John Carney has been banging the muni crisis drums pretty loud, siding generally with Team Whitney over Team Everyone Else on this important debate.
In his latest piece, he argues that just like with other markets gone haywire — there’s been a massive levering up in munis over the past several years.
The size of muni debt grew from $1.4 trillion in 2000 to something like $2.7 trillion today. That growth really isn’t that much more modest than the growth of home mortgage debt from $6.7 trillion in 2000 to the 2008 peak of $14.6 trillion.
The pace of issuance expanded as well. In 2000, only about $200.9 billion of new muni bonds were issued. By 2007, $424 billion were issued. Last year, $430 billion were issued.
The revenues of the states and local governments didn’t expand at a pace to match the pace of debt accumulation. State and local government revenues expanded from $1.3 trillion in 2000 to just $1.9 trillion in 2008. Each dollar collected by the states in 2000 supported $1.07 of debt. By 2008, that number had grown to $1.26. In short, the states were increasing their leverage during the boom years of the decade.
The situation got even worse following the financial crisis. Tax revenues declined while states refused to reign in spending. As a result, leverage climbed so that by 2009, the last year for which complete data is available, each dollar of revenue was supporting $1.35 of debt.
He goes to note than in 2000, half of all US states had fully funded pensions, but that now that number has dwindled to 4.
Figured out the problem yet?
As evidence that states have been recklessly levering up, he’s comparing them always to 2000, a year so bubblicious that even the Federal Government was running a surplus.. Here’s an LA Times piece form November 16, 2000 remarking on the amazing surplus in California. That’s how out abnormal tax collections were!
Last year the centre on Budget Policies And Priorities put out a report arguing that the scale of the muni debt was in line with historical levels.
Their argument — which we broke down here — jibe with what Carney is saying, that 2000 was an unusually light year for muni debt outstanding as a percentage of GDP. Sure, we’re higher than that now, but still well within range.
Bottom line. It’s easy to make the current situation look bad if you compare it to the biggest bubble year of all time, but this doesn’t prove that from a historical perspective, things have gotten all that bad.