Munis close mostly unchanged ahead of light supply; state spending plans called 'imbalanced'

By Sheri Kasprzak

New York, April 11 - Municipals rounded out the week mostly unchanged, market insiders said.

There wasn't a lot of trading activity to be found during the Friday session, said a trader, and the coming week is expected to be very light. Only about $3 billion of new offerings are slated to price during the holiday-shortened week.

Looking to Treasuries, the market was mixed to end the week. The 30-year bond yield fell by 1.5 bps, the five-year note yield climbed about a basis point, and the 10-year note yield was flat.

Spending plans 'imbalanced'

Recent data has demonstrated that state tax revenues have grown along with U.S. economic growth, but an interesting phenomenon has occurred as well, said Tom Kozlik, municipal credit analyst with Janney Montgomery Scott LLC.

"During economic downturns, state governments typically pare back spending and balance it with lower revenues," Kozlik wrote in a report released Friday.

"Then, during times of positive economic growth (like now) state planners typically sock away funds to help through the next economic downturn. However, evidence from the recent cycle has been different; a new spending paradigm has surfaced, one where some states' spending plans have been consistently imbalanced, even though the broader economy is growing."

Pension benefits are among the biggest expenditure that has not been curtailed, Kozlik noted.

"In fact, pension benefit funding in some cases is much worse now because states have reduced pension plan contributions in order to fund other spending, not a fiscally responsible practice," he added.

"This is creating an increasingly worrisome level of fiscal damage that could be all but irreversible unless significant reforms are made."

There's a great likelihood, Kozlik said, that credit circumstances for states that are not cutting back on spending will worsen, pointing out that New Jersey's debt was recently downgraded to A+ from AA-.

North Carolina deal set

Among the few offerings ahead next week is a $321.05 million deal from the State of North Carolina. The state plans to offer series 2014A general obligation refunding bonds (Aaa/AAA/AAA) through competitive sale on Wednesday.

The bonds are due 2015 to 2025, and proceeds from the sale will be used to refund existing state G.O. debt.

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