Eye on the Market | April 9, 2012 J.P Morgan Q&A on the USA, with a watchful eye on the risk of giant man-eating plants; Spain However, there’s more of an effort at the state/local level to address this issue than at the Federal level. More than 40 states lowered pension benefit liabilities over the last 3 years according to the National Conference of State Legislatures. Measures taken include raising employee contributions (while lowering employer payments), raising minimum retirement ages, cutting post-employment healthcare benefits and in some cases, switching to defined contribution from defined benefit plans. The good news, to paraphrase Mark Twain, is that reports of municipal bonds’ demise have been greatly exaggerated. From 1970 through to the end of 2011, municipal bonds rated by Moody’s experienced a grand total of 71 defaults among 17,700 issuers (11 of which occurred during 2010 and 2011). General obligation bonds accounted for 5 defaults; 29 were related to housing; 22 for hospitals and healthcare; 3-4 each for education and infrastructure. Utilities and cities registered 2 each, while counties, special districts, and water & sewer and experienced 1 each. The average recovery for defaulted munis was 65%, compared to 49% on corporate senior unsecured bonds. Last comment on municipals: while /ocal tax collections are weak due to the collapse in home prices, state tax collections have been increasing for 7 quarters in a row. State and local tax revenue US mutual fund flows Percent, YoY change of 4-quarter moving average Billions, USD 20% 1,000 Bonds balas 800 10% Local 2 600 5% 400 0% 200 5% 0 -10% Stat -200 ate a 15% 400 Equities 2004 2005 2006 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2012 Source: US Census. Source: Investment Company Institute. OK, so the US economy is improving, but is still heavily dependent on monetary and fiscal stimulus to grow, and the only belt- tightening one can find is at the state and local level. Since 2009, after eq