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By Christine Benz | 03-15-2011 12:54 PM

Managing Risk in Munis

Morningstar's Miriam Sjoblom highlights the opportunities and concerns in the municipal market today, and suggests tactics for combating credit risk.

Christine Benz: Hi, I'm Christine Benz from Morningstar.com.

It's Tax Relief Week on Morningstar.com. Here to discuss what's been going on in the municipal bond market is Miriam Sjoblom. She is associate director of fund research at Morningstar.

Miriam, thanks so much for being here.

Miriam Sjoblom: Good to be with you, Christine.

Benz: So Miriam, there has been this very public debate brewing about how worried people should be about what's going in the municipal bond market. Could you discuss both sides of the debate; the very worried camp, as well as people who are saying, "Ah, it's probably not such a big crisis"?

Sjoblom: Well, you know, the most famous declaration was Meredith Whitney's appearance on 60 Minutes, where she predicted there would be 50 to 100 sizable municipal defaults amounting to hundreds of billions of dollars.

Since then you had a number of commentators come out and say, "perhaps we think that's a bit exaggerated," but there are some concerns. I think what the concerns boil down to is that, since 2008 state and local governments have been facing very large deficits that they've been struggling to close.

So, the way they've done that is a variety of ways. A number have had rainy day reserve funds that they built up during the good times. They've had help from the federal government through the American Recovery and Reinvestment Act of 2009. Some of them have used one-time accounting gimmicks to plug holes in their budgets, and then, many have just been raising revenue through tax increases or fee increases and cutting services and that type of things.

So, the concern is, states and local governments are still facing these huge budget deficits, but some of these fixes are not there anymore. The rainy day reserve funds are depleted. The federal aid is drying up this year. So, you have some really hard political decisions that these governments need to make. Cutting services that their constituents really like and some depend on, as well as raising taxes and revenues. So, it's a really difficult environment, and it's definitely a challenging one.

Benz: So, Miriam, how about in the, "don't panic" camp? Are there people who are more sanguine, and why is that?

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