Cumberland Advisors Market Commentary – Why States Are Not Going to Default from the Coronavirus Fallout

Author: Patricia Healy, CFA, Post Date: March 27, 2020

In our opinion this is a short-term shock, although it will likely change some behaviors for the long term that will need to be monitored.

Market Commentary - Cumberland Advisors - Why States Are Not Going to Default from the Coronavirus Fallout

The initial concern is liquidity, not just in the bond market but also at the state level, where tax payment dates have been extended and economically sensitive revenues such as sales taxes, energy taxes, and transportation fees have experienced a sharp drop-off from the coronavirus-induced shutdown. The unprecedented federal response is to address liquidity in the market as well as provide funds to important sectors of the economy such as healthcare and transportation and other aid to municipalities for fighting the virus. Postponed revenues will eventually be received by the states, although not as much as states had originally budgeted.

States have tremendous resources available to them, and numerous states have economies larger than the GDP of some countries. Resources include federal aid revenue sharing, taxing, and fee-raising ability. States also have the flexibility to reduce expenditures. Many states budget conservatively to have flexibility to adjust revenues and expenses throughout the year. Most states have also built up sizable reserves as a reaction to their experience during the financial crisis. I just got off a conference call with Fitch Ratings, whose analysts surveyed states and reported that many are expecting to use internal fund borrowing to finance the delay and shortfall in revenue. They also have tremendous market access and access to their banking partners.

States are not authorized to go bankrupt. States cannot file for Chapter 9 bankruptcy, because they are co-sovereigns with the federal government under the US Constitution (10th Amendment). The State of Arkansas did default on payments during the Depression because of the desperate economy and their overlevered position, but the state eventually repaid the debt.

Patricia Healy, CFA
Senior Vice President of Research and Portfolio Manager
Email | Bio

Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.

cumber map
Cumberland Advisors® is registered with the SEC under the Investment Advisers Act of 1940. All information contained herein is for informational purposes only and does not constitute a solicitation or offer to sell securities or investment advisory services. Such an offer can only be made in the states where Cumberland Advisors is either registered or is a Notice Filer or where an exemption from such registration or filing is available. New accounts will not be accepted unless and until all local regulations have been satisfied. This presentation does not purport to be a complete description of our performance or investment services. Please feel free to forward our commentaries (with proper attribution) to others who may be interested. It is not our intention to state or imply in any manner that past results and profitability is an indication of future performance. All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed.