With both groups, Brooks said, rainy-day funds today are no longer as flush, pension funds are in worse shape, and the steps both took to balance their budgets, raise taxes, cut spending and staff, have been exhausted.
“The easy stuff has been plucked from that tree, the low-hanging fruit,” Brooks said. “It’s not going to be easy to go further than that. And as a result of that, we believe they’re more vulnerable. We’re not predicting a recession, but they’re more vulnerable.”
Beyond hefty obligations for pensions and other post-employment benefits, governments are going to have to deal with the growing need for infrastructure eventually, according to Richard Ciccarone, managing director and chief research officer at McDonnell Investment Management. Charts tracking a measure of the average age of property plant and equipment show that state and local governments continue to see aging infrastructure, he said.
“Cities are watching their infrastructure get older,” Ciccarone said. “And there’s a probability that they’re going to need to borrow down the road here, as a result.”
When these factors are considered, AllianceBernstein underweights state and local GO bonds in its portfolios, Brooks told investors. As GOs comprise 35.5% of the muni market, AllianceBernstein stands at 23.6%, underweight by almost 12 percentage points.
Instead, it puts money into essential-purpose revenue bonds. While they represent about 22% of the market, he said, AllianceBernstein sits at 34.7%, or 12.6 percentage points overweight.