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Don’t Buy Bonds from These States

05/20/2011 11:00 am EST

Focus: BONDS

Marilyn Cohen

President & CEO, Envision Capital Management, Inc.

Some states are trying to rectify their budget deficits and gain stronger footing, but a good number are spending more and more despite being in dire straits already. Which states to avoid? Marilyn Cohen of Bond Smart Investor has the answer in this exclusive interview with

Marilyn, you’ve been really pretty bearish on muni bonds for quite a while. You’ve written your book Surviving the Bond Bear Market.

You mentioned some of that but we’re seeing a lot of political ferment in the states. We’ve seen it in Wisconsin with Scott Walker, in Ohio with John Kasich, in Michigan. New Jersey’s Chris Christie has become a big figure.

As states grapple with these budgets, some are doing a better job than others, right?

They absolutely are—and the big, big surprise to me has been New York. You know Cuomo has done…

That’s Andrew Cuomo?

Yes, he’s been a silent hammer. He has done a really good job with all of the headline news, and it looks to me like New York is getting its act together much faster than most pundits really thought.

As opposed to California...we are so dysfunctional. I wish we could come up with a worse word than dysfunctional.

Jerry Brown got elected because he said he would put on the ballot whether we are going to extend these higher taxes that Schwarzenegger implemented, and he didn’t get that done. I mean we’ve got a $25 billion deficit, of which they’ve only plugged the hole with $9 billion, and they keep on spending.

And one thing about New York: I think it has the most funded pension plan of any state—probably because they’ve contributed so much of the budget to it—but I think in that case, they’re actually in better shape than a lot of states too.

Well, you’re right, and kudos to New York. That was such a big surprise.

Ohio is working very hard—Governor Kasich—in getting their budget taken care of, but they are start using some smoke and mirrors, which I don’t like. They’re talking about selling some of their prisons and some of their toll roads. Well, that may work for the new fiscal year, but what are they going to do as an encore?

So be careful about these one-time fixes, for which California is notorious, and Illinois—I don’t think 2012 is going to be all that much easier for them.

What about Texas? Texas really surprised me last year when they announced I think they had about a $25 billion budget deficit as well. They always like to portray themselves as kind of having rugged financial rectitude and things like that. How are they doing?

They’re working on it. The [state] House wants to cut more than the Senate in all different areas.

Now, are they all controlled by the Republicans, both the House and the Senate? I know the governor is a Republican.

I don’t know the answer to that off the top of my head, but I do know that there is a tug of war going on between the House and Senate. And the numbers they’re talking about...if they end up in between, they’re going to be okay.

But don’t forget, they’ve got the growth that the other states that are in trouble do not have. Corporations are coming in. Individuals are coming in. All of those revenues are really going to help them—as long as they curtail their spending, which it looks like it’s going to happen.

Now, both Illinois and Connecticut have Democratic governors, and they have both raised taxes—as opposed to the other states, which really haven’t. Now, even New York has sort of put a lid on it, and is actually cutting some taxes. What do you think about that?

I think that Illinois is just the poster child of states for everything that can go rotten. So they raise their state income’s still not high, in relationship to you being in New York and me being a Californian. They have yet to really cut back on the spending, and their pension funds are so underfunded.

So, put that all together as a cook and mix it up, and you’re going to come out with a flop. You’ve got to change the ingredients.

Connecticut—it’s a small state. They’re just gouging—gouging—their residents, and you know what? Money is portable.

It’s also the richest state in the country, I think.

Well, it is. All the hedge funds are there, and they’ve got all the New Yorkers who commute into Connecticut, but money is portable. The state of Maryland showed us that, when a few years ago they put on a millionaire’s tax and baked that into their budgets. Guess what? They found that the [millionaires]...

They moved to Virginia.

They found that they all moved to Virginia, exactly right! So, I think that Connecticut is not on a good path, but nevertheless they are in significantly better shape than Illinois and California. 

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