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March 28, 2023  |  5 Minute Read

While recent events related to the banking sector are creating uncertainty and near-term financial market volatility, we expect state and local municipal bond credit to remain on solid footing for the foreseeable future.


COVID-related federal monies and robust core revenue growth has led to the build-up of near record reserves for many municipalities (see Exhibit 1). Consequently, we believe that states and localities should be well equipped to withstand ongoing inflationary-related expenditure pressures, a reasonable economic slowdown and potentially higher-than-normal borrowing costs.


Historically, publicly rated municipal bond defaults have been rare over time—particularly versus corporates. The average ten-year cumulative default from 1970-2021 for Moody’s rated municipals was 0.15%, while the same statistic for corporates was 10.36% (see Exhibit 2). For investment grade Moody’s rated credits only, those statistics decline to 0.09% and 2.17% for municipals and corporates, respectively.


Exhibit 1: US States' Total Fund Balance as % of Expenditures


Source: NASBO; Goldman Sachs Asset Management as of March 23, 2023. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities.


Exhibit 2: Moody’s Comparative Default Rates (1970–2021)


Source: Moody’s; Goldman Sachs Asset Management as of March 23, 2023. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities.


Over the last half century (see Exhibit 3), the overwhelming majority (as measured by par) of defaulted municipal bonds were confined to creditors whose financial problems generally stemmed from long-standing challenges and were unrelated to acute macro-economic events such as the Global Financial Crisis and the bursting of the dot-com bubble.


Washington Power Supply System infamously defaulted after delays and design changes caused construction costs for multiple nuclear plants to spiral out of control around the same time the demand for energy dropped off. The Jefferson County default stemmed in part from a court mandated capital improvement plan which saddled the water/sewer system with an excessive debt load.


By the time Detroit filed for bankruptcy in 2013, the city’s population had declined by nearly two-thirds from its peak over 60+ years earlier. Finally, the bankruptcy of the Puerto Rico debt complex was caused by a variety of factors including the sunset of corporate tax benefits that lead to an exodus of jobs, years of structural budgetary imbalances and ultimately, an overreliance on debt.


Exhibit 3: Default Volume is Driven by Large General Governments and Utilities


Source: Moody’s; Goldman Sachs Asset Management as of March 23, 2023. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities.



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Competitive Enterprises refers to a business enterprise that engages in, or owns or controls a significant interest in any entity that engages in, the performance of services of the type provided by the Company, its Affiliates and/or their predecessors.

Municipal Utilities are utilities that are owned and operated by the local government or another state body to provide a service to the public.

General Governments consists of central, state and local governments and the social security funds controlled by these units.


Municipal Securities are subject to credit/default risk, interest rate risk and certain additional risks. High-yield, lower-rated securities involve greater price volatility and present greater credit risks than higher-rated fixed income securities. Investments in fixed-income securities are subject to credit and interest rate risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. All fixed income investments may be worth less than their original cost upon redemption or maturity. Income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT).

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Date of First Use: March 28, 2023. 312614-OTU-1769752.