In addition, analysts say, a number of municipalities have demonstrated that they take their debt payments seriously and are willing to sell property, raise taxes, hike fees, plead with the feds and state officials, and otherwise do whatever they have to do to pay their bondholders. In the case of Harrisburg, for instance, though the city flailed in the face of its debt payments—debt payments it knew about for years—the state stepped in. "We couldn't stand by and let the city default on these bonds," Gov. Rendell said.
Other analysts hold that the crisis will test how state and local governments will manage their budget gaps, but ultimately most will manage them. "We believe the crises that many state and local administrators find themselves in are policy crises rather than questions of governments' continued ability to exist and function," says a report from Standard and Poor ' s. "They're more about tough decisions than potential defaults. This is because, for the states in particular, debt service generally holds a priority status relative to other obligations." In other words, not every debt issuer is as stupid as Harrisburg.
Indeed, the muni market is huge and diverse. Surely, individual hospitals and housing projects will continue to default—and will make up most defaults. Surely, some towns and counties will fail to close their fiscal gaps, and will seek help from states. Surely, some states continue to tread dangerously unsustainable fiscal paths.
And it's the states that raise the biggest, and most pressing, questions. What will happen if California or Illinois or New Jersey starts to falter? What if unionized workers refuse to accept more cuts, or pensioners revolt? Right now, most expect that the federal government will step in to backstop the states. Warren Buffett, for one, argues the point: "It would be hard in the end for the federal government to turn away a state having extreme financial difficulty when they've gone to General Motors and other entities and saved them."
But California is a whole lot bigger than Harrisburg, and conservatives are already warning against bailing out "beggar states." Pension liabilities, in particular, loom large. And even if a total muni crisis is not around the corner, fiscal problems, in all their horrible variety, will be with the United States for a long time.