Looking back on 2014, State and Local governmental bonds’ credit quality generally improved due to three trends. First, State governments saw steady economic growth and job creation, higher stock market returns helped income tax revenues and sales taxes increased on more consumption. Second, local municipalities saw property values appreciate and in some cases exceed the highs recorded at the height of the real estate bubble. Lastly, the recession’s having left an indelible impression on budget officials lead to restrained spending growth. These credit factors helped drive investment grade municipal bonds to the top performance decile in the investment grade bond universe. Looking forward to 2015, many of the same credit fundamentals remain in place, but, given the firming base, growth will likely occur at a slower pace than in prior years. State governments will be constrained as nominal transfer payments to local authorities reach prerecession levels. Local authorities will see additional state support, and the lagging property assessment cycle will reflect improved economic conditions and less foreclosure activity. These positive credit trends are not without risks. Deferred spending on infrastructure and failure to address long-term pension and retiree health benefits will consume much if not all of the revenue growth. The result is more idiosyncratic risk. For example, the State of New Jersey just appointed an emergency manager to oversee Atlantic City, NJ, which has seen its finances hit hard by regional competition undermining its gambling based economy, leading to the closure of some of its casinos. Kern County, CA is another credit with exposure to specific risk due to its reliance on oil and gas production. The county just declared a state of fiscal emergency. And let’s not forget Puerto Rico’s electric utility – PREPA. After having its credit rating fall below investment grade, the island territory of the U.S. now sits on a mountain of debt and has left PREPA in a precarious position. Odds are the utility is headed toward a debt restructuring. The lesson from 2014 to apply to 2015 is that municipal credits with idiosyncratic risk can, and do, enter restructuring. And as we saw from settlements in Stockton, CA and Detroit, MI, bondholders went zero for two versus pensioners in 2014.