MuniLand

The newly confirmed chairman of the Securities and Exchange Commission, Mary Jo White, testified to the House Financial Services Committee on May 16 and requested an increase in funding for her agency. SEC funding does not come from federal government revenues, but from fees assessed on securities transactions. White’s request to increase the agency’s funding does nothing to increase the federal deficit or take funding from other programs. She is merely asking to spend the money the agency collects.

This is the SEC’s Budget Authority (what Congress says the SEC can spend, in the center column) and the Actual Obligations (what was spent, in the right column) for the last several years, in thousands:

There have been increases since the financial crisis in 2008, but the Budget Authority from Congress was frozen between fiscal year 2012 and 2013. Chairman White explains why this will not do:

The securities markets we oversee are continuously evolving, and the technology of today is most certainly not the technology of tomorrow. Fast-paced and constantly changing markets – fueled by financial firms whose annual technology budgets exceed what the SEC spends on its entire operations – require constant monitoring and analysis. When issues are identified, the investing public deserves appropriate and timely regulatory and enforcement responses. The securities industry also has been growing rapidly in size. In the last decade, trading volume in the equity markets has more than doubled, as have assets under management by investment advisers. It is expected that these trends will continue in the foreseeable future. At the same time, the SEC’s jurisdiction has grown to cover significant new aspects of the securities markets.

And how much of the fees that the SEC collects would Chairman White like to spend?:

Since going through a three-year bankruptcy process, a lot of wonderful initiatives have taken place in Vallejo, California – a city of 118,000 people in the northern end of the San Francisco Bay. After the city’s police force was cut down over 300 community watch groups formed to protect neighborhoods. The city recently launched Nextdoor, a private social network platform for neighborhood communication. In the most substantial move, the city has established a first in the nation “Participatory Budgeting” process. It was described by a participant as:

Funded by $3.2 million dollars allotted by a citywide sales tax passed by Vallejoans while still in bankruptcy, the city of Vallejo embarked on Participatory Budgeting (PB), the first US city to ever try PB citywide. PB Vallejo garners ideas from its stakeholders and citizenry with the goal of funding proposals that benefit the public, are a one-time expenditure, and are implemented by the city of Vallejo or other approved public agencies and nonprofits.

Did the city residents take it up?

Over 600 people assembled together at meetings across the city and online at www.pbvallejo.org to come up with over 800 ideas and suggestions on the well-being of Vallejo. 100+ volunteer budget delegates have worked together and with city staff to flesh out those ideas into viable proposals. These proposals will go onto a ballot in May where the citizens of Vallejo, ages 16 and above, will vote on which plans will go forward to the city council to fund and implement this fiscal year. The budget delegates are now preparing for three planned expos in April where they will present the proposals that will be on the ballot so the voters of Vallejo can interact, ask questions and walk away with what they need to make an informed vote.

Last December I wrote about a project sponsored by California Treasurer Bill Lockyer that is now up and running:

In the past year, three California cities have filed for bankruptcy. This casts a pall on the bonds of other California cities, because investors wonder if they also contain buried fiscal issues. In an effort to create more transparency, a new open source ratings project was recently launched:

Responding to market concerns about municipal credit quality, the California State Treasurer’s Office has commissioned a San Jose State University economist and a government-bond research group, Public Sector Credit Solutions, to develop a default probability model for city bonds.

Puerto Rico now faces a $495 million revenue shortfall for the year. Revenues have come in less than projected, and having pared government jobs under the former governor Luis Fortuño, Puerto Rico is now resorting to one-off financial maneuvers to fill the budget hole. Moody’s describes the moves in a May 15 report:

In our issuer comment of March 18, 2013, Puerto Rico Faces Large Mid-Year Budget Gap, we noted that full year revenues for fiscal 2013 were likely to be $910 million or 10.4 percent below initial estimates of $8.750 billion and 9.3 percent below fiscal 2012 revenues. Revised estimates showed the shortfall to be slightly larger at $965 million as of January 31, 2013. In response, the commonwealth has implemented a number of corrective measures, including modest expense reductions.

Puerto Rico’s revenues are likely to decline 9 percent from 2012, and it has no time to raise taxes to capture more. The commonwealth has resorted to refinancing debt and moving debt between entities. It brings to mind how shell games are played.

A big trip line for states and cities is the host of promises they have made to provide health benefits to retirees (Other Post Employment Benefits (OPEB)). Almost universally, cities and states are shouldering these OPEB costs as they come due. Pay as you go, if you will. From a recent Bloomberg presentation:

These so-called OPEB promises made by the 15 biggest cities alone total $115 billion, with an average burden of $2,300 for every man, woman and child, according to data compiled by Bloomberg. How will local governments manage to make good on their pledges without becoming insolvent? Will we see governments reduce benefits and raise their cost for current workers, as has been the case in several cities and states?

Cities and states cannot unilaterally end these benefits, outside of Chapter 9 bankruptcy, because they are contractual promises. As Stockton, California was entering the bankruptcy process, it eliminated lifetime unlimited health care benefits for former employees and their dependents. Stockton had awarded these OPEBs to former employees who had worked for the city for as little as a month, and the expense helped push the city into bankruptcy. Retirees and former employees took Stockton to court and a judge ruled that, given the city’s fiscal distress, it could cease these benefits.

This week, New York Governor Andrew Cuomo unveiled his proposal to create a Financial Restructuring Board to help distressed local governments manage their finances. One of the key features is an alternative binding arbitration process for unions and municipalities to resolve contract issues more rapidly. New York has an unusual employee provision that leaves all previous contract terms in place if municipalities and unions fail to reach an agreement. This provision could prevent old contracts from festering with rich wage increases and swelling employee and pension costs. Governor Cuomo said in a press release:

Growing retirement costs, declining populations, decreasing property values, and the recent fiscal crisis have all contributed to the difficult financial issues facing localities today…The Financial Restructuring Board will bring together state and local officials to help localities make tough decisions and solve this crisis now instead of kicking the can down the road.

Governor Cuomo pointed his finger at four New York cities that have balanced their budgets for years with substantial state aid. It includes a chart that details state subsidies to these cities via the Aid and Incentives for Municipalities (AIM) program:

On Tuesday the SEC is holding a roundtable on credit ratings to address the ongoing question of ratings shopping. Rating shopping is when a bond issuer shops its deal to various credit rating agencies to see who will assign the highest rating. The rating agencies that will assign the best ratings are given the business and the rating fee. Here is how the SEC describes its event:

As previously announced, the roundtable will consist of three panels. The first panel will discuss the potential creation of a credit rating assignment system for asset-backed securities. The second panel will discuss the effectiveness of the SEC’s current system to encourage unsolicited ratings of asset-backed securities. The third panel will discuss other alternatives to the current issuer-pay business model in which the issuer selects and pays the firm it wants to provide credit ratings for its securities.

The possibility of a credit rating assignment system comes from legislation that Minnesota’s senator Al Franken inserted in Dodd-Frank. Franken’s law requires that the SEC study the feasibility of a bureau or panel that would assign a rating agency to rate an offering. Currently issuers choose which firms will rate their offering although for structured finance or asset-backed deals issuers must share the particulars of the new deal with all raters recognized by the SEC in that category. This is equivalent disclosure and something that I have advocated with the SEC since 2007 and Congress since 2008. It has slightly increased competition in rating structured finance securities as seen in the chart above although the size of the market has declined since 2007.

A rather surprising notice appeared on the Federal Business Opportunities website:

The Bureau of the Public Debt, on behalf of the Office of the Comptroller of the Currency (OCC) intends to award an order to Municipal Market Advisors for Municipal Bond Research. Municipal Market Advisors is the sole provider of the Municipal Bond Research.

Did the BPD bid this award out in an open process? Well, no not exactly, in fact not at all:

Lots of ink has been spilled about the famous ex-Major League pitcher Curt Schilling, who convinced the state of Rhode Island’s Economic Development Corporation to issue $75 million of privately placed “special and limited obligations bonds” to fund a loan to his gaming company. After getting the loan Schilling and Company proceeded relatively quickly to go bankrupt and was unable to repay the loans to EDC, which funded the bonds.

Matt Bai, of the New York Times, wrote a lengthy story of the personalities involved but provided little detail about the financial underpinnings of the story.

Josh Barro, at Bloomberg, detailed how he badgered Rhode Island’s governor Lincoln Chaffee with questions about the 38 Studios bonds and then was offended when he didn’t get the answers he wanted. Barro unfairly blasted the governor for his pension reform, which is comparable to what 40 plus other states have done.

Australia arguably has one of the best individual retirement systems in the world. The government-sponsored system – superannuation – requires mandatory employee and employer contributions to retirement savings. In certain need-based circumstances, the government may also contribute. Australians take funding their retirements seriously, and the government is giving them a powerful new tool to save by moving trading of government bonds onto the Australian Securities Exchange (ASX). From the government:

Deputy Prime Minister Wayne Swan and Minister for Financial Services Bill Shorten today announce that Australian Government Bonds (AGBs) will be available for trading on the Australian Securities Exchange for the first time on 21 May.

Why is this important?

This will enable retail investors to buy and sell AGBs in a similar way to how they buy and sell shares. The retail trading of AGBs will make it easier for mum and dad investors, including many self-managed super funds, to hold and trade Commonwealth-backed bonds.