Muni sweeps: Tough choices ahead

April 14, 2011

US Capito ~ 1910l

Congressman Darrell Issa’s Committee on Oversight and Reform is holding a hearing this morning on state and municipal debt.

Should be an idealogical rodeo.

This is the third hearing on the topic for the Committee. The previous hearings  “State and Municipal Debt: The Coming Crisis?” part 1 and part 2 are here.

I listened to the second hearing held on March 15. The range of views on the severity of the indebtedness of states and towns was startling.

The credit rating agencies appearing at the hearing, Robert Kurtter for Moody’s and Robin Prunty for Standard & Poor’s, professed that the muni market, even with pension challenges, was essentially healthy. Their sworn testimony pits these credit rating agencies in direct competition with all muniland doomsayers including equity analyst Meredith Whitney.

Although Ms Whitney declined a request from Congress to testify  she has proposed to the Securities and Exchange Commission that her firm become a “nationally recognized statistical rating organization” (NRSRO).

She does not meet the requirements of the law to be so designated and her refusal to appear before Congress would make it hard for the SEC to provide her an exemption.

Dean Baker of the Center for Economic and Policy Research argued that the financial crisis decimated pension values and allowing time to reestablish asset valuations in pension funds would go a long way to fixing the problem.

Congress has ruled out any wholesale rescue of the municipal market and Federal Reserve Chairman has said the same to the Senate Baking Committee.

Congress will likely be taking a light fix approach after much discussion.

Andrew Ackerman of the Wall Street Journal has reported on a potential legislative measure:

Rep. Patrick McHenry (R-NC) plans to introduce the measure within the next month or two, he said in an interview Wednesday, adding that his aim is to require issuers to provide more corporate-style disclosures.

A key element of the planned legislation would allow the SEC to impose uniform accounting standards set by the Governmental Accounting Standards Board.

There are about 55,000 borrowers in the muni market, about 20,000 of which don’t adhere to GASB standards, the SEC has said.

We’ll be tuned in Thursday morning from 9:30 to 11:30 to hear more. We’ll report back.

Vermont’s pension kings;

In honor of the testimony of Vermont governor Peter Shumlin testimony at the House Oversight Committee today we highlight an excellent article from the Burlington Free Press on his state’s pension participants.

The article “Judges, state troopers earn highest Vermont pensions” lays out in sweet detail the broad range of pension amounts being earned by former state and local workers. Out of the top 100 pensioners, 78 are retired members of the Vermont State Police, while 18 go to the judiciary.

But front line workers generally receive much less.

Here is the money quote:

The top 100 pensions as of June 30, 2010, ranged from $97,928 to $56,820.

At the other end of the spectrum, there are plenty of state and municipal workers and teachers, the records show. The records show 98 percent of municipal pensions, 84 percent of teacher pensions and 82 percent of the state pensions were less than $25,000 for the last fiscal year, which ended June 30.

Reverse migration:

From the Business Insider 18 Cities Where The Suburbs Are Rapidly Turning Into Slums. Between 2000 and 2008, suburbs saw their poor populations grow by 25 percent — almost five times faster than urban poverty growth, according to Brookings.

This has huge implications for municipal revenues and costs to provide social services.

Great satellite photos in the piece too.

Jacked up munis:

Oh goodie, trading “inflation swaps” inside muni bond funds.

The road to ruin is paved with such ill matched form and content.

Marketwatch has a flattering article on muni bond funds loaded with derivatives. I wonder if the reporter fully understood what they were writing about.

While managers from Pimco, AllianceBernstein and JPMorgan declined to say exactly what percentage of their returns was due to trading so-called inflation swaps, they did say the strategy has paid off this year as inflation fears have spread. Such swaps, or derivatives, work like this: A fund manager pays a fixed rate for a swap from a brokerage house or financial services firm based on inflation expectations. If those expectations rise, that contract becomes more valuable; if they fall, the contract loses value.

It’s a very volatile way of managing a municipal bond portfolio,” says Jeff Tjornehoj, a senior research analyst at Lipper. For example, the JPMorgan fund lost 7% (compared to a 3% loss for intermediate muni bond funds) in 2008.

Big red warning sign please. We’ll look at this issue again in more depth.

Little sweeps:

New York Times: In Financial Crisis, No Prosecutions of Top Figures

Joshua Rauh: Are State Public Pensions Sustainable? Why the Federal Government Should Worry About State Pension Liabilities

Birmingham News: Alabama House voted to make state workers pay more for retirement

Oklahoma Policy Institute: Protecting Core Services

Northern Trust Investments: 2011 Expectations for Muni Market: More Volatility

San Francisco Chronicle: “Tertium non datum”

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