Muni sweeps: Strutting her stuff

April 15, 2011

Philly mummers 2009

She may not be the prettiest girl but at least she’s out there

The home of the famous Mummer’s parade struts its stuff for the bond markets.

The city of Philadelphia was named tops for transparency in a University of Illinois at Chicago survey of cities providing investors with financial information online.

Every municipality, like every person, has problems. Hiding them doesn’t instill confidence in investors. I’m glad to see Philly and other cities letting it all hang out. From the the Philadelphia Inquirer:

Philadelphia won praise for providing not only archived and current financial information about the city’s finances, but also links to documents related to future bond issues and its policies on debt management and the uses of swaps, which are financial derivatives.

No Senator Wyden your bill will not pass

It’s always reassuring when your intuition is confirmed by an expert. I thought is unlikely that Senator Ron Wyden’s second attempt to remove the tax-exempt status of municipal bonds would get traction in Congress. That’s because states and local governments are a potent lobbying force there. A very powerful force.

Girard Miller, a senior strategist at the PFM Group, one of the nation’s leading municipal advisors, sketches out the hoary details:

Their bill is probably dead on arrival as it will invite the wrath of state and local governments. States and localities will oppose the idea that Congress should ever start taxing their bonds on a mandatory basis. Even though they lost the landmark court case on immunity from federal taxation in the 1988 South Carolina vs. Baker case, they still have a solid public-policy case for preserving their historical exemption from federal taxes on public-purpose infrastructure projects.

To dive deeper into the tax geekiness read the rest of his post at Governing.

Obama raising taxes on rich net positive for munis

Tax exempt muni bonds help shelter high income earners from taxes. So the higher their taxes the more they want munis. No surpise that the President’s new deficit reduction plan could be a boon for muniland.

The Bond Buyer lays it out:

Obama’s plan would rely on tax-code changes and reforms for a savings of $1 trillion over the 12-year period. The broad initiatives the president laid out — expiration of the Bush income tax cuts for the wealthiest and capping itemized decisions at 28% for high-income households — would benefit municipal bonds, according to market participants.

“That’s bullish for munis,” said Richard Ciccarone, managing director and chief research officer at McDonnell Investment Management.

The higher the effective marginal tax rates, the greater the value of tax-exempt bonds. Ciccarone noted that the top income tax rate went north of 70% after the Great Depression because the government needed to cut the federal deficit. Limits on tax deductions also would make munis more attractive because tax-exempt interest is an exclusion rather than a deduction from income taxes.

New Jersey simplifies and reduces

New Jersey is facing one of the toughest challenges in managing it’s tremendous debt load and competing against its neighbors. It’s positive to see that it is simplifying its capital structure rather than resorting to more tricks via complex bond structures or derivatives. On tax rates it has some stiff competition.  From Michelle Kaske of the Bond Buyer:

“We will continue to rely on bonds as a key source of public financing for our infrastructure projects, but we’re going to be doing so with a plain-vanilla approach,” Sidamon-Eristoff said during his presentation. “We’re not going to be using things like” capital appreciation bonds.

Other agendas for the administration include reining in spending to keep expenditures in line with recurring revenues. In addition, Christie is eager to lower taxes on corporations and individuals to make the state more competitive for business creation and growth.

New York’s income tax rate on its wealthiest citizens will return to 6.85% in 2012, which is below New Jersey’s 8.97% rate. Pennsylvania’s income-tax rate is even lower at slightly above 3%, the treasurer noted.

“From where I sit and stand as the state treasurer of New Jersey, I just see a very competitive environment that just got even more competitive,” Sidamon-Eristoff told the conference participants. “My ideology or philosophy about taxes doesn’t matter because it’s a function of how we stack up next to our neighbors.”

Little sweeps

Bond Buyer:  Municipal Bond Worries Spur OCC Scrutiny of Banks’ Exposure

CNN Money:  Muni bonds that won’t blow up

Reuters Muni defaults fall, defying dire forecast

Albany Times Union:   PEF, CSEA: No ‘model’ deal with givebacks, pay freeze

Stateline: DROP pensions: A sound investment or a waste of taxpayer money?

Bloomberg: S&P’s Absent Rating, Shrinking Cash Threaten DeKalb Luxuries

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