Muni sweeps: Dirty bonds?
Economic Musings has posted an excellent piece on “community development district” [CDD] bonds. CDD bonds, commonly called “dirt bonds,” were widely used to fund housing development infrastructure during the real-estate bubble. Needless to say, many have been hit hard due to the collapse of the housing market. Economic Musings outlines the legal and structural details of these bonds and then questions whether high-yield muni bond funds are accurately valuing the securities in their portfolio:
Lost in the implosion of the securitized markets sits an overlooked yet just as opaque remnant of the housing crisis – CDD or “Dirt Bonds”. Save for the rare fixed income aficionado, this segment is still to this day unknown. In general, a CDD is a local, special purpose government authorized by the state as an alternative method for managing and financing infrastructure required to support community development. In most cases, the community development is water, sewer, and drainage infrastructure to raw undeveloped lots. The CDD then levies assessments on the property.
These taxes and assessments pay the construction, operation and maintenance costs of the district and are set annually by the governing board of the district. The taxes and assessments are in addition to county and other local governmental taxes and assessments and all other taxes and assessment provided for by law.
Muniland revenue flows
Natalie Cohen of Wells Fargo Securities issued a research piece yesterday called “Small Issuer Focus.” There is a lot of good analysis in the piece, notably this very succinct sketch of muniland revenue challenges:
The “double whammy” of budget reductions and constrained local revenues could, in our opinion, make the coming year stressful at the local level. However, we note that the return of revenues at the state level should take some of the pressure off cuts to local government next year and afterward, particularly for schools, which are considered a high public service priority.
While state government typically relies on highly economically sensitive revenues such as sales taxes, personal and corporate income taxes, local governments depend on property taxes. Property values and more important, property assessments against which taxes are levied, are slower to reflect economic change.
Recent reports found that values continue to decline in places and may not yet have hit bottom. For these reasons, property tax revenues will likely, in our view, remain under pressure for at least the next few years as housing foreclosures slowly slog their way to resolution.
Ratings are expensive
Bond Buyer has a story (behind their paywall) about muniland issuers and credit rating agencies:
[T]he cost of a rating may have gone up as a result of Dodd-Frank. Timothy Firestine, chief administrative officer for Montgomery County, Md. [approx population 971,600], said he was “shocked” when the annual cost of ratings from one of the credit agencies jumped to $95,000 last year from $60,000.
The agencies are “taking into account additional work from Dodd-Frank,” he said Sunday in an interview.
Government Finance Officers Association members said they would also like to see greater transparency in the cost of a rating from issuer to issuer. “The whole [fee] schedule seems to be a bit arbitrary,” Firestine said.
Sounds like we need an open-source ratings fee database!
Mr. Market and Uncle Regulator want more disclosure
The drumbeats are building, reports the Bond Buyer:
State and local governments should boost their continuing disclosure voluntarily or federal regulators may mandate improvements for them, a state finance director warned Saturday.
“I think the problem is obvious,” said Frank Hoadley, capital finance director of Wisconsin. “We’re being hammered from all sides — the SEC, the bond investor community, and the political side — about the quality and frequency of our disclosure.”
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