Muni sweeps: Weak Massachusetts demand?

May 25, 2011

Muniland investors have been anticipating strong demand for new bonds being brought to market. Issuance has dropped dramatically, and generally this would create strong demand for new bonds. Massachusetts brought a bond deal yesterday that had a higher yield and lower amount than was anticipated. This is surprising since Massachusetts is a state with many high-income earners. Dow Jones reported:

The Commonwealth of Massachusetts on Tuesday sold a $ 469.8 million offering of general obligation municipal bonds via lead underwriter J.P. Morgan.

The deal size was $20 million smaller than initially planned. Randy Smolik, senior municipal analyst at Thomson Reuters, said the bonds came at yields that were slightly higher than expected, which raises questions about demand at a time of few new issues, and as muni bond funds prepare for a semi-annual period when coupon income necessitates reinvestment.

“If the deal isn’t being very responsive at these levels… it kind of tells me that June money isn’t that anxious to invest at these levels,” Smolik said.

State auditor is blowing the whistle pension shortfall

This is the first time I’ve seen a public official issue a paid press release to discuss a problem in his state:

[State] Auditor General Jack Wagner said today that the city of Pittsburgh’s pension plans for uniformed and non-uniformed workers are severely underfunded and that additional concrete steps must be taken to boost contributions and protect pensioners, taxpayers and the city’s municipal bond rating.

Wagner released an audit today that showed the consolidated plans for police, firefighters and non-uniformed personnel were only 34 percent funded as of Jan. 1, 2009. City council adopted a bailout plan in December 2010 that would boost funding to 50 percent and avert a state takeover that would be mandated by Act 44 of 2009.

Wagner noted that, although Public Employee Municipal Retirement System is responsible for determining if the minimum 50 percent funding threshold is met, his office has not seen any other evidence supporting the establishment of the revenue stream besides the city ordinances. But even with those additional funds, derived from parking tax revenues, the pension plans would still be severely underfunded, Wagner said.

Hopefully it’s a new trend.

The cops are on the beat to oversee municipal advisers

One of muniland’s regulators, the Municipal Securities Rulemaking Board (MSRB), has published a proposed rule to structure how municipal advisers are regulated. Municipal advisers give advice to public entities about bond issuance and municipal derivatives.

Similar to the rules governing broker-dealers, the MSRB is proposing to require the designation of a supervisory principal and maintenance of “book and records” that can be produced if the MSRB wants to review the activities of a firm:

MSRB Rule G-44 would require municipal advisors to establish and maintain a system to supervise the municipal advisory activities of associated persons. The rule would set the minimum requirements for this system, including the establishment and maintenance of written procedures. Ultimate responsibility for appropriate supervision rests with the municipal advisor.

This stuff is so dry, but it is the architecture of the muniland market. Comments on the proposed rule are due June 24, 2011.

A financial markets war horse on Ms. Whitney

Jack Bogle, the founder of Vanguard, was asked his opinion about Meredith Whitney’s call on muniland defaults in a Fox Business interview:

Q: What do you think of the massive muni-bond default forecast by prominent analyst Meredith Whitney, who said there might be between 50 and 100 this year? So far her prediction isn’t holding up.

A: I think Meredith Whitney paints with too broad a brush and I think painting with that broad brush has tarnished that industry. And I think if you get out of munis it’s at your peril because states and cities are taking measures not to default and these bonds offer great tax advantages (munis are free of state, local and federal taxes). At Vanguard, we diversify to soften the impact of a possible default. Each of our portfolios owns 1,000 municipalities. No more than 1% investment in any single bond.

Mini sweeps:

Bloomberg: Bachus Comforts Wall Street While Assailing Dodd-Frank at Home Bachus announces SEC hearing for Jefferson County, Alabama debt

Wall Street Journal: State Tax Revenue Increases by 9.1%

Standard & Poor’s: A Property Tax Drop Alone Is Unlikely To Erode Local Governments Credit Quality

Center for Retirement Research: The Funding of State and Local Pensions in 2010

Reuters: Outlook “mixed” for public pension funds: study

Stateline: State workers to pay more for health benefits

Los Angeles Times: Private firm HB Capital Resources has rich role in municipal bonds

Bond Buyer: Audit of Conduits Sought

Washington Business Journal: Kwame Brown’s latest: No more tax-exempt out-of-state bonds

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