MuniLand

Tax reform is back in muniland

Tax reform is back in muniland headlines. Naomi Jagoda of the Bond Buyer has the details:

House Ways and Means Committee chairman Dave Camp’s draft tax reform plan, released Wednesday, would terminate the tax exemption for private-activity bonds and advanced refunding bonds issued after 2014.

As expected, the plan would create three individual income brackets — 10 percent, 25 percent and 35 percent — and would tax a portion of muni bond interest, which is currently tax-exempt, for those in the highest bracket. The surtax would apply to individuals with incomes of $400,000 or more and couples with $450,000 or more of income as well as all munis they hold, whether new or outstanding.

It would essentially cap at 25 percent the value of tax exemption for those in the 35 percent tax bracket, sources said. The surtax would be unprecedented and would likely dampen demand for muni bonds and raise borrowing costs for state and local governments, market participants said.

Camp’s proposal singles out high earners, above $400,000 for an individual and $450,000 for couples, to tax their municipal interest at 10 percent. I pulled the most recent IRS data and there were about 432,000 taxpayers with incomes above $500,000 who filed returns in 2011 and claimed tax exempt interest ($500,000 is the closest income break in the IRS tables). Their total non-taxed municipal interest was $25.56 billion for 2011 or an average of $59,000 per taxpayer. At the very top of the table 9,186 taxpayers earned $4.2 billion tax exempt interest or $458,000 for each taxpayer. Interestingly, in the highest income brackets the number of taxpayers collecting tax-exempt interest and taxable ordinary dividend income are roughly the same (see chart):

Puerto Rico Senate approves $3.5 billion general obligation issuance

The Puerto Rico Senate followed the House and approved the authorization of $3.5 billion of new general obligation bonds. Included in the approved legislation is language that allows bond anticipation notes to be issued. The legislation allows for the new debt to:

1. Pay or refinance debt and other obligations of the Commonwealth of Puerto Rico,

2. Repay or refinance debt and other obligations of any public corporation with the purpose of covering or fund a portion of the deficit of the Commonwealth of Puerto Rico, 3. Repay or refinance obligations incurred by the Commonwealth of Puerto Rico on ancillary contracts to bonds Commonwealth of Puerto Rico issued, refinanced or paid,

The SEC’s new municipal adviser rule is not confusing

Governing.com ran a story titled “Why’s the SEC’s New Municipal Advisor Rule So Confusing?” Actually the new rule, although not yet finalized, is not confusing. There are resources for muniland participants to understand how it will be implemented and what responsibilities muni advisors have towards their clients. In fact, I have never seen a better rollout for a new regulatory effort.

Here is a roadmap:

As directed by Congress in the 2010 Dodd Frank legislation, the SEC published the definition of a municipal adviser last September. Over 1,100 municipal advisers have registered with the SEC and MSRB (registrations here including a downloadable list). Reuters detailed what happened last January:

After it was signed in 2010, the Dodd-Frank law ignited a fight over exactly who counts as a municipal adviser. The dispute lasted until the SEC approved a final definition in September, which allowed the MSRB to begin drafting regulations.

Puerto Rico’s bond rally and economic contraction

Reuters and others have reported on the recent rally in Puerto Rico bonds.

The S&P Municipal Bond Puerto Rico Index is up 4.94 percent so far this year, with most of that increase happening in February. That same index fell more than 20 percent in 2013, when net outflows in Puerto Rico-oriented funds totaled $20.2 billion, or 28 percent of $83.4 billion in assets under management, according to Lipper data.

The primary spur for the February rally in Puerto Rico bonds was the investor call held by the Government Development Bank on February 18. The GDB had held its previous investor call on October 15, 2013 and it hadn’t issued any financial information in the  four months between calls. Investors were starved for information aside from the monthly Economic Activity Index data issued by the GDB.

Looking back over my previous writing, another big movement in Puerto Rico bond prices caught my attention. This was the violent 40 percent spread widening of Puerto Rico general obligation bonds that happened between August 28 and September 3 last year:

How much will Detroit bondholders suffer?

 

Detroit’s proposed treatment of general obligation bondholders has turned muniland upside down. Here is what Fitch Ratings says:

Fitch Ratings believes the recent Detroit plan of adjustment filed with the Bankruptcy Court on Friday, Feb. 21, 2013, if confirmed, would set a troubling precedent in the municipal market. The plan not only classifies unlimited tax general obligation (ULTGO) bonds as ‘unsecured,’ but further degrades ULTGO value by giving other similarly classed ‘unsecured’ creditors preferential treatment, including unfunded pension and retiree health care liabilities.

Reactions to Detroit’s plan of adjustment

Detroit’s plan of adjustment was filed on Friday by Emergency Manager Kevyn Orr (Plan of Adjustment Disclosure Statement):

Losers:

Retirees
Unsecured bondholders
Swaps counterparties
Bond insurers

Winners:

Detroit Institute of Art (DIA)
Various foundations contributing to save the DIA
Secured bondholders
Residents of Detroit
The state of Michigan

Here is a 140-character summary:

Pension tension and getting the job done

Video source: Pennsylvania Senate GOP

My colleague Felix Salmon recently dove into the subject of public pensions and the controversy about National Public Radio accepting funding from pension reform zealot John Arnold. It’s too bad that NPR and its affiliate WNYT were not more transparent about their connection to Arnold. There is a lack of understanding about the condition of public pension systems and how many are in dire financial condition. For example, Salmon wrote:

None of this will be easy: the whole reason why pension obligations started ballooning in the first place was that local governments didn’t have the money to hand out pay raises. So the unions will push back against these ideas: they like any system which makes it easier for them to accrue valuable benefits at negligible up-front cost to the government. But if you want to guarantee vocal opposition which is almost impossible to overcome, then your best way of doing that is to combine or replace these kind of reforms with an attempt to renege on governments’ existing pension obligations.

State and local governments from coast to coast are working to achieve a soft “renege” on existing pension obligations and retiree health benefits owed to 12.9 million active plan participants and 7.8 million retirees. Public unions almost everywhere are lobbying and litigating to preserve their pension benefits. In many cases it’s simply a matter of not having enough cash to pay these obligations at the contractual or legislated levels while also supporting government services. Peter Hayes, Managing Director at Blackrock, wrote:

‘There is no lien, there is no property interest, these creditors are like all others’

A showdown between bond insurers and city attorneys in Detroit’s bankruptcy highlights the level of protection that secured bondholders have in Chapter 9 bankruptcy. Detroit attorneys argued that federal bankruptcy law trumps Michigan state law and that “secured” bonds could be impaired. From Chad Livengood of the Detroit News:

[Bond insurers] Ambac Assurance Corp., Assured Guaranty Municipal Corp. and National Public Finance Guarantee Corp. want [federal bankruptcy judge Stephen] Rhodes to order the city to segregate special property taxes Detroit voters approved for economic development, cultural and recreation projects and public safety facilities and resume paying bondholders the full amount owed.

‘These monies were raised solely for repaying the bonds and no other purpose,’ Guy Neal, attorney for National Public Finance Guarantee, said in court Wednesday.

Puerto Rico partly opens the kimono

Puerto Rico held a long-awaited investor call on Tuesday. In a highly scripted performance, participants delivered statements that accompanied the presentation slide deck. The call lasted one hour and 20 minutes and no questions from attendees were answered. Written questions submitted two weeks prior were addressed. Important issues of government liquidity and the proposed 2015 budget were briefly detailed.

Puerto Rico Governor Alejandro Garcia Padilla, in a pre-recorded talk, opened the call with an update on the commonwealth’s fiscal and economic progress over the last 13 months. He said that he was proud to have acted rapidly to address problems that were created years and possibly decades ago. He said that politics have been put aside.

Government solvency and the Government Development Bank’s (GDB) liquidity are the key focus for investors. Incomplete data made it hard to assess whether sufficient cash flows exist to service short-term liquidity needs and repay additional debt service for a proposed $3 billion dollar general obligation debt offering.

Puerto Rico’s funny labor data

 

The Federal Reserve Bank of New York made a big splash by pre-announcing that the Bureau of Labor Statistics would revise the employment data for Puerto Rico upwards. Here are the revisions that the NY Fed says that the BLS will make:

Oddly the BLS website shows different employment figures for Puerto Rico than what the NY Fed references. The BLS shows Puerto Rico employment as 1.04 million in June 2012 (an unemployment rate of 14.1 percent) versus approximately 1.01 million in June 2013 (an unemployment rate of 13.2  percent). The decrease in the BLS unemployment rate is due to a large shrinkage in the labor force of 40,322 year over year.

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