Is it time to replace Detroit’s emergency manager?

In a stunning decision, bankruptcy judge Steven Rhodes refused to approve a $165 million settlement proposed by Detroit emergency manager Kevyn Orr to pay off Bank of America/Merrill Lynch and UBS for dubious interest rate swaps. Orr’s swap proposal has been contentious since Detroit formally filed for bankruptcy on July 18th, 2013. The Detroit News reported:

U.S. Bankruptcy Judge Steven Rhodes on Thursday denied a deal that would have allowed Detroit to pay two banks $165 million to terminate a troubled pension debt deal blamed for pushing the city into bankruptcy.

Rhodes ruled the settlement was too expensive and that Detroit was ‘reasonably likely’ to win a lawsuit against two banks involved in the pension debt deal.

In sharp terms, the judge said he will not let Detroit continue to make bad financial decisions, the likes of which triggered the biggest municipal bankruptcy in U.S. history. ‘The court … will not participate or perpetuate hasty and imprudent financial decision-making,’ Rhodes said. ‘It’s just too much money.’

The states’ focus on Medicaid spending

Two political war horses, former Federal Reserve chairman Paul Volcker and Richard Ravitch, who helped restructure New York City after its near bankruptcy, released the final report of the task force they have led for the last three years. Their group, the State Budget Crisis Task Force, came to this conclusion:

The Task Force recognizes the difficulties inherent in government change. It also recognizes the urgency for change. The primary reason the Task Force was created is that insufficient attention is directed to the fiscal imperatives of the states. States, and the local governments they create, are charged with providing the most important domestic government services. Yet important decisions on the national level often do not consider the impact of those decisions on their ability to deliver those services.

For the most part, state governments, with their requirement to have a balanced budget every year, are better-run than the federal government, which rarely faces hard choices on prioritizing spending. I agree with the task force’s observation that the federal government does not take state needs enough into account when setting the federal budget and regulations. Medicaid spending has become the biggest expense for states, and yet they have little control over this spending.

Fullerton, CA may be wasting money on its police force

Two Fullerton, California police officers were acquitted Monday in the brutal beating death of a homeless and mentally ill man, Kelly Thomas. Here is the story from Reuters:

The confrontation between six Fullerton police officers and Thomas was captured by a surveillance camera at the bus station and led to demonstrations in the community, as well as the ouster of three city council members in a recall election.

On the videotape, [police officer] Ramos is seen strapping gloves on his hands, balling them into fists in Thomas’s face and telling Thomas, whom he knew from previous encounters: ‘You see these fists? They are getting ready to f— you up.’

Repurposing America’s cities

Nothing will rev up a city’s tax base faster than clearing blight and bringing abandoned properties back onto the tax rolls. The New York Times describes the problem:

In all, more than half of the nation’s 20 largest cities in 1950 have lost at least one-third of their populations. And since 2000, a number of cities, including Baltimore, St. Louis, Pittsburgh, Cincinnati and Buffalo, have lost around 10 percent; Cleveland has lost more than 17 percent; and more than 25 percent of residents have left Detroit, whose bankruptcy declaration this summer has heightened anxiety in other postindustrial cities.

The result of this shrinkage, also called ‘ungrowth’ and ‘right sizing,’ has been compressed tax bases, increased crime and unemployment, tight municipal budgets and abandoned neighborhoods. The question is what to do with the urban ghost towns unlikely to be repopulated because of continued suburbanization and deindustrialization.

Cash flow problems in higher education

There have been endless stories about the massive student loan problem. One in six borrowers are now late in their payments. It’s a crushing burden for college graduates who can’t find a job or don’t have one that pays enough. We also hear about colleges and universities that are struggling with debt loads that they took on to finance new construction. The New York Times reported in December 2012:

But some colleges and universities have also borrowed heavily, spending money on vast expansions and amenities aimed at luring better students: student unions with movie theaters and wine bars; workout facilities with climbing walls and ‘lazy rivers’; and dormitories with single rooms and private baths.

Instead of funding better instruction, the borrowing mainly addressed campuses and housing. More from the Times:

Cheers to the MSRB

The Municipal Securities Rulemaking Board made a wonderful regulatory push when it issued its proposed rule for the conduct of municipal advisers. Municipal advisers are professionals who are supposed to help state and local governments structure their borrowing and investment activities in the most economically efficient way.

In the past, advisers did not always place the interest of their government clients ahead of all other interests and they had undisclosed conflicts of interest. Basically, local governments could be treated as “muppets” by advisers without any restraint from the law.

In the Dodd-Frank Reform Act, Congress created a new law to protect municipalities and gave new authority to the MSRB to create rules to regulate the activities of municipal advisers. To put the law into effect, the MSRB issued Proposed Rule G-42, and said:

How much do mutual fund flows affect the muniland yield curve?

Municipal bond yields rocketed up late last May after Federal Reserve Chairman Ben Bernanke commented on the likelihood of quantitative easing being drawn back at the year’s end. Mutual fund investors, spooked by possible losses from rate increases, began exiting muni funds.

S&P Indices does a good job of aggregating yields for all maturities and credit qualities (i.e. 5, 10, 20 and 30 year bonds rated AAA, AA, A, BBB). But a even rich index like S&P doesn’t show us some of the finer movements of the market.

Thomson Reuters Municipal Market Data plotted AAA general obligation bonds maturing in 5, 10, 20 and 30 years. This gives us a more precise picture of yield movements across the interest rate curve over time. You can see the same yield spike that happened in late May and early June in the S&P index.

Are local governments really recovering?

Janney Montgomery director and credit analyst Tom Kozlik issued a short research piece that highlighted U.S. Census data for local government revenues. The Census data suggests that local governments, in aggregate, will continue to face a difficult time in years ahead because revenues have flattened since 2009. Here is Kozlik’s chart, which maps the Census data:

Moody’s changed its view of local governments to stable from negative in a December report for the first time in four years, but cautioned that the credit quality of local governments was not as steady or solid as it had been prior to the recession:

Moody’s outlook for the US local government sector has been revised to stable from negative. Our outlook had been negative since 2009. In the aftermath of the Great Recession, stable means something new for local governments.

Selling Puerto Rico Cofina 3.0


Richard Larkin is generally positive on Puerto Rico. Larkin is Senior Vice President and Director of Credit Analysis at H.J. Sims. At the Bloomberg Muni Link conference last November, Larkin thought the interest rate that Puerto Rico would have to pay to sell a third lien of its Sales Use Tax bonds (known as SUT bonds or Cofina 3.0) would be around 7 percent. This was pretty much in line with market chatter.

Is privatization waning?

For thirty years there has been an ideological pressure for the U.S. government to sell public infrastructure, assets and services. Prisons and schools have been privatized. Toll roads, like the Indiana Toll Road, have been sold to private consortiums. Many of these assets were created by earlier generations who regarded their obligations to citizens as important. Now there is a bigger commitment to an economic philosophy that insists government is the most expensive and least efficient provider of services. Somewhere along the line, with little economic or financial validation, privatization was accepted as the best approach for public assets.

Recent events suggest that the tide may be turning. Idaho’s governor, a privatization advocate, has announced that he is ending private contracting for the state’s correctional facility. The Idaho Statesmen-Review’s Betsy Russell reports:

[Idaho] Gov. Butch Otter just announced that he’s ordering the state Board of Correction to halt its ongoing effort to get new bids from private firms to run the privately operated state prison, the Idaho Correctional Center, south of Boise, and instead move to have the state take over operating the scandal-plagued lockup.

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