A muniland outlook for 2014

After taking a look back at 2013, here are my predictions for muniland in 2014.

The biggest muniland story this year will be the development of the Chinese municipal bond market. It’s not often that you get to watch a government launch a bond market. And China’s will be massive. From the South China Morning Post:

The [Chinese] mainland’s quest to solve its $3 trillion-and-growing public debt problem by starting a domestic municipal bond market hinges on the one thing officials are most afraid of: transparency.

As markets absorb the results of the latest audit of state finances, Beijing’s long-standing vow to develop a municipal bond market to curtail rapid growth in other types of hidden public debt will take centre stage once more.

By letting local governments sell bonds for cash, Beijing wants to rely on nimble markets rather than inflexible regulations to keep spendthrift units in check.

The stakes are high. A bond market is the centrepiece in a blueprint to mop up fiscal troubles and keep the economy growing at an even pace, giving it room to start other financial reforms.

Texas’ great energy success

Texas is America’s energy powerhouse, producing 16 percent of domestic energy, according to the U.S. Energy Information Administration:

    Texas was the leading crude oil-producing State in the Nation in 2011 and exceeded production levels even from the Federal offshore areas. Texas accounted for 28 percent of U.S. marketed natural gas production in 2011, making it the leading natural gas producer among the States. Texas led the Nation in wind-powered generation capacity in 2010 and is the first State to reach 10,000 megawatts of wind capacity.

Although Texas is known for its oil and natural gas production, it is in the area of wind energy that Texas has hit a new milestone. The state opened a massive electricity transmission grid that was built to gather wind energy produced in West Texas and move it to the population centers in East Texas. It is the first to build infrastructure specifically to support industrial scale production of alternative energy. Here is how it happened, according to the Public Utilities Commission (PUC) of Texas:

Description: The utilities code section 39.904 in conjunction with Senate Bill 20 (2005) established Texas’s Renewable Energy Program and directed the PUC to identify Competitive Renewable Energy Zones (CREZ). A CREZ is a geographic area where wind generation facilities will be constructed. In 2008, PUC issued order 33672 designating five CREZs for the generation of wind power and defining the required transmission upgrades to deliver wind generated energy to Texas consumers.

Is Puerto Rico following Argentina’s path?

The mysterious borrowing undertaken by the Puerto Rico Government Development Bank in the middle of December has been explained. The GDB issued a press release that said that it had “borrowed” $110 million from the state workers insurance fund:

Government Development Bank for Puerto Rico (GDB) Interim President José Pagán Beauchamp today confirmed the GDB’s placement of $110 million in Senior Guaranteed Notes with the Puerto Rico State Insurance Fund Corporation. The bonds have a coupon of 8 percent per annum and have maturities of $40 million, $30 million and $40 million on December 1, 2017, December 1, 2018 and December 1, 2019, respectively.

It looks like a desperate grasp for liquidity. The GDB, however, calls it a plus for the state workers insurance fund that it “borrowed” assets and improved its cash flow.

Muniland’s ‘Best of 2013’

Some exciting developments happened in muniland in 2013. Here is a round-up:

Best paradigm shift

The Center for State and Local Government Excellence developed a holistic approach to analyzing pension costs for local taxpayers that eschews the current approach of reporting municipal, sewer, library and school pension burdens separately.

The team at The Center for State and Local Government Excellence has set a new standard in how local pension burdens should be reported in financial documents like CAFRs. The center’s new approach for measuring a municipality’s pension burden is to aggregate the direct cost of locally-administered pension plans (both city and taxpayers’ share of costs) and contributions to state teacher and non-teacher plans on behalf of dependent school districts. The aggregated cost is compared to a community’s revenues to understand how much must support pensions.

A lot of previous pension analysis looked at pension plans’ funding levels. This study looks at the cost to taxpayers to support the pension promises they have made.

Puerto Rico’s GDB borrows again

Muniland’s most closely watched issuer, Puerto Rico, borrowed last week, according to a notice filed with the Municipal Securities Rulemaking Board’s EMMA system. There was no official statement, but the securities have CUSIP identifiers.

The Government Development Bank was the obligor and there are three maturities: 2017, 2018 and 2019. The GDB is rated Baa3 by Moody’s (under review with the PR general obligation ratings). All three maturities were borrowed at 8 percent. Thomson Reuters MMD Baa3 yield curve for Baa credits was 1.95 percent for 2017, 2.39 percent for 2018 and 2.93 percent for 2019. For the 2017 maturity, Puerto Rico paid four times the benchmark rate.

Many have speculated that if Puerto Rico were to issue a third lien series of Cofina bonds, that longer maturities would have to be priced around 8 percent or higher. But given the 4 to 6-year borrowing at 8 percent that the GDB did last week, Cofina might have to price even higher, even though Cofina has stronger guarantees for repayment. The Bond Buyer reported that Puerto Rico municipalities might issue a variant of Cofina bonds:

Teachers invade the Puerto Rico Senate

In the municipal bond market news tends to get abstracted and formalized. For example, leading analyst Alan Schankel, of Janney Capitol Markets, wrote about the Puerto Rico legislative session addressing the reform of the teachers’ retirement system:

The Governor of Puerto Rico called the legislature into session yesterday to consider reforms to the Teachers’ Pension Plan. After sweeping reforms to the Government Employees’ pension plan were enacted in April, Commonwealth leadership promised to next tackle the Teachers’ plan. As of June 2011, the Teacher’s plan was 21 percent funded, better than the 7 percent funding level of the primary plan, but well below the 80 pecent level many analysts consider adequate. If no action is taken, assets of the Teachers’ plan will be depleted in less than 10 years, which would require pay-as-you-go payments from the Treasury. Unlike government employees, the teachers are not eligible to collect Social Security, so pushback to reforms such as extending the retirement age or increasing teachers’ contributions have been significant, including a disruptive protest at yesterday’s Senate session.

Schankel has the big picture view. A big struggle developed in Puerto Rico this week between the government and teachers. The governor of Puerto Rico, Alejandro García Padilla, launched reform of the teachers’ pension system early this week.

States are our biggest spenders

Spending by states, at $1.7 trillion, is about 10 percent of the national GDP. State spending supports education, medical care for low income citizens, assistance to local governments and many other services. State governments are hives of economic activity. Like corporate entities, they must balance their books at the end of every year.

Tax revenues are erratic, so state budget processes must be flexible enough to make mid-year adjustments. Municipal Finance Today reported on good budget news in the recently released National Association of State Budget Officers (NASBO) report:

NASBO in its report said that after several years of recovery, they are seeing noticeable improvements in the state budget environment. Both budget cuts and gaps have decreased, states have enacted net tax cuts in two of the last three fiscal years and revenue collections have outpaced projections.

A deep dive with T. Rowe Price portfolio manager Hugh McGuirk

I had a chat with Hugh D. McGuirk, head of T. Rowe Price’s municipal bond team and a member of their Fixed Income Steering Committee. Mr. McGuirk is also a portfolio manager for the US Municipal Long-Term Bond Strategy at T. Rowe Price. Here is the interview.

Q: Do you do credit analysis in house?

A: Hugh McGuirk: Yes. The T. Rowe Price municipal investment strategy is driven by rigorous, independent fundamental analysis.

Q: Are you finding adequate dealer liquidity when you need to make adjustments to portfolios or cover redemptions?

The many market views of Puerto Rico

“That is what makes markets” is a financial industry aphorism that means there can be a broad spectrum of views about an asset or a specific security. This is most true for the municipal bonds of Puerto Rico.

With the darkest view of Puerto Rico bonds, BlackRock’s Managing Director and Head of Municipal Bonds Group Peter Hayes told Fox Business News that the Commonwealth may have to restructure its debt “somewhere between now and the middle of 2014 when their fiscal year begins.”

In this Reuters Insider MuniLand video, Emily Raimes, Senior Credit Officer at Moody’s, outlines the fiscal and economic factors that her ratings team will be evaluating after placing Puerto Rico on negative credit watch last week.

Investors talk Massachusetts debt

The Massachusetts Treasurer Steve Grossman headlined an all-day investor conference for the state’s debt last week. The slides were published on EMMA. Like other states and cities, Massachusetts has a number of agencies issuing debt in addition to the Commonwealth (there are 12 that you can see at the bottom of this post). Let’s have a look at the conference highlights:

Real estate remains sluggish:

The state is especially dependent on federal spending from the Department of Defense, research and healthcare.

Five market participants were polled on federal issues related to muniland:

Transportation funding has become more state-centric since Congress has not raised the federal gas tax since 1993:

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