MuniLand

Every one of the 19,492 municipal and 16,519 township governments in America is unique. But, when it comes to the fiscal affairs of these entities, there are a lot of similarities. Almost all local governments provide fire and police protection, libraries and parks, tax collection and public works like street maintenance and garbage collection. Generally the 50,432 school districts in the U.S. act as independent political entities with their own budgets, tax collection and bond issues.

Most of these municipal governments and school districts are governed by everyday citizens who are elected to positions of public authority. They rely on paid administrators to efficiently provide public services and educate children, but they must still make important decisions about taxation, approve personnel contracts and agree to bond issuance and refinancings. For officials who may be working part-time on the job with scant experience, these can be daunting responsibilities.

In the personal finance space there are loads of websites like Mint.com and HelloWallet.com that help individuals monitor, plan and project their expenses. I wondered if there were comparable ones in muniland to help small governments and school districts get a sense of how their spending patterns compare to other comparable municipal entities.

After searching around I found several great sites for municipal officials, bond market participants and interested citizens to get a better understanding of the fiscal picture of municipal entities.

The Pioneer Institute of Massachusetts has an excellent tool called Muni Guide Utilty that allows officials in one Massachusetts town or city to compare their economic and fiscal data with other cities of comparable size. This tool allows the user to drill down to specific budget line items to see how they compare to others. It also offers a more general reference guide to budget issues called “Guide to Sound Fiscal Management for Municipalities”.

California State Comptroller John Chiang said in a press conference yesterday in San Francisco that he expected more municipal bankruptcies in the Golden State. Bloomberg has the details:

“We will start to see more bankruptcies, not necessarily because of pension issues,” Chiang said. “We need the state to participate in trying to prevent these bankruptcies.”

California cities that have hit their fiscal bottoms have been turning to the Chapter 9 municipal bankruptcy process. Recently, Stockton, Mammoth Lakes and San Bernardino voted to put themselves under the protection of a bankruptcy judge and shield themselves from new legal claims. Bankruptcy is a complex and expensive process. Fitch Ratings said in a recent report (page 5) that the state of California offers no other intervention process for broke cities.

In 2010, the small town of Moberly, Missouri issued $39 million in municipal bonds for a private manufacturing facility that the town hoped would add 600 jobs to its community of 14,000. Yesterday the Missouri Attorney General Chris Koster filed felony theft and securities fraud charges stemming from the collapse of that project, the Mamtek sweetener factory. The charges were made against California businessman Bruce Cole who was the CEO of Mamtek. Cole was arrested at his home in Dana Point, California and Attorney General Koster said extradition proceedings would begin immediately.

In short, Cole is alleged to have used proceeds of the municipal bond offering for personal expenses. The Moberly Monitor has the details:

The probable cause affidavit alleges that shortly before the sale of the Mamtek bonds, Cole directed a Mametk consultant to prepare an invoice purporting to come from “Ramwell Industrial, Inc.” This invoice requested payment of $4,062,500 for Ramwell’s services, including $3,562,500 for “Design, acquisition, and installation of five production lines,” $325,000 for engineering and design, and $175,000 for project supervision.

Having spent almost a year on Capitol Hill when the Dodd-Frank financial reform bill was being debated and drafted, my antenna goes up when an industry trade group praises something done by Congress. It’s usually a sign that the trade group was successful at getting their points of view adopted into law. I’m much happier when trade groups are screaming and kicking about provisions of the law, such as the new rules for derivatives trading and reporting.

This week the Bond Buyer ran an op-ed from Michael Decker, managing director of the securities industry and financial markets association (SIFMA),that praises recent legislation by the House Financial Services Committee. The new legislation amends the Dodd-Frank definition of “municipal advisors” by narrowing who the law would cover and specifically removes securities dealers from that designation. Municipal advisors are professionals paid to advise cities and other municipal issuers on the best ways to structure new bond offerings and manage the debt they have outstanding.

Thankfully the legislation leaves in place a “fiduciary” responsibility for municipal advisors, which requires that they act in the best interests of their clients, the municipal bond issuers (ie cities, states, sewer and water authorities). A “fiduciary” obligation is the strictest form of relationship between two parties.

President Obama’s proposal for cuts to the federal budget, which Congress directed him to detail as part of the sequestration process, was released last week. The cuts must come from the annual $1.2 trillion in discretionary (non-entitlement) federal spending. Reuters reports:

The White House presented a detailed breakdown Friday of $109 billion in across-the-board spending cuts scheduled for January, setting off a fresh blame game between the Obama administration and Republicans over responsibility for what both say is a preventable budgetary calamity.

The itemization of the so-called “sequestration” plan showed potential pain all around: $11 billion out of the Medicare healthcare program for the elderly, a $15.3 billion cut in defense procurement accounts and hefty cuts to a Department of Agriculture program that supports farm prices.

Online higher education 2.0 has arrived. It is open source, open enrollment and often provided by non-profit colleges. It has the potential to greatly expand access to higher education and to rapidly improve the knowledge base of global citizens. It is the antithesis of high-priced, online for-profit schools like University of Phoenix.

The momentum in online education is being captured by schools like University of California Berkeley, which recently joined Harvard and MIT in a not-for-profit online learning collaboration supported by edX, an open source technology platform.

Online collaborative platforms support massive open online courses (MOOC), which are often offered for free (or for small fees) and allow students from around the world to register for coursework from top tier schools. In a recent report, Moody’s described the potential for universities using MOOCs:

The stampede into municipal bonds has been strong since the market hit a low point after Meredith Whitney’s famous prediction in 2010 of hundreds of billions of dollars in defaults. Her words caused a run out of muniland, which damaged a lot of retail investors who sold their holdings at market lows.

The rebound in demand since then has pushed down yields to near historic lows, as investors stampeded back into muniland in a search of security and returns. This excellent chart of yields for AAA general obligation bonds from Daniel Berger at Thomson Reuters Municipal Market Data is worth a thousand words.

Further:

Bloomberg writes,  “State-Local Government in Best of Times for Finance: Muni Credit”

The first round of Pennsylvania’s natural gas impact fee has been collected and the media is crowing. Collections of the fee, which applies to drilling in horizontal and vertical wells regardless of their production, came in at $197 million, according to the state Public Utility Commission. This figure is about ten percent higher than a recent legislative report had predicted, and is assessed on wells drilled through December 2011.

Media and fracking proponents are focusing on the fact that revenues bested the legislative estimate, but no one has taken the trouble to measure fee revenues against what the state could have collected if they had followed the practice used by other energy rich states like Oklahoma and Texas. All other energy-producing states collect severance or royalty fees based on well production. I have never understood why Pennsylvania chose the flat fee. However, Governor Tom Corbett and state Senate President Joseph Scarnati, who pushed the legislation, have received substantial contributions from gas companies and drillers.

The Pennsylvania gas fee — dubbed an Impact 13 fee — is a fee assessed on the well itself. The fees rapidly step down from $50,000 per well in the first year of production to $20,000 per well in the fourth year (based on natural gas prices between $3.00 and $4.99 per thousand cubic feet). After the 11th year of production, the fee is $10,000 per well. The fee step-down, which varies with the price of gas, can be seen in the chart above.

Municipal bond trading volumes are on a downward march. The Municipal Securities Rulemaking Board (MSRB), which oversees muniland, publishes trade statistics on its website. You can see on the chart below, which shows daily trade volumes, how “customer bought” trades especially have been trending down. These are trades done by retail and institutional clients to acquire bonds.

“Customer sold” trades, which generally represent funds or brokers selling bonds out of client accounts to be replaced with other bonds, have been relatively steady. Bonds are sold to raise cash and to move assets to other classes. Interdealer trades are done between dealers to transfer bonds that are sold onto clients who are not dealers (think retail and institutional investors).

There are several reasons for declining trade volumes, but foremost is the very low level of yields on municipal bonds today. Taylor Riggs of the Bond Buyer, who reports dealer trading desk activity, tweeted this on Tuesday:

Chicago public school teachers went on strike after attempts to reach an agreement with public school negotiators failed on Sunday. There are many issues at stake for Chicago, but the struggle is basically about job security and control of hiring decisions by school principals. As school reform is being further implemented in Chicago, teachers are bearing the brunt of tightening fiscal priorities. Reuters reports:

In Chicago, last-minute contract talks broke down not over pay, but over the reform agenda, both sides said Sunday. The union would not agree to Emanuel’s proposal that teacher evaluations be based in large measure on student test scores.

Nor would the union accept his push to give principals more autonomy over hiring, weakening the seniority system that has long protected veteran teachers. Already, the demographics of the teaching profession in Chicago have notably shifted, as the private managers who run charter schools tend to favor rookie teachers who are younger and far less likely to be minorities, studies have shown.