MuniLand

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:

#muniland slow again as little direction stalls the market. hard to trade munis with yields so low… bit.ly/RHT7eK

— Taylor Riggs (@TaylorRiggs_BB) September 11, 2012

With very low yields there is not much “spread” — the difference between the bid and offer price — for dealers to capture. The market effectively becomes more sluggish because there is less incentive for brokers and dealers to search out trades. Investors would usually prefer to wait on the sidelines for higher yields before getting back in the market.

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.

A special commission of the Australian government has been hard at work for the last two years examining how to improve the nation’s education system. Their baseline findings say that Australian academic performance had declined, and that more resources are needed. Australian Broadcasting Corporation reported on the findings of the Gonski Commission (named after its chairman businessman David Gonski):

The report says the performance of Australian students has declined at all levels over the last 10 years.

It says in 2000, only one country outperformed Australia in reading and scientific literacy, and only two outperformed Australia in mathematical literacy.

Mary Williams Walsh of The New York Times recently dove into the issue of pension obligation bonds (POB), and she came up empty-handed. In her piece on bankrupt Stockton, CA’s POBs, Walsh relied on the analysis of an academic, Jeffrey A. Michael, with little background in municipal bonds, to claim that Stockton was duped into issuing $125 million of these bonds in 2007. Michael contends that the POB underwriter, Lehman Brothers, did not adequately disclose the risks associated with issuing POBs. Walsh writes:

After reviewing an analysis of the bond deal, underwritten by the ill-fated investment bank, Lehman Brothers, and watching a recording of the Stockton City Council meeting where Lehman bankers pitched the deal, Mr. Michael concluded that “Stockton is entitled to some relief, due to deceptive and misleading sales practices that understated the risk.

Lehman Brothers just didn’t disclose all the risks of the transaction,” he said. “Their product didn’t work, in the same way as if they had built a marina for the city and then the marina collapsed.

The crisis that public pensions face over funding shortfalls is becoming increasingly important in the media. Add to that some concerns about the generous benefits that some public retirees receive. As state after state struggles with new controls on benefits and takes steps to address plan shortfalls, the issues become mired in more and more complexity.

There is one issue in the pension storm that is easy to understand; that is the issue of “pension spiking,” or an employee taking sometimes illegal steps to inflate the final salary on which their pension is based. California State Controller John Chiang has gone so far as to call spiking a “form of public theft.”

The Federal Reserve Bank of Cleveland defines pension spiking as:

The practice of inflating employees’ salaries to increase their benefit base. This can be accomplished through a last-day “promotion,” where the employee receives a new title and a salary far above what he earned in the previous 364 days, or where an employee nearing retirement receives the lion’s share of available overtime.

Big trouble is brewing in Chicago, the nation’s second-largest school district, as negotiations between the city and teacher representatives moves closer to a strike deadline on September 10. Chicago teachers have filed a strike notice that, if acted on, would be their first strike since 1987. The main disagreement between the teachers and the city is Chicago Mayor Rahm Emanuel’s plan to lengthen both the school day and the year. The district is offering teachers an eight percent raise over four years, and it wants to form a committee to create a new pay system.

Chicago teachers, the second highest-paid teachers nationally after New York City, say the fight is not about compensation, but rather that the mayor is actively withholding resources from the Chicago Public Schools system. The rhetoric has become inflammatory. Teachers’ union president Karen Lewis called Emanuel “a liar and a bully” while exhorting a union crowd at a Labor Day rally.

The political ramifications of the Chicago feud stretch far beyond the shores of Lake Michigan. Emanuel was previously President Barack Obama’s chief of staff. He is still a leading Democratic figure representing an important voting block in Illinois. The opposition he has created with Chicago teachers, an important base of the Democratic party, could not have come at a worse time as the incumbent president and Democratic-controlled Senate fight to stay in office. There is more at stake with a teacher’s strike than whether Chicago school children will miss a few days of school.

The UCLA Center for Health Policy Research has published the results of a study that showed a new program for children resulted in fewer days spent in the hospital, lower medical costs and a higher satisfaction rate by families and care coordinators. The tiny “Partners for Children” California public health program increased home and community-based care for terminally ill children on Medicaid – largely by removing a six-month time limit for how early children with terminal conditions can enter hospice care – and it has shown very promising results. If the program results can be replicated on a larger scale, the program might make an important contribution to lowering health costs and helping terminally ill patients spend more of their time at home. (here)

California Healthline describes the background of the program:

“In 2010, the state opened the program to more than 135 families covered by Medi-Cal (California’s version of Medicaid) in 11 counties.

Individuals up to 21 years old who had been diagnosed with life-threatening illnesses, such as cystic fibrosis, cancer and neuromuscular and cardiac disorders, were eligible to participate in the program.

Reuters reported this week that New Orleans was lucky to escape major damage from Hurricane Isaac, which dumped heavy rains and high winds on the city. Reactive defenses that were put in place after Hurricane Katrina in 2005 appear to have worked in protecting the city from severe damage. More importantly, the fiscal condition of New Orleans seems to have survived the collapse of the economy after the last disaster.

Just as Hurricane Isaac was making landfall this week, New Orleans was in the municipal bond market with a $167 million general obligation bond offering — A sign of the rebound. However, the bond offering was not painless. The city had to pay 1.31% more to investors for 10-year bonds than comparable AAA-rated securities, according to Thomson Reuters Municipal Market Data.

New Orleans is rated A3 by Moody’s, BBB by Standard & Poor’s and A- by Fitch; all lower investment-grade ratings. This offers a mixed-to-good economic picture for the city. Fitch Ratings details some positives:

A Reuters story with the headline “U.S. states’ debt tops $4 trillion — report” caught my eye because I had never seen any analysis of the debt of states that put the number so high. The report the story referred to was issued by a mysterious non-profit organization called State Budget Solutions (SBS). The group’s website lists no physical address and says that SBS is affiliated with another non-profit, Sunshine Review of Alexandria, Virginia, whose Form 990 IRS filing declares that it has one employee. Furthermore, there is a third affiliated non-profit, Sunshine Standard, which also lists no information describing its funding or management. Considering that the three groups are non-profits focused on transparency and accountability for governments, their own behavior is pretty opaque. It’s also extremely odd that they don’t ask for donations on their websites. What non-profit doesn’t need donations?

SBS describes its mission in the following way:

“The State Budget Solutions Project is non-partisan, positive, pro-reform, proactive and anchored in fundamental-systemic solutions. The goal is to successfully engage political journalists/bloggers, state officials and opinion leaders in a new way of thinking about state government and budgets, fundamental reforms, transparency and accountability.”

These are excellent goals, but the information that SBS is disseminating seems slanted for political purposes. For instance, it breaks out the liabilities of all 50 states by type of debt and shows unfunded pension liabilities for states at about three times the more commonly cited figure of the Pew Center on the States.

A lot of ink has been spilled recently over Berkshire Hathaway’s move to close out $8 billion worth of municipal credit default swaps. Journalists and market commentators have wondered whether Warren Buffett has soured on municipal bonds as an investment vehicle and whether other investors should as well. The latest bit of speculation comes from Charles Gasparino, who writes that the move was most likely political and had to do with disagreements with President Obama over the politics of welfare. Gasparino’s piece in the New York Post may be the most convoluted thing that I’ve ever read about municipal bonds:

“And even if, when you dig deeper, the move suggests Buffett wasn’t making a bet against all munis but only those that adopt some of the same policies he and President Obama are advocating on a national level.”

Gasparino says that after making calls to market participants, he has determined that some of the municipal credit default swaps that Buffett closed out were written on the debt of California and Illinois, two states in dire fiscal shape.