MuniLand

Bloomberg View’s Josh Barro is lauding New Jersey Governor Chris Christie in advance of his keynote address at the Republican National Convention:

“Christie’s record in New Jersey is too substantively centrist to run as the darling of the party’s right. Instead, if he runs in four years, he’ll have to make the case for a more compromising and consultative politics that tries to occupy the center, modeled on his successes in New Jersey.”

Unfortunately, Barro never details any successes of Christie during his time as governor. In fact, Christie’s record is particularly thin, and New Jersey remains in dire fiscal shape. In contrast to Barro’s piece, the reporters in the Bloomberg newsroom have detailed how bond markets are actually charging New Jersey and its municipalities more to borrow since Christie took office:

“New Jersey and its localities are paying an average yield penalty of 0.57 percentage point over AAA securities to borrow for 10 years, according to data compiled by Bloomberg. The gap is more than double the five-year average. It was 0.35 percentage points the day Christie took office.”

Translation: Municipal bond markets are charging New Jersey and its towns nearly twice as much to borrow than they did before Christie took office.

Last week the New York Fed put out a controversial report claiming that the default rate for municipal bonds is 36 times higher than one cited by credit rating agencies. Using data sets from S&P Capital IQ and Mergent that tracked defaults for unrated bonds, the New York Fed report created a big stir among muniland commentators and probably a small amount of concern among retail investors. The data cited by the New York Fed is well known among market professionals and has been thoroughly dissected, but so far the discussion hasn’t focused on why these unrated bonds default at higher rates. Specifically, no one has linked the high default likelihood of this sector, private activity bonds, to the fact that Congress has exempted them from rigorous disclosure since 1968.

Randall Forsyth at Barron’s pulled the right information from JPMorgan municipal bond research to explain what this unrated sector of high defaulting bonds is. Take special note of that last section:

“The vast majority of defaults came from revenue bonds, which are backed by the cash flows from a specific authority or entity, such as a municipal hospital, or an industrial-revenue bond issued on behalf of a private entity. In other words, by far the diciest niche of the muni market.

The progressive website Media Matters for America disputed the thrust of a recent Fox TV special called Cities Going Broke because the show laid much of the blame for fiscal stress on union presssures. Media Matters argues that the financial crisis is the real culprit here, as it devastated state and local taxes. Though the crisis did cause tax revenues to fall, Media Matters never looks more deeply at the wages of municipal workers in stressed communities to see how they affect municipal finances. Two examples now in the media show that public-sector wages and unions bear part of the blame.

First, take a look at Yonkers, NY, where Michael Spano, the city’s Democratic mayor, is waging a public fight with the firefighters’ union in advance of their upcoming contract negotiations:

Mayor Mike Spano upped the ante in his fight with the firefighters union Sunday, calling for givebacks on pay, hours and sick leave before the city considers hiring a new class.

Here is Brian Uhler of the California Legislative Analyst Office addressing questions about the use of Chapter 9 bankruptcy by municipalities in California. Read more here.

Also, starting tomorrow, MuniLand will be on holiday until August 22. See you then!

Good Reads

Governing: Pension plan changes pose challenges for lawmakers

Bond Buyer: California’s $10 billion Ran sale tied as largest ever

Morgan Stanley: Muni bankruptcy: More lessons

Bloomberg: New Orleans murder rate climbs as city begins overhaul of police

Reuters: Bond sale to boost Detroit cash flow set for Thursday

Alliance Berstein: Could tax reform hurt municipal bond prices?

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State and local governments spend $2.5 trillion annually to employ over 19 million workers, 6 times as many as federal government.

Some odd employment data is coming out of Puerto Rico. Although the population of the island has increased (see chart above), labor participation and the number of people employed have declined steadily, as seen below.

Meanwhile the government reports that the unemployment rate keeps declining (see below). Is this because they are contracting the size of the labor pool, or are there really new jobs coming online?

A Spanish-language publication says that employment gains this year are coming from government hiring (Google Translation from Spanish):

The story of the federal government in one simple chart. Bloomberg’s Scarlet Fu shows how government spending on entitlements rose as the level of government investment decreased.

Good Reads

WaPo: A Golden State train wreck

Assured Guaranty: Preliminary objection to Stockton bankruptcy filing

The Record: Bankruptcy challenge cites CalPERS bias

Reuters: Bond insurer contests Stockton bankruptcy over pensions

Press Enterprise: San Bernardino: Rifts erupt at city level

Bloomberg: Massachusetts sees 8 percent pension gains shunned by CalPERS

MSRB: MSRB seeks comment on proposal to enhance protections for online municipal investors

Bond Buyer: MSRB proposes protections for online retail investors

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State Pension Systems Assets Rise Nearly $325 Billion in 2011, according to new Census Bureau stats go.usa.gov/G6e

The public pension fund crisis is dire across most of America. Some states and local governments have well funded pension plans, but on a national basis pension plan shortfalls are estimated to be in the trillions of dollars. Public resources are increasingly being diverted to pay for pensions. Cities with large public pension plans had median contribution rates of 12.7 percent of payroll in 2009, up from 10.3 percent in 2002 (GAO page 15). This is projected to climb as more public workers retire. As pension costs rise, state and local governments either have fewer resources to spend or must raise taxes to maintain a steady level of services.

California has bestowed some of the most generous pensions in the country, and cities there are looking for ways to lower their contributions. Recent ballot initiatives passed in San Diego and San Jose will create modest reforms to those cities’ pension benefits. The San Francisco Chronicle reported that State Senate President Pro Tempore Darrell Steinberg (D-Sacramento) suggested there might be some “constitutional issues” at play since the San Diego and San Jose reforms affected the benefits of current public workers. The reforms are being challenged in court.

But there is one place, clearly within the law, that cities can make substantial and fiscally stabilizing changes to their workers’ pension benefits: Within the Chapter 9 municipal bankruptcy process. Cities like Stockton, Mammoth Lakes and San Bernardino have the opportunity to adjust their pension liability as they seek to adjust their other unsecured creditors.

The current U.S. drought monitor. To view regional drought conditions, click through the map. State maps can be accessed from regional maps.

Good Links

CBPP: Deficit-reduction package without new revenues would shift costs to states and localities

Reuters: Connecticut’s pension fund assets slip 0.9 percent in FY 12

NJ.com: Four major pro sports leagues sue to stop New Jersey from allowing betting

In the wake of three cities’ recent bankruptcy filings, California’s Legislative Analysts Office has published a municipal bankruptcy guide. Authored by Brian Uhler, the report gets down into the nitty-gritty of Chapter 9 municipal bankruptcy proceedings. To my knowledge California is the first state to detail the mechanics of federal bankruptcy law as it applies to its own municipalities.

I think this is an excellent report, but I imagine it was intended for members of the California legislature as much as city officials coping with distressed finances. There are swarms of bankruptcy attorneys circling weak municipalities, willing and able to establish an hourly relationship and give advice. But California legislators have a lot of constituencies to placate, and every muni bankruptcy affects public unions and their retirees. Public unions have long been a powerful force in Sacramento. Bloomberg reported that public unions contributed $76 million to California politicians and ballot measures in 2010, the single largest interest group that year.

The report provides the mechanics for assessing whether a municipality qualifies as “insolvent;” how California’s mediation process, AB 506, works; and what happens after the bankruptcy paperwork is filed. For most municipalities the largest area of spending is wages and benefits for employees, and the report addresses both. Basically, wage contracts can be broken in Chapter 9 if the city can show:

New video from Cato on #sequestration, military spending. A primer for some; useful factoids and graphics for experts: youtu.be/s-nB6zQu9Mw

— Cato Foreign Policy (@CatoFP) August 7, 2012

Good Links

Tax Foundation: Governor Brown’s tax proposal and the folly of California’s income tax

Bloomberg: Brown redevelopment fund seizure drives increase in city taxes

The Record: Opinion: Christie’s rhetoric does not match reality

Reuters: Puerto Rico bonds were the most actively traded in 2nd quarter 2012

Montana Watchdog: Commentary: Tax exempt status for municipal bonds on endangered list?