MuniLand

A nine-member working group of banks, underwriters, financial analysts and attorneys released a white paper this week to provide guidance to states and municipalities on disclosure for bank borrowing – a small but significant sector of muniland. Since there is no requirement to disclose bank borrowings by public entities, no one knows what the total size of the sector is. I’ve heard numerous estimates in the $200 to $300 billion range, which would mean the sector is about 5.4 percent to 8 percent of the $3.7 trillion municipal bond market.

It’s pretty astounding that a community or a state has no legal responsibility to notify its citizens or bondholders when it takes a loan from a bank. Securities laws give authority to the Municipal Securities Rulemaking Board to only regulate municipal bond underwriters and not cities or states. Since a bank loan does not require a securities underwriter, the MSRB has no authority to compel disclosure. There is a lot of commentary trying to parse if and when a bank loan is actually a bond and hence subject to securities regulation. From Richards Kibbe & Orbe’s Brian Fraser and Paul Devlin:

The MSRB acknowledged that it is difficult to distinguish between loans and securities and pointed to the multi-factor test established by the U.S. Supreme Court in Reves v. Ernst & Young, Inc., 494 U.S. 56 (1990), which we discuss in more detail below. In essence, the MSRB warned the market in the September 2011 notice that there is no “one size fits all” solution to the questions posed by the loan/security distinction and emphasized that the analysis is dependent on the facts and circumstances of individual transactions. The MSRB issued its third and most recent notice on April 3, 2012. In that notice, the MSRB encouraged state and local governmental issuers to voluntarily post information about their bank loan financings on EMMA in order to promote market transparency and efficiency.

Why would the MSRB, credit rating agencies, bondholders and now the nine-member working group encourage public issuers to disclose bank borrowing? Because it potentially affects the rest of the issuer’s capital structure and its bondholders. From the white paper:

• The bank loan may increase the issuer’s debt outstanding;

• The covenants and events of default for the bank loan may be different than those for the bonds, potentially allowing the bank to assert remedies before the outstanding bondholders;

Officials react to tunnel toll block

In a three minute court hearing in Virginia, Portsmouth Circuit Judge James A. Cales Jr. rejected as “unconstitutional” the ability of the state’s Department of Transportation to set tolls on a Norfolk tunnel. The tolls are being collected to fund 17 percent of a new tunnel that is being built by a public private partnership (PPP). The private entity in the PPP is putting up 12 percent of the cost, but it will receive most of the cash flow over the term of the 58-year lease. I wrote about this project last year:

The project, which is now owned by Australian infrastructure company Macquarie, will add another tunnel under the Elizabeth River to relieve congestion in the Norfolk and Hampton Roads area. Getting control of the project will bring in rich rewards for Macquarie and its construction partner Skanska. For an equity investment of $208 million, Macquarie stands to realize over $5 billion in cash flow over the 58-year concession after repayment of bonds, loans and mandated capital expenditures.

Judge Cales did not discuss the unfair economics of the deal, rather he said the Virginia Assembly could not give the Department of Transportation unilateral power to set tolls and taxes. The judge wrote:

Pension & OPEB panel @ #BBwash is making the case that we are in deep trouble, w/little way out

— David Merkel (@AlephBlog) April 30, 2013

Bloomberg Link recently hosted a panel on the costs of healthcare for public retirees, pensions and public debt. Panel members included Richard Ravitch, who helped manage the New York City fiscal crisis in the 1970s when the bond market stopped lending to the city, and Ed Rendell, former governor of Pennsylvania. These men are two of muniland’s strongest war horses who have fought big governance battles. Bloomberg provided background for the discussion:

These so-called OPEB promises made by the 15 biggest cities alone total $115 billion, with an average burden of $2,300 for every man, woman and child, according to data compiled by Bloomberg. How will local governments manage to make good on their pledges without becoming insolvent? Will we see governments reduce benefits and raise their cost for current workers, as has been the case in several cities and states?

Scranton, Pennsylvania blasted into the national consciousness last summer when its mayor, facing a cash shortage, slashed city worker wages to minimum wage.

In August the city was saved from immediate ruin by the union-owned Amalgamated Bank:

Amalgamated Bank recently provided $6.25 million of short-term financing to the City of Scranton, Pennsylvania. Nearly two months ago, the salaries of 400 municipal employees were reduced to the minimum wage level. Now with Amalgamated’s loan, the City can make its full weekly payrolls and pay its vendors while completing and putting in place a three-year fiscal recovery plan.

Concerned Residents Confront Carlyle Over Sludge Dumping*

I’ve written numerous times about how public private partnerships (PPP) are often a bad deal because they privatize profits and socialize risks. A perfect example of this is the bankruptcy of privately-held Synagro Technologies, which contracted with municipal governments to treat raw sewage and then spread it on farm fields. Reuters reports:

Carlyle Group LP’s (CG.O) Synagro Technologies Inc filed for Chapter 11 bankruptcy protection on Wednesday with a plan to sell the business to a Swedish private equity firm for $455 million.

Synagro, the largest recycler of organic waste in the United States, has agreed to a sale to an investment fund associated with EQT.

Puerto Rico’s governor Alejandro Garcia Padilla presented his new budget for the Commonwealth on Thursday. Caribbean Business reported on the details:

Puerto Rico Gov. Alejandro García Padilla unveiled a $9.83 billion operating budget Thursday night during a state of the commonwealth address in which he pledged to reduce crime, create jobs, boost school attendance and expand the U.S. territory’s tourism sector.

The proposed spending package is $783 million more than the current budget, which will be covered by new revenue and $200 million in deficit financing, he said.

A stronghold of America’s establishment may be about to be toppled. The world’s largest Masonic Temple in Detroit will be foreclosed for unpaid taxes. The bones of twentieth-century America are withering away. Detroit’s WXYZ reports:

It’s a nationally registered historic landmark built in the 1920s.

It’s a symbol of art, culture and grandeur.

And according to county tax documents; it’s in foreclosure.

Wayne County says the owners of the Masonic Temple have forfeited their right to the Detroit building because of more than $150,000 in back taxes.

The Masons once represented one of the strongest fraternal organizations in America. Their “lodges” or “temples” are found across the states as relics of a once strong national organization. In many ways, the decline and abandonment of these edifices is a mirror-image of the decline of American manufacturing. Detroit, once the wealthiest city in America, had both the largest and grandest Masonic Temple and manufacturing base. Now both have crumbled to ruins.

The Port Authority of New York and New Jersey announced on Wednesday that it has awarded the contract to rebuild the Goethals Bridge to a public private partnership (PPP). Bloomberg reports:

A group led by Kiewit Corp. and a Macquarie Group Ltd. (MQG) unit won a Port Authority of New York and New Jersey contract to finance, design and build a $1.5 billion replacement for the 85-year-old Goethals Bridge…

…“As we move forward with continuing constraints on our resources, we’re financing necessary infrastructure and at the same time minimizing the use of public funds and public debt capacity,” Port Authority Executive Director Pat Foye said yesterday at a board meeting in Manhattan.

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Several professionals in muniland have jumped on SEC Commissioner Dan Gallagher for his recent warnings about the possibility of an “Armageddon” for retail investors in muniland.

Anonymous blogger @munilass berates Gallagher for his statements about retail investors:

In the interview, Gallagher said his concerns mostly relate to retail investors, who hold approximately three-quarters of outstanding municipal bonds. He then called the muni market a bubble (a term that becomes less useful every time someone utters it) and said “there are a lot of investors in the municipal bond market that aren’t supposed to be there.”  I take the latter to be a reference to credit risk, not interest rate risk, but Gallagher did not elaborate, so I am not sure what he meant by that.

Philadelphia held its bond investor conference last week. Although the press was not allowed to attend, the city did post the presentations on its website. Philadelphia Inquirer reporter Joe DiStefano neatly summarized the city’s political and fiscal position, which is not as rosy as the presentations make it seem:

Philadelphia hopes to borrow more than $1 billion by selling or refinancing bonds over the next nine months. For all the city’s growth around Center City, the colleges and the Navy Yard, officials face some big challenges: the lowest credit ratings of the biggest U.S. cities (low credit ratings tend to boost borrowing costs, though current interest rates are near rock-bottom levels); the financial near-collapse at the School District; the scheduled end of the sales-tax surcharge; labor negotiations and court decisions that have mostly upheld city labor union positions and reversed Nutter administration cost-cutting schemes; a thwarted real estate tax reform; stagnant office growth; high poverty in worn city neighborhoods; and more.

Philadelphia’s most important fiscal problem is its relationship with the city’s unionized employees. The city summed up the problem in the investor presentation (page 19). Note that the city has had no new agreements with three of four municipal unions since 2009, and that most employees have the right to strike.