MuniLand

If you own bonds issued by the Commonwealth of Puerto Rico or one of its public entities, you need to read the latest report from Alan Schankel of Janney Montgomery Scott. An old-line broker in Philadelphia, Schankel has published the best overview of Puerto Rico debt that I have seen. And the future for most of this debt does not look too bright as Puerto Rico’s economy is barely crawling along.

There is nothing shocking in Schankel’s broad overview:

With outstanding debt in the range of $60 billion, Puerto Rico is one of the more prolific issuers of tax exempt municipal bonds. The fact that interest on island debt is exempt from all state and local income taxes generates particularly strong investor demand for bonds of the Commonwealth’s various issuers.

About half of the debt is general obligation or otherwise tax backed, while most of the remainder is secured by revenues, including electricity sales, water and sewer utility charges and highway tolls, with all bonds to varying degrees dependent on the fortunes and stability of the island’s economy. Puerto Rico’s status as a territory adds unique considerations to credit evaluation.

Here are Schankel’s money quotes:

Current general obligation credit spreads, with yields about 200 basis points above AAA benchmarks, do not reflect bondholder risk.

Translation: An investor is not getting paid enough interest to cover the risk of owning these bonds. Prices need to come down, and yields need to go up.

Marquette Associates has a very interesting chart of the week showing how state and local government budget cuts are a drag on GDP.

Good Links

Al Jazeera: Interactive: U.S., Yemen lead the world in guns

U.S. Census: Statistics about Americans with disabilities

S&P: Video: Reform efforts could shape U.S. pension funded ratios

Huffington Post: Five truths about public employee pensions

Bloomberg: New York is set to overtake California, which has reigned as biggest borrower for two decades

Oakland Tribune: California attempts to square up its special funds accounting

Reuters: Miami weighs “financial urgency” to cut staff costs

Times Tribune: Scranton council to work weekend with mayor, if necessary, over recovery plan

It was just six weeks ago that I wrote: ”Detroit is standing on the precipice of fiscal collapse.” Now, however, I may nominate Detroit as the turnaround story of the year. Make no mistake, hard times lie ahead for the Motor City, but it has since stepped back from its own fiscal cliff.

Mayor Dave Bing, the new city program manager and the city’s chief financial officer are using the powers granted to them under the consent agreement with the state to make big changes. Under the direction of the financial advisory board, which was also put in place under the consent agreement, the mayor used his new authority to cut the pay of city workers in 40 unions by 10 percent and make other changes to labor agreements:

[Mayor] Bing has said the changes are needed in order to make the city fiscally solvent. Among the changes: a 10-percent wage reduction, the elimination of longevity pay for longtime employees and increased co-pays on health care, to 20 percent from 10 percent on some plans. Other so-called work rule changes include using civilians in positions currently held by police officers.

Watch the latest video at video.foxbusiness.com
Peter Hayes of BlackRock gives a good overview of the current state of muniland (Hattip Learnbonds).

Good Links

NASBO: Pension accounting reforms regarding the use of discount rates

BlackRock: $55 billion – amount closed in budget gaps by 31 states for FY 2013

Manhattan Institute Public-sector unions’ money machine

LAT: Bankrupt cities? Don’t blame unions

Reuters: Economy, budget woes threaten non-profit hospitals – Moody’s

MTA: Budget remains balanced, but long-term challenges persist

City of Harrisburg: City completes and releases 2009 audit of city finances

Times-Tribune: Scranton Composite Pension Board tables city request for $16 million loan

Bloomberg’s Romy Varghese wrote an excellent piece about escalating wages and pension costs for public safety workers that mirrors much of what I’ve been writing about several bankrupt California cities. As municipal revenues slowly inch up, mandated wage and pension increases have been ravaging budgets:

Rising personnel costs have helped drive revenue-strapped cities toward insolvency from coast to coast.

“A majority of their costs are tied up in people,” said Christopher Hoene, research director for the National League of Cities in Washington. “If you look at any organization of any size around the country, you’ll see anywhere between 60 to 80 percent of their costs are in personnel-related expenditures.”

Inbox me if you want to put the #TransformingDetroit logo on your site or blog. twitter.com/mayordavebing/…

— Mayor Dave Bing (@mayordavebing) July 23, 2012

Yesterday Detroit celebrated its 311th birthday. Cheers to the city. We’re hoping for a transformation, too.

Good Links

Harpers: The price of gun control

Council of State Govts: The Book of the States 2012

Federal Transit Administration: Database of federal grants for transit asset management projects

Municipal advisers, those muniland professionals who are hired by public officials to evaluate their needs for financing and guide them through the underwriting process, don’t receive enough attention. Generally, they are paid by a government entity but also receive fees from the banks who underwrite the deals. Dodd-Frank set out to restrain potential conflicts in this space by requiring municipal advisers to register as such and imposing a fiduciary duty on their activities.

Now, however, some members of the House of Representatives are trying to roll back the portion of Dodd-Frank that would impose this fiduciary duty. A first-term congressman from Illinois, Robert J. Dold, whose prior professional experience was operating a pest-control business, has proposed legislation to strip the fiduciary duty requirement from Dodd-Frank. His bill currently has 35 co-sponsors.

Typically, municipal officials have little to no experience in financial markets. A financial adviser is on hand to untangle the complexities of different financing structures, guaranteed investment contracts (GICs) and derivatives. For public entities to get a fair deal, it’s critical that they get conflict-free advice from their financial advisers. The big Wall Street banks have for years sold highly complex and expensive products to poorly informed governments. See, for instance, these episodes from 2008:

After the tragic murders in Aurora, Colorado last Friday, the debate over gun control in the U.S. has been reignited. Policymakers would do well to study the case of Australia’s gun-control laws, which were put in place following a comparably tragic incident in 1996. After a man killed 35 people and wounded an additional 21 with two semi-automatic rifles in the Tasmanian town of Port Arthur, Australia passed a law that banned all such rifles, along with semi-automatic and pump-action shotguns, and then created a restrictive system of licensing and ownership controls.

The national government also undertook a gun buyback program. This involved each state and territory establishing and operating a system through which gun owners and dealers could surrender the newly prohibited weapons in return for compensation. Arrangements were also made to compensate firearms dealers for loss of business related to these newly prohibited firearms.

Interestingly, the Australian government only set the policy parameters for the program and left it to each state and territory to establish how to enact it. Because of the variance in the territories’ methods, there’s an interesting data set researchers were able to use to analyze the effectiveness of the program:

An interesting, on-the-ground look at the bankrupt city of Vallejo, California (via the Huffington Post).

Good Links

WSJ: U.S. cities with bigger economies than entire countries

Reuters: Public pension funds to face calls to set realistic targets

Council of State Govts: State pension systems on the rebound

Reuters: New bond insurer endorsed by National League of Cities

Reuters: Residents seek dissolution of a New York tax district

Reuters: Stockton made scant headway in U.S. pre-bankruptcy talks

Self-Evident: Some perspective on the recent California bankruptcies

Go Lackawanna: New union contracts introduced in Scranton

@Twitter Talk

Not so shocking: 1) Your city forms militarized police unit, calls it “Strike Force.” 2) Your city pays out damages.startribune.com/local/minneapo…

— radleybalko (@radleybalko) July 24, 2012

My story today on the annual private-activity bond survey. PAB issuance saw a 13% decline in 2011 #munilandbondbuyer.com/issues/121_141…

Watch States Plagued by Fiscal Problems, Pension Payments on PBS. See more from PBS NewsHour.

Here’s a deep dive on the fiscal problems of the states and the Volcker-Ravitch report on the state budget crisis from PBS.

Good Links

Stateline: Report: Without major overhauls, state budget crises will linger

Pew Center on the States: Data visualization on the widening gap of pension funding