It was a mixed picture as Pennsylvania Senate Local Government Committee took testimony today about how local PA governments issue debt and enter into interest rate swaps. Has every local government in Pennsylvania made as big a mess issuing debt as Harrisburg? Was every school district bamboozled into multiple layers of expensive and unnecessary interest rate swaps like the Bethlehem School District?
There is the idea in muniland that all state and local governments balance their budget at the end of every year. But the reality is a little messier because governments often do short term borrowing from Wall Street. The Federal Reserve reports $54 billion of short term municipal borrowing in the first quarter of 2013, at least part of which is used as deficit financing. Cities and states also borrow internally from other government funds, like a water fund, to balance the general fund. That is what sunk San Bernardino, California, which sucked money from its external funds to paper over huge deficits in the general fund. That story ended with San Bernardino in bankruptcy.
One of the most difficult issues related to improving the structure of bond markets for retail investors is that wholesale trading happens entirely apart from retail trading. Retail investors suffer because they pay much higher prices than institutions do. This differs from equities markets where every investor, large or small, can buy a share of Google at the same price at the same time.
Barron’s ran a cover story last week and more articles followed in the financial press about the economic disabilities of Puerto Rico. These disabilities have been fueling a sell-off of the commonwealth’s public debt. Here is a chart showing the spread (or extra yield) that Puerto Rico bonds have had over the last three months:
Here is a broad sweeping statement for you: there is a lot of group-thinking in all markets, and when I talk to participants far outside of New York, I tend to find their thinking more individual and reasoned. I recently chatted with Jeffery Elswick of Frost Investment Advisors’ Total Return Bond Fund, who is based in San Antonio, Texas. The fund is generally classified as a core, intermediate investment grade bond fund that buys all kinds of bonds, including taxable munis. Morningstar gives the fund five stars.
A lot of ink has been spilled over the assertions of Kevyn Orr, Detroit’s emergency manager, on the level of funding in Detroit’s pensions (Okay, I might be the leader of that pack). The issue has bearing on the benefits that Detroit’s retirees will receive, as well as how much cash-flow the city will have to service its bonds and other debts. The pension question is a major point in Detroit’s bankruptcy negotiations. Reuters described the situation like this:
On June 14th, when Detroit emergency manager Kevyn Orr released his creditor proposal detailing how he wanted to treat creditors of the city, including retirees, I was aghast. Orr’s report said that the city’s pensions, which have been listed as exceptionally well-funded for years, were suddenly in desperate shape. What had been the one strong piece of Detroit’s balance sheet was suddenly reported to face medium-term collapse. Was there securities fraud in the financial reporting or had the investments in the pension funds blown up?
A debt recovery plan for Harrisburg, Pennsylvania was filed on Monday after a year of negotiations with creditors, unions and other stakeholders. The plan’s most important attribute is that it saves Pennsylvania’s capital city from declaring bankruptcy and it may fiscally stabilize the municipality for years to come.