MuniLand

Wobbly muniland markets

Just some chart play today. Notice all the weak spots.

Chart 1 and 2 are from Morgan Stanley’s August Municipal Bond Monthly.

S&P Muni Index data is here.

Check me out on Reuters Insider. Insider is a free Thompson Reuters video service for finance professionals covering multiple asset classes.

An appeal to President Obama as he goes to Scranton

President Obama and his entourage are pulling into Scranton, PA for a speech on Friday. In many ways Scranton is the east coast equivalent of Detroit; a former industrial powerhouse reduced to the economic wilderness. The city’s unemployment rate was 9 percent in April 2013. Scranton almost ran out of cash last summer and the mayor reduced everyone to minimum wage to meet payroll.

The city of 76,000 has defaulted on contracts that can lead to loan defaults and is deficit borrowing at extremely high rates. It’s been in the state fiscal distress program for over two decades. The city has finally taken steps to right its fiscal ship. But it had to fight public unions tooth and nail to alter their path (page 14):

The full implementation of the 2002 Recovery Plan was never fully realized due to the opposition from the public safety unions of the City. The public safety unions sought Act 111 binding arbitration proceedings to challenge the 2002 Recovery Plan. After years of legal proceedings relating to the arbitration awards, the Pennsylvania Supreme Court ruled in late 2011 in favor of the public safety unions, overturning prior appellate court decisions.

What Obamacare may cost muniland workers

A handful of U.S. cities, led by Chicago, are working to shift retiree health care expenses (OPEBs) off their balance sheets and onto the federal government via President Obama’s Affordable Healthcare Act. Retiree healthcare is a big expense for muniland, and few governments have saved for this expense. Since OPEBs are often protected by contract, they are not easily lowered or adjusted. Spending such as education and other programs is often crowded out. Shifting some of these retiree benefits to Obamacare is attractive for many stressed cities.

Some municipalities are reducing employee hours to qualify them as “part time” under Obamacare rules. The municipality then wouldn’t have to provide health care. Asbury Park Press reports:

[Middletown, N.J.] shaved back hours for some part-time workers to avoid providing insurance required under the federal health care reform law, the Asbury Park Press has learned.

Muniland is shrinking

Muniland bond issuance is slowing, according to Thomson Reuters data. Year-to-date issuance through June was $176 billion versus $194 billion in the same period a year ago. Thomson Reuters broke down the data by the largest issuing states and region of the country above. The West, likely fueled by California, and the Southwest were the only regions that borrowed more this year than last. It would be interesting to map this against economic growth across the country.

 

This chart shows how municipal bond issuance for new money projects has remained steady at around $70 billion this year to date, while issuance to refund higher coupon bonds has slowed from $125 billion to $106 billion. As interest rates go up, refunding higher coupon bonds with new bonds slows refunding issuance. If interest rates continue to go up, this source of new issuance will likely shrink considerably.

There are many factors that are weighing on issuance, but the primary one is likely to be the high-rate environment. There are other factors like shrinking federal revenues due to sequestration and rising pension and healthcare costs for state and local governments. There has been more active pressure from rating agencies about future liabilities like pensions and a lot of uncertainty about the direction that Congress will take regarding capping the muni bond tax exemption.

Diluting the MSRB

Muniland’s overseer, the Municipal Securities Rulemaking Board, has a big job keeping the $3.7 trillion municipal bond market in order. The MSRB was first authorized by Congress in 1975 and mandated to have 5 securities firms, 5 bank dealers and 5 public members. It was nonetheless dominated by the views of bank and dealer members, rarely undertaking investor protection initiatives. There was minimal oversight of municipal bond trading and underwriting practices as dealer banks were steering the ship.

After some gruesome muniland disasters like this one detailed by Bloomberg, Congress added law within the Dodd-Frank bill for the MSRB:

Joseph Ambrosini says the deal looked so easy. JPMorgan Chase & Co. bankers told him there was really no risk. All he had to do was sign a public financing contract, and the bank would give $280,000 to his school district in New Castle, Pennsylvania.

Can Philadelphia borrow to save its schools?

Philadelphia will borrow $50 million to fund the opening of its school system on September 9th. Reuters reported:

The city of Philadelphia will borrow $50 million in the capital market for its cash-strapped public schools so they can rehire about 1,000 furloughed employees and open on time on Sept. 9, Mayor Michael Nutter said on Thursday.

It’s not clear, however, that Philadelphia can assume debt for the school. I discovered this while reading the Philadelphia school district financial statement (page B-93):

Muniland, meet your issuers

 

Bloomberg’s Joe Mysak, whom I consider the king of muniland, had a delightful stream of consciousness via Twitter today about how little information he had to report from when he was a muni reporter in the 1990s. In one tweet he laments the lack of access to preliminary official statements for bond offerings. To get one, “you basically had to rely on spies,” he says.

Thankfully, those days are over. Official statements are in the public domain via a giant file cabinet called EMMA, which is maintained by the Municipal Securities Rulemaking Board. It’s muniland’s equivalent to the SEC’s Edgar system for corporate securities (actually it’s even more advanced).

How safe are GO bonds?

Detroit’s Emergency Manager Kevyn Orr and Michigan Governor Rick Snyder have told some bondholders that they will not be repaid at 100 cents on the dollar in Detroit’s bankruptcy plan. Lamentations ring out across the nation. This treatment of general obligation (GO) bonds – the gold standard for municipal securities – has rocked the market.

Here is the formal description of GO’s from the MSRB (emphasis mine):

[General obligation] typically refers to a bond issued by a state or local government that is payable from general funds of the issuer, although the precise source and priority of payment for general obligation bonds may vary considerably from issuer to issuer depending on applicable state or local law.

Most general obligation bonds are said to entail the full faith and credit (and in many cases the taxing power) of the issuer, depending on applicable state or local law. General obligation bonds issued by local units of government often are payable from (and in some cases solely from) the issuer’s ad valorem taxes [property taxes], while general obligation bonds issued by states often are payable from appropriations made by the state legislature.

Where is Detroit’s sales tax?

I have read about 5,000 stories about the collapse of Detroit. I keep searching for some useful or novel idea for fixing the city, and what I haven’t seen is any discussion of raising taxes.

I wrote yesterday about Stockton, California putting a 3/4 cent sales tax increase on the ballot. The city intends to use the new revenue to put more police on the streets. I thought about how little of Detroit’s revenues came from sales tax, and I wondered why a tax couldn’t be implemented to lift the city out of bankruptcy.

According to the Detroit News, Detroit has the highest property tax rate in the country:

Stockton proposes sales tax hike to put police on the street

Stockton, California was a topic on Morgan Spurlock’s Inside Man program on CNN this week. The focus was on the increase in crime since the city slashed spending on police and fire in its bankruptcy proceeding. 70 percent of the city’s budget is spent on “safety” needs, and the city is broke.

After the housing crisis cut property tax collections, the ax in Stockton had to fall on the next-largest area of spending. City employee payrolls were cut 25-30 percent for public safety and 40 percent for non-safety positions. Now the city has a 3/4 cent sales tax increase on the ballot for November to add police to the streets. The proposed tax would raise an estimated $28 million dollars the first year. It’s an excellent idea, but not a panacea for the city’s deep fiscal problems.

Stockton pays very high salaries to city employees, especially to fire and police workers. As I wrote in March:

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