MuniLand

Is this an orderly process of tax reform?

Although there are people, like Bond Dealers of America CEO Mike Nicholas, who have predicted that federal tax reform will not happen until 2017, the Senate Finance Committee has kick-started the process. Law firm KL Gates sent out a primer about the Senate Finance Committee plans:

The momentum toward comprehensive tax reform accelerated significantly on June 27th, 2013, when the bipartisan leaders of the Senate Finance Committee, Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT), sent their Senate colleagues a joint letter requesting Senators to submit their tax reform proposals by July 26th, 2013. [1] In doing so, Senators Baucus and Hatch are beginning to set the table for the Finance Committee to consider tax reform in the coming months. As discussed in our previous alert, the time to weigh in on tax reform is now.

Senate Finance Committee members Senators Max Baucus and Orrin Hatch have asked all senators for their tax reform wish lists:

The [Baucus-Hatch] letter is significant in several respects. Perhaps most importantly, it asks Senators to start from a “blank slate”—that is, to assume that all tax credits, deductions, and other tax expenditures are repealed. From here, Senators are asked to propose which expenditures should remain in the Tax Code, and make other recommendations on tax provisions that should be added, repealed, or reformed during tax reform. Thus, the Finance Committee has effectively put every tax expenditure,and potentially an even wider array of issues, on the table while also acknowledging that some tax expenditures should be retained.

Imagine the size of the lobbying effort that will accompany this process. KL Gates again:

The Yankees parking lots that went bankrupt, skipped city payments and took city land

 

Bond Buyer Publisher Mike Stanton, (@MikeStanton1891)  and I were slugging it out on Twitter after I tweeted that the Yankee Stadium parking garage bonds were likely one of the most corrupt muniland deals ever.

I might have said this because the bonds had defaulted. Or because the $238 million of bonds were unrated. Or it might have had something to do with the issuer of the bonds, the Bronx Parking Development, being a couple working out of their home in Hudson, New York, who had defaulted on two previous municipal bond deals structured in the very same way. Or maybe I said this because, in the event of a default, the deal allowed the bondholders to take control of extremely valuable public land and convert it to use for private gain. This fourth explanation actually prompted my opinion of the deal.

Who is earning tax-exempt interest from muni bonds?

About one third of the U.S. House of Representatives signed a letter to keep the current tax exemption for municipal bonds in place. Investment News got the story:

The municipal bond market’s dogged efforts to prevent President Barack Obama from tinkering with the 100-year-old tax exemption for muni bond income has received some high-profile support from 137 members of Congress.

A letter supporting the status quo for the muni tax exemption, and signed by 95 Democrats and 45 Republicans, was delivered today to Speaker of the House John Boehner and minority leader Nancy Pelosi.

Pensions: Looking at the big picture

There is a lot of debate in muniland about how state and local governments should calculate pension liabilities. But I have not heard much discussion about the asset side of the pension story. It is a generally-accepted assumption that investment earnings are about 60 percent of the annual increase in pension funds. But what about the other 40 percent that represents the contributions made by governments and employees? We’re often told that state and local governments are under-funding their pensions. How much are they really contributing?

The U.S. Census collects this data about state and local government pension plans on a delayed basis. The most recent is for 2011. I thought it might be a good exercise to compare 2011 data with 2008 data. With the financial crash, 2008 was a tough year for public pensions.

The data shows everything moving in the right direction, including increased contributions made by governments and employees. In 2011, combined investment earnings and contributions of $616 billion far outstripped the pension payment outflow of $231 billion.

Detroit’s swaps deadlock

Pity Kevyn Orr, Detroit’s emergency manager who was hurried in by the city to clean up a long festering mess. The Greek hero Hercules re-routed two rivers to clean out the filth of 1,000 cattle, whose stable had not been cleaned in 30 years. Orr is attempting a similar feat by slashing and diverting cash flows to stabilize the city’s finances after 30 years of fiscal mismanagement.

Orr has been involved in closed door negotiations with numerous parties after making a lowball proposal for creditor haircuts last month. Some of these negotiations are not going well. Orr filed his first lawsuit against a Detroit creditor, Syncora, a Bermuda based bond insurer, last Friday. Orr alleges that he was forced to file the suit over claims to the legal right to cash flows from Detroit’s casino tax revenues.

In 2009, after Detroit was downgraded and a swap termination event was triggered, a portion of casino revenues were committed to pay off interest rate swap counterparties (UBS A.G.. SBS Financial Products and Merrill Lynch Capital Services as credit support provider to SBS) by an agreement hammered out by Mayor Dave Bing.

Note to the Bloomberg Editorial Board

This note applies to all editorial boards that want to write on the insolvency and likely bankruptcy filing of Detroit

In a blistering but lightly researched op-ed, the Bloomberg Editorial Board dove into the battle between Detroit’s creditors.

Detroit is a poverty-stricken, run-down city that has hocked most of its assets, slashed its employee payroll, taken on debt at an astonishing rate and been crippled by a group of banks that sold unsophisticated and possibly corrupt interest rate swaps to public officials.

Chicago’s fiscal headache

Chicago has nearly identical fiscal challenges to its home state of Illinois: pension underfunding, massive school deficits and recurring deficits. But unlike the state, many of the decisions that need to be made in Chicago are out of the control of leaders, especially related to pensions. These decisions are made in the state legislature. Chicago Mayor Rahm Emanuel seems to have had little success lobbying for the city’s interest. Chicago political writer Greg Hinz described it in Crain’s Chicago Business last year:

In a rare mayoral visit to Springfield, Rahm Emanuel today told lawmakers that they need to act now on pension reform for government workers, and he laid out some specifics as to what he wants.

Testifying before a House committee, Mr. Emanuel called for a 10-year holiday on paying cost-of-living increases in Chicago’s four pension funds and other government retirement systems around the state. That freeze would apply to both current workers and those who already have retired.

Muniland gets a data boost

The Federal Reserve Bank of New York has begun publishing data about the bond holdings of its primary dealers. Primary dealers are the largest and most active trading groups in bond markets. This new data will add a lot to our understanding of market flows.

The primary dealer banks own less half than 1 percent of outstanding municipal bonds, or $17 billion for the week ending June 19, 2013. The amount of municipal bonds outstanding is $3.7 trillion.

According to MSRB’s EMMA data system, the average daily trade volume by par amount for the last thirty days for municipal bonds is $12 billion. Dealers are holding about 1.4 days’ worth of trading volume. The big dealers traded $8.8 billion of securities for the week of June 19, controlling about 73 percent of daily muniland trading.

It may get easier for retail investors to buy bonds

Muniland’s oversight organization, the Municipal Securities Rulemaking Board, has proposed some new rules to the SEC that may make it easier for retail investors to buy bonds that are newly brought to market.

The dealers who underwrite bond offerings tend to favor their institutional and high net worth clients, so typically retail investors have a difficult time getting an early part of the pie. In fact, the issuer would often prefer that their bonds be placed with retail investors, because they tend to be the most stable owners as buy-and-hold investors.

The MSRB’s new measures would strengthen the retail order period. The first would establish specific obligations on the senior syndicate manager to disseminate detailed information about the terms and conditions of any retail order period. Whatever terms the state or local government has set for retail investors to be able to buy bonds must be provided to all the dealers in the selling group (on a large deal this could be up to 15 or more dealers). It sounds simple, but it doesn’t always happen.

Moody’s flawed estimate on public pension liabilities

As the debate continues over public pension funding levels, we have this headline from the Financial Times this week: “US States need $980 billion to fill pension gap, says Moody’s.” This is not exactly news. A number of studies, including ones from the Pew Trust and the Public Fund Survey, have identified a massive shortfall for public pension funds. In fact, the Pew Trust said that the shortfall in 2010 was $1.38 trillion, so perhaps we should be applauding state legislatures for improving the gap since then.

The shortfall numbers in these studies, to put it simply, are all over the place. There are many variables that go into these models, but the main factor that causes variation is the expected rate of return on the assets in the plans. The official assumed return on the assets that are held in trust to pay pension liabilities is 8 percent, according to the Public Fund Survey. Fiddling with this projected rate of return can cause swings in the amount of unfunded liabilities. The Moody’s study uses an unconventional assumption. According to the Adjustments to state pension liabilities document:

Accrued actuarial liabilities will be adjusted based on a high-grade long-term taxable bond index discount rate as of the date of valuation (of the fund).

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