MuniLand

State tax revenues slip back to slower growth

The Rockefeller Institute said in a note about fourth-quarter state tax revenues that revenues continue to be positive, but they have slowed from the first half of the year. Personal income taxes made up about 41 percent of total state tax revenue in the fourth quarter of 2013 and slowed considerably from the first half of the year. Rockefeller writes:

The state personal income tax revenue picture in the first two quarters of calendar year 2013 represented the strongest growth since the start of the Great Recession. However, the growth in personal income tax collections softened in the third quarter of 2013 and was a mere 1.0 percent in the fourth quarter of 2013.

Personal income taxes are the bedrock of state tax revenues. But state sales taxes are also important and showed nice, steady gains. From Rockefeller again:

Sales tax collections increased by 5.5 percent in the fourth quarter of 2013 compared to the same quarter of 2012. According to preliminary data, only six of 45 sales-tax states reported declines in sales tax collections compared with the same quarter last year. Arizona had the largest sales tax decline at 14.4 percent, followed by Georgia at 4.6 percent. The large sales tax decline in Arizona is mostly due to expiration of a temporary one-cent increase in sales tax of three years ago. The following five states reported double-digit growth in sales tax collections: California, Maine, Minnesota, Ohio, and Virginia.

Rockefeller sums it up:

The strong growth recorded in the first half of 2013, as discussed in previous State Revenue Reports, appears to have been mostly attributable to the acceleration of income to tax year 2012 by some taxpayers driven by the fear of potential federal tax rate increases in tax year 2013. We now are witnessing the earlier warnings that the ‘bubble’ in income tax receipts would be short-lived. And, quite likely, the growth in personal income tax collections will be much softer in the first half of 2014 as well. However, in most states, the overall trend in tax collections for fiscal 2014 is positive.

Deep in the public pension weeds

Most discussion about public pensions revolves around the levels of funding that governments report in their Comprehensive Annual Financial Statements (CAFRs). It’s a means of taking the temperature on the health of the pension fund.

To get these numbers, actuaries do some complicated math that projects the lifetime earnings of the public employees in the plan. They also calculate how much funding the sponsor government must contribute, how much payout retirees will receive and they make projections on how the investments owned by the pension funds will perform over time.

Like most financial modeling, the math is based on numerous assumptions — some which are accurate over time and some of which vary from actual results.

New bonds in the time of the inverted yield curve

Just a few more data points on the upcoming $3 billion Puerto Rico general obligation sale expected to price on Tuesday, March 11. Note the yield curve remains inverted and likely will offer some very high yields to investors lucky enough to win bonds maturing in 2022 through 2025 (red box marks the maturities listed in the tentative sinking fund schedule below).

Here is the most recent preliminary official statement (March 6, 2014).

Here is the tentative sinking fund schedule:

The dollar amounts of the use of proceeds has not been detailed yet, but here are the broad uses (page 23):

An important part of the use of proceeds is repaying some of the deal underwriters for various short term financings and swap termination payments to Morgan Stanley, Goldman Sachs and Bank of America Merrill Lynch (page 23-24):

Don’t let Chicago’s crisis go to waste

Moody’s cracked the whip and downgraded the rating of Chicago’s general obligation bonds to Baa1 from A3 this week. It’s only a one-notch downgrade, but no American city should wear the scarlet letter of BBB. Chicago’s Mayor Rahm Emanuel is seemingly frozen in place and having a tough time addressing the city’s fiscal problems. His behavior belies his famous 2009 quip to never let a serious crisis go to waste.

Moody’s in its rating comment about the city’s $8.3 billion general obligation and sales tax debt seems to think Chicago is in pretty rough shape:

The negative outlook reflects our expectation that, absent a commitment to significantly increase revenue and/or materially restructure accrued pension liabilities to reduce costs, the city’s credit quality will likely weaken. The formidable legal and political barriers to these actions are incorporated in the outlook.

Puerto Rico’s perfect storm

 

Two critical documents related to Puerto Rico’s upcoming $3.5 billion general obligation bond offering have been released: A draft of the preliminary official statement (POS) for the general obligation bond underwriting and a special liquidity update from the Government Development Bank (GDB).

Both documents contain new financial information and a laundry list of risks for potential bondholders. Citi has published a special focus report on the upcoming GO bond offering. Raise the starting gun; the race will begin soon.

Where did all the bonds go?

Long-term municipal bond issuance is shrinking. I don’t need to recite the numbers, just look at the chart above (from Sifma with data from Thomson Reuters).

Municipal tax-exempt bond issuance has been lower than 2008-levels for five years. I wrote last August:

There are many factors that are weighing on issuance, but the primary one is likely to be the higher 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.

Chris Christie’s pension reform: round two

I have a lot of experience talking to Congressional staffers, regulators, rating agency analysts, municipal bond traders and portfolio managers. When you pump these parties for information there is always a clear line about the type and amount of information they will share.

But I had a bad encounter with the press spokesperson for New Jersey Governor Chris Christie’s treasury department. When I questioned the department’s methodology for their claim that reform in 2011 had reduced over $100 billion in future state pension liabilities, the treasury spokesman told me I need to go to college to understand pension fund projections. I wrote in 2011:

The accomplishment that seemed to be propel Christie to national prominence was his pension reform efforts. He has over-inflated his accomplishments on the issue. For example, he claims he made only one of three payments in seventeen years into the state’s public pension funds. If this were true the funds would have collapsed.

Tax reform is back in muniland

Tax reform is back in muniland headlines. Naomi Jagoda of the Bond Buyer has the details:

House Ways and Means Committee chairman Dave Camp’s draft tax reform plan, released Wednesday, would terminate the tax exemption for private-activity bonds and advanced refunding bonds issued after 2014.

As expected, the plan would create three individual income brackets — 10 percent, 25 percent and 35 percent — and would tax a portion of muni bond interest, which is currently tax-exempt, for those in the highest bracket. The surtax would apply to individuals with incomes of $400,000 or more and couples with $450,000 or more of income as well as all munis they hold, whether new or outstanding.

Puerto Rico Senate approves $3.5 billion general obligation issuance

The Puerto Rico Senate followed the House and approved the authorization of $3.5 billion of new general obligation bonds. Included in the approved legislation is language that allows bond anticipation notes to be issued. The legislation allows for the new debt to:

1. Pay or refinance debt and other obligations of the Commonwealth of Puerto Rico,

2. Repay or refinance debt and other obligations of any public corporation with the purpose of covering or fund a portion of the deficit of the Commonwealth of Puerto Rico, 3. Repay or refinance obligations incurred by the Commonwealth of Puerto Rico on ancillary contracts to bonds Commonwealth of Puerto Rico issued, refinanced or paid,

The SEC’s new municipal adviser rule is not confusing

Governing.com ran a story titled “Why’s the SEC’s New Municipal Advisor Rule So Confusing?” Actually the new rule, although not yet finalized, is not confusing. There are resources for muniland participants to understand how it will be implemented and what responsibilities muni advisors have towards their clients. In fact, I have never seen a better rollout for a new regulatory effort.

Here is a roadmap:

As directed by Congress in the 2010 Dodd Frank legislation, the SEC published the definition of a municipal adviser last September. Over 1,100 municipal advisers have registered with the SEC and MSRB (registrations here including a downloadable list). Reuters detailed what happened last January:

After it was signed in 2010, the Dodd-Frank law ignited a fight over exactly who counts as a municipal adviser. The dispute lasted until the SEC approved a final definition in September, which allowed the MSRB to begin drafting regulations.

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