MuniLand

America is not growing, it’s contracting

The Guardian’s Heidi Moore wrote an epic screed about the illusion of economic recovery and waded through a river of micro data to prove her point. She highlighted how the housing recovery was driven by banks withholding their foreclosure inventories from markets and how three large banks halted foreclosures, which slowed supply. Unfortunately, she only had anecdotal evidence to support these ideas. She berated consumers for their increasing confidence in the economy and called it unfounded. She blasted the federal government, Congress and corporate CEOs for doing nothing to revive employment and stimulate economic growth. Moore writes:

The reason to maintain skepticism of good times a-coming is that an economic recovery can – and is – used to package a lot of political snake oil. As long as people believe in a recovery, Congress can keep ignoring the unemployment and equality crises and enjoy ginning up imaginary problems like the plague of corporate tax rates.

Actually, Congress is doing a lot to address the economy and unemployment. You can see it if you look at the macro data; specifically GDP growth versus the amount of debt that the U.S. Treasury is issuing. In fact, total U.S. growth in Q1 2013 came from issuing Treasury debt; not an increase in economic activity ($339 billion of new debt issued from 1/2/13 to 3/31/13 while GDP grew only $140 billion in same period).

In Q1 2013 the U.S. Treasury issued two and a half times more debt, which flows into the economy as cash stimulus through government spending, than the U.S. had in overall economic growth. To put that in reverse: If the Treasury had not issued that debt, the economy would have shrunk by approximately $199 billion. Instead it grew by 2.4 percent.

It could be argued that Congress and the federal government are doing more by issuing debt (deficit spending) than the Federal Reserve is doing by suppressing interest rates through bond purchases. Moore is on the right path, but she misses the point. Congress is issuing debt to keep America out of recession. Without that debt issuance, America would be contracting.

The Detroit Institute of Arts should sell part of its collection

After the question was recently raised about the Detroit Institute of Arts selling its holdings to provide liquidity to the city, many looked to Michigan Governor Rick Snyder. According to the Detroit News editorial page editor Nolan Finley on Twitter, the governor (who tweets from @onetoughnerd) said that ultimately it is a “legal question” whether or not the art should be sold. But is it? Or it is more of a moral question in the face of Detroit’s desperate financial situation?

The Detroit Institute of Arts has one of the most substantial public art collections in the country. The building and art collection are owned by the city of Detroit and administered by a non-profit organization. The DIA describes the setup:

Massachusetts leads states with ‘green bonds’

Massachusetts is again setting the gold standard for muniland. The state has a solid lead in best practices for bond market disclosure, and now it is offering the first ever state-issued “green bond” to fund environmental projects. Here is what is happening, according to Colin MacNaught, the Assistant Treasurer for Debt Management in the Office of State Treasurer Steven Grossman:

As part of our $475 million general obligation bond sale, we’re selling $100 million “Green Bonds” to fund environmentally beneficial projects. The World Bank has already sold approximately $5 billion in dollar-denominated Green Bonds but we may be the first state in the muni market to sell “Green Bonds.”

Many municipalities and private entities use the tax-exempt municipal bond market to fund projects for waste treatment and other uses that could be considered environmental. But it is fascinating that a state has set itself up as a conduit to fund these projects. It is structuring the bonds to be attractive to investors who specifically want to make sustainable investments. From Colin MacNaught again:

More bridges, less war spending for America

This week a semi truck plowed into the I-5 bridge crossing the Skagit River in the State of Washington, causing part of the bridge to collapse. The incident echoes the failure of the Minneapolis bridge in 2007. These are serious but rare occurrences in the U.S. Even so, the nation’s infrastructure needs more attention.

Here is the estimate of necessary infrastructure spending for the next seven years by the American Society of Civil Engineers:

In a Detroit bankruptcy, who is first in line?

The state-appointed emergency manager for Detroit, Kevyn Orr, has been given a year of legal authority to address Detroit’s insolvency problem. It is a herculean task to right decades of complex problems. Muniland observers believe that the city will end up filing for Chapter 9 bankruptcy.

The rationale for this relates to certain limitations of the emergency manager’s authority. Outside of Chapter 9, the emergency manager cannot legally cut debt or pension liabilities, and the likelihood that bond market creditors and the city’s 48 unions will voluntarily make concessions seems slim.

Orr has authority to cut public employee wages. He possibly could obtain pension concessions as part of wage negotiations. Detroit Mayor Dave Bing already reduced public employee wages by 10 percent last July, when he used his new authority under the state’s Consent Agreement to cut the pay of city workers in 40 unions and make other changes to labor agreements.

Municipalities try to throw off pension plans

Two California cities, Pacific Grove and Canyon Lake, are trying to end their participation in CalPERS – the statewide public pension plan. The communities are unable to bear the cost increases in their retirement systems, which they are unable to control today. Now we hear news of another community and a non-profit group on the other side of the country that are trying to untangle themselves from established pension plans.

Ted Nesi, reporting for WPRI, details Coventry, Rhode Island officials who are trying to walk away from a non-teacher school worker pension plan:

Elected officials in Coventry have taken an apparently unprecedented step by washing their hands of responsibility for one of their employee pension plans, saying taxpayers have no obligation to come up with enough money to stop it from running out of cash within 12 years.

Memo to Congress: Increase funding for the SEC

The newly confirmed chairman of the Securities and Exchange Commission, Mary Jo White, testified to the House Financial Services Committee on May 16 and requested an increase in funding for her agency. SEC funding does not come from federal government revenues, but from fees assessed on securities transactions. White’s request to increase the agency’s funding does nothing to increase the federal deficit or take funding from other programs. She is merely asking to spend the money the agency collects.

This is the SEC’s Budget Authority (what Congress says the SEC can spend, in the center column) and the Actual Obligations (what was spent, in the right column) for the last several years, in thousands:

There have been increases since the financial crisis in 2008, but the Budget Authority from Congress was frozen between fiscal year 2012 and 2013. Chairman White explains why this will not do:

Despite neighborhood watch efforts, bankrupt Vallejo is still running defecits

Since going through a three-year bankruptcy process, a lot of wonderful initiatives have taken place in Vallejo, California – a city of 118,000 people in the northern end of the San Francisco Bay. After the city’s police force was cut down over 300 community watch groups formed to protect neighborhoods. The city recently launched Nextdoor, a private social network platform for neighborhood communication. In the most substantial move, the city has established a first in the nation “Participatory Budgeting” process. It was described by a participant as:

Funded by $3.2 million dollars allotted by a citywide sales tax passed by Vallejoans while still in bankruptcy, the city of Vallejo embarked on Participatory Budgeting (PB), the first US city to ever try PB citywide. PB Vallejo garners ideas from its stakeholders and citizenry with the goal of funding proposals that benefit the public, are a one-time expenditure, and are implemented by the city of Vallejo or other approved public agencies and nonprofits.

Did the city residents take it up?

Over 600 people assembled together at meetings across the city and online at www.pbvallejo.org to come up with over 800 ideas and suggestions on the well-being of Vallejo. 100+ volunteer budget delegates have worked together and with city staff to flesh out those ideas into viable proposals. These proposals will go onto a ballot in May where the citizens of Vallejo, ages 16 and above, will vote on which plans will go forward to the city council to fund and implement this fiscal year. The budget delegates are now preparing for three planned expos in April where they will present the proposals that will be on the ballot so the voters of Vallejo can interact, ask questions and walk away with what they need to make an informed vote.

California launches the best new source of muniland data

Last December I wrote about a project sponsored by California Treasurer Bill Lockyer that is now up and running:

In the past year, three California cities have filed for bankruptcy. This casts a pall on the bonds of other California cities, because investors wonder if they also contain buried fiscal issues. In an effort to create more transparency, a new open source ratings project was recently launched:

Responding to market concerns about municipal credit quality, the California State Treasurer’s Office has commissioned a San Jose State University economist and a government-bond research group, Public Sector Credit Solutions, to develop a default probability model for city bonds.

Will Puerto Rico ever see economic growth?

Puerto Rico now faces a $495 million revenue shortfall for the year. Revenues have come in less than projected, and having pared government jobs under the former governor Luis Fortuño, Puerto Rico is now resorting to one-off financial maneuvers to fill the budget hole. Moody’s describes the moves in a May 15 report:

In our issuer comment of March 18, 2013, Puerto Rico Faces Large Mid-Year Budget Gap, we noted that full year revenues for fiscal 2013 were likely to be $910 million or 10.4 percent below initial estimates of $8.750 billion and 9.3 percent below fiscal 2012 revenues. Revised estimates showed the shortfall to be slightly larger at $965 million as of January 31, 2013. In response, the commonwealth has implemented a number of corrective measures, including modest expense reductions.

Puerto Rico’s revenues are likely to decline 9 percent from 2012, and it has no time to raise taxes to capture more. The commonwealth has resorted to refinancing debt and moving debt between entities. It brings to mind how shell games are played.

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