Credit ratings beyond the S&P case

February 6, 2013

The long awaited prosecution against a U.S. credit rating has finally arrived. The Department of Justice filed a civil suit this week alleging that Standard & Poor’s committed mail and wire fraud and defrauded investors with ratings of residential mortgage backed securities (RMBS) and collateralized debt obligations (CDOs). These securities are known in regulatory and market parlance as “asset backed securities” because loans or bonds are bundled into larger, more complex securities. Until this market collapsed in the 2008 financial crisis, it was the source of great profits for banks, investors and credit rating agencies. It also accelerated the collapse of the financial system as the securities were sold around the world to increasingly less sophisticated investors.

Raise the federal gas tax

February 5, 2013

Members of Congress approved spending $198 billion during fiscal years 2012 and 2013 on the war in Afghanistan, according to the Center for Strategic and International Studies. In contrast, in fiscal year 2012, Congress allocated only $37 billion to the Federal Highway Administration for transportation infrastructure. About $23 billion of this spending on highways, bridges and mass transit comes from the 18.4 cents of federal tax Americans pay on a gallon of gasoline. This tax – instituted in 1993 – has not been adjusted (even for inflation) since it was put in place. From McClatchy:

The perils of unrated municipal bonds

February 2, 2013

It is extremely rare to see a muniland market professional pitch a specific bond to the public. In fact, I’ve never seen an analyst or a portfolio manager do it in the general media. So I was more than a little shocked to see Alexandra Lebenthal pitching a newly issued unrated bond on Maria Bartiromo’s show on CNBC.

California gets a little lovin’

February 1, 2013

The state of California received some good news this week when credit rating agency Standard & Poor’s upgraded the state’s long-term rating to “A” on its $73 billion in general obligation (GO) bonds (a single A rating is four notches below AAA). It’s certainly a feel-good moment for Governor Jerry Brown and other public officials. The municipal bond market has been anticipating the state’s improving credit position for the last year, as you can see in the chart above. It shows that the extra interest cost (over the AAA gold standard) on the state’s bonds has declined in the last year. The Golden State is getting some sunshine in muniland.

America’s military is “lender of last resort”

January 31, 2013

America is slowly awakening from its long debt-induced slumber. It has conducted two major wars, a bailout of banks and a major stimulus program without raising taxes to pay for them. Because the Federal Reserve kept interest rates low, it was easy for politicians to continue to raise the debt ceiling and spend without making reductions in other areas of the budget. But those days have ended, the punch bowl has been removed and a new sobriety has rolled into our national capital.

Are sales taxes more ecological?

January 30, 2013

There is a growing cadre of Republican governors who are considering lowering or eliminating income taxes in their states (Louisiana, Nebraska, Kansas, Oklahoma, Missouri, and Indiana). The revenue they would forego by eliminating the income tax would be made up by increasing state sales taxes. There are several strong arguments in favor of this change for the way it would increase personal savings and lower tax rates on small business owners who usually run their business expenses and profits through their own income statements. So by eliminating state income taxes, more profits are left with small businesses to possibly expand.

How muniland sees cities

January 28, 2013

Alisha Green of Sunlight Foundation is working on a project to identify the ways that different types of data are used to describe cities. She put up a great post that sketches out a number of ways to view a city demographically, including population density, unemployment and housing. She asked me recently to write about how I personally view cities. I think of cities almost entirely as cash flow machines that collect taxes and provide social services. That is muniland. Here are Alisha’s questions and my answers:

Illinois on the downward slope

January 28, 2013

The state of Illinois was placed in the lower investment grade class last week when Standard & Poor’s downgraded the state to A- with a negative outlook.

The big cliff that Nate Silver didn’t see

January 25, 2013

Nate Silver of the New York Times weighed in with his substantial analytical skills on the growth of government spending. For a data source, he used, and most of the federal spending he analyzed appeared to be in line with the general consensus. But there was one area that has been very contentious, the federal debt, which is where his data source did not serve him well. Here is how he describes America’s debt:

Calling New York State Comptroller DiNapoli

January 23, 2013

Late in 2012, New York State Comptroller Thomas DiNapoli launched the Fiscal Stress Monitoring System, an early warning system for municipal entities in the state that were suffering financial stress. The program’s purpose was described this way in a webinar: