MuniLand

If you say “Jefferson County” to a professional in muniland, you will likely get a shudder of mild revulsion. This Alabama county is the biggest example of Wall Street aggression towards a public entity since Orange County, California declared bankruptcy in 1994 after buying too many interest-rate derivatives. Dodd-Frank, the financial-reform law that’s been in effect for a year, changed the rules for municipal bonds and derivatives.  But did it change them enough to avert a repeat scenario?

First, a little background: Jefferson County was ordered by the federal EPA to build a sewer system at an estimated cost of $1.2 billion. The construction went over budget and was rife with massive corruption that has ensnared 17 people. The funding of the sewer project was equally corrupt. JP Morgan was under investigation for bribery in 2009 and eventually reached a settlement with the SEC. The Washington Post reported this at the time:

J.P. Morgan Chase agreed to a $722 million settlement with federal regulators over accusations that the bank and two former executives made illegal payments to win municipal bond business from Jefferson County, Ala.

The Securities and Exchange Commission said Wednesday that J.P. Morgan and former managing directors Charles E. LeCroy and Douglas W. MacFaddin paid $8 million to friends of Jefferson County commissioners who voted to hire the bank to carry out municipal bond offerings and other transactions to finance a new sewer system. The friends worked for local financial firms, but did not work on the deal.

The financial deals arranged by J.P. Morgan ultimately resulted in millions of dollars in losses and pushed the county to the brink of bankruptcy, causing residents to pay much higher rates for water and sewer services.

Has Chris Christie “fixed” the problem?

Joan Gralla of Reuters reports that Governor Chris Christie will be signing the pension and health-benefit reform law today. This is an important step for the health of New Jersey’s pension plans, and Governor Christie should be lauded for his accomplishment.

The state’s 2010 Debt Report (page 15) said that they have $87.5 billion in unfunded liabilities as of June 30, 2009 and that the rate of increase has gone up substantially in recent years:

$30.7 billion for the seven major state pension funds $56.7 billion in unfunded post retirement health benefits

Unfortunately Governor Christie has skipped payments of $5.5 billion over the last two years and compounded these unfunded liabilities. One of these skipped payments was used to claim a “balanced budget.” Your household budget is not really “balanced” if you skip your car loan payment for a year.

The ever-shrinking welfare rolls

Stateline has done some very good reporting on the decline of the welfare rolls. Welfare funding was switched to block grants in 1996, and the funding level has remained the same since then. From Stateline:

Welfare is not a big budget item for most states, taking up less than 2 percent of all state spending, according to the National Association of State Budget Officers (NASBO)…

…When Congress overhauled that system in 1996, it changed welfare from an “entitlement program” guaranteeing coverage to everyone who was eligible and instead created the Temporary Assistance for Needy Families (TANF) block grant that hands out lump-sum payments for welfare. States are essentially given a set amount of money and allowed to use it as they wish. The amount has stayed level since 1996.

We are making some headway on unemployment although some states still have substantial problems. For the larger, original version from Calculated Risk Blog click here.

Muni tax exemption “on the table”

Bond Buyer reports:

Two weeks ago, about a dozen issuer advocates met with staff members for Democrats and Republicans on the Senate Finance Committee to emphasize the important role tax-exempt bonds play in infrastructure development.

The issuer groups were told by staffers that the tax exemption of muni bonds was on the table as part of discussions on spending cuts, and that the committee may soon schedule hearings on this subject, sources involved with the meeting said.

There has been so much talk in muniland about massive defaults, but so far there has been very little discussion about the actual mechanism of default and municipal bankruptcy. Public entities generally try everything before resorting to default or bankruptcy. The video above is an excellent primer on the many choices that can be made leading up to the end game.

Bond defaults can happen with or without a bankruptcy. Here is Wikipedia’s definition of default:

In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant (condition) of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either unwilling or unable to pay their debt.

When I hear “municipal bonds” I usually think of the “public wealth” being used to assist the less fortunate or being used to build common assets that are available to all the public. But in Massachusetts it’s the very wealthiest that have benefited from public financing.

Linden Ponds, an upscale retirement community where President George H.W. Bush’s brother, Prescott Bush Jr., spent the last part of his life, is in the process of defaulting and restructuring on $152 million in municipal bonds.

From the Boston Business Journal:

Last month, Linden Ponds skipped a principal and interest payment on its bonds as a way to conserve cash. Linden Ponds is a nonprofit whose creditors include municipal bond mutual funds based in Boston. Sovereign Bank also plays a major role as the letter of credit provider, or financial backstop, on the variable rate portion of the debt.