MuniLand

Taxes are the fuel for the government. Without taxation the state withers. Our governments have taken on so many responsibilities but have become starved for fuel. There is much debate on how much we as a country should spend on entitlements and defense, but often these arguments are made on the premise that the United States has higher taxes than other nations.

The Center for American Progress developed the following charts to help visualize the state of American taxation. If you check out “Ten Charts that Prove the United States Is a Low-Tax Country” you will see that our nation, on a relative basis, does not have especially high taxes. It also helps explain why our nation is running massive deficits and is close to defaulting on its debt. We have choked off the fuel to support the public realm.  These charts almost make the case for the need to increase taxes on the wealthiest Americans in the short term to help reduce the deficit and bring the nation to a sounder fiscal footing:

Party is approach

An excellent piece by John Gramlich in Stateline about how party affiliation is driving state agendas. Here are the money quotes:

Holding a lock on the governorship and both houses of the legislature in 20 states, GOP conservatives advanced an agenda that may change the face of state government for decades. They honored pledges not to raise taxes by enacting huge spending cuts to balance budgets in Florida and Texas…

They put tough abortion limits back on the agenda, passing laws in Alabama, Kansas and Oklahoma. Most famously, Republicans in Indiana, Ohio and Wisconsin put new restrictions on the rights of public employees, whose protests made national news for a month.

Change can be glacial, but it happens

Bloomberg digs a little deeper into the story of pension-fund woes and finds California municipalities are already adopting changes, with more to come:

In a survey by the League of California Cities, two-thirds of the 296 localities that responded said they’re negotiating changes in their plans. Thirty-eight percent had increased pension payments from current employees, and 20 percent had created a new tier of benefits for future hires.

Some believe the changes at the local level, particularly lower benefits for future workers, don’t go far enough.

California needs to extend tax increases to balance budget

These are hot times in Sacramento.  California’s constitution requires the legislature to send a budget to the governor by June 15.  Time is running out to patch up an agreement, and there is a new incentive for lawmakers to get it done. From Bloomberg:

There are differences this year. In November, voters lowered the threshold to pass a budget to a simple majority from two-thirds. The same measure also stripped lawmakers of salary and per-diem pay for every day they’re late with the spending plan.

Brown has been meeting behind closed doors since March with Republican lawmakers to craft a compromise. The governor’s tax extension, a so-called bridge tax, is the major sticking point, said his spokesman, Gil Duran.

CA Treasurer launches another derivatives investigation

We often see Wall Street selling sophisticated products to state and local governments which are not appropriate for them — think interest rate swaps and Jefferson County. So it’s always refreshing to find a government official who actually tries to keep Wall Street in line.

Sharp-eyed California State Treasurer Bill Lockyer has been monitoring the spread (price) levels for the state’s credit-default swaps. He noticed a very significant one-day drop in CMA Datavision (one of two muni CDS price aggregators) and wants to understand what caused this. Katy Burne at Dow Jones has done an excellent job reporting the story:

California’s state treasurer is looking into what he believes were erroneous prices reported last month for credit-default swaps tied to the state’s debt.

Downdraft

The colorful chart above is from Lisa Pollock of Markit and shows the states which have the most traded credit-default swaps and their spreads to the benchmark. Bloomberg has more on that theme.

Derivatives transparency for dummies

Much of the damage that occurred in the financial crisis of 2007-09 came through the use of derivatives. Wall Street sold these products to sophisticated and unsophisticated investors across the globe. I wrote about the efforts of the Pennsylvania Auditor General Jack Wagner to develop a database of swaps for local governments. This effort should be lauded and hopefully copied by other states. But the value of the information in the database is not as great as having near real-time trade information to compare the pricing of a new derivative.

The Dodd-Frank Act has authorized a lot of transparency for the derivatives market. It’s very complex and arcane, so don’t worry if you haven’t figured it out yet. The law firm Reed Smith has created a “derivatives transparency for dummies” chart and I thought it would help us understand the changes.

Lisa Pollack of Markit in London posted via Twitpic this table of DTCC data on municipal credit default swaps. Since California is the biggest muniland issuer it’s not a big surprise that it leads with the greatest number of contracts outstanding.

The market is cleaved into two pieces

The Municipal Securities Rulemaking Board has issued a critical new rule for muniland. The rule, known as G-23, prohibits a dealer, such as JP Morgan or Goldman Sachs, from advising a municipal entity and then switching hats to act as the underwriter. Do you see the massive conflict that this could have posed?

The dealer, acting as an “adviser,” could have set up the municipality to structure a bond that had more expensive fees than a straight bond, and then jump over to being the underwriter to collect the higher underwriting fee. If a dealer is acting in a dual role, who is looking out for the issuer’s interest? Previously the dealer was only required to make a disclosure that the dual role could be a conflict.

A post-Memorial day salute to all who have served our nation!

Grand Rapids shakes her booty

In Michigan, the decline of the U.S. auto industry has shrunk many cities. In January Newsweek highlighted the decline of American cities and identified Grand Rapids as a city on a downward spiral. Grand Rapids has fought back, producing the video above to show the vitality of their city. Good on you Grand Rapids. Your sense of caring and community shines through. (H/T CuriousityCounts.com)

San Jose goes the restructuring route

Bloomberg writes about the city of San Jose’s plans to restructure $550 million in short-term debt. With long-term rates fairly low, it could be an excellent strategy for municipal entities to refinance short-term variable-rate debt into fixed, long-term paper:

San Jose, California, the 10th- largest U.S. city by population, plans to restructure as much as $550 million in airport debt this year as it weighs whether to declare a state of fiscal emergency, municipal officials said.

Job creation or program pass-through?

The Congressional Budget Office has published a new report entitled “Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from January 2011 Through March 2011.” It makes some large claims about how many jobs stimulus funds have created:

Various recipients of ARRA funds (most recipients of grants and loans, contractors, and subcontractors) are required to report, after the end of each calendar quarter, the number of jobs funded through ARRA. The law also requires CBO to comment on those reported numbers.

During the first quarter of 2011, recipients reported, ARRA funded more than 571,000 full-time-equivalent (FTE) jobs.

Hack for Change

Attention Muniland! Do you have an idea for a public web or mobile application? Change.org is sponsoring a Hack for Change on June 18th and 19th and is soliciting ideas for their programming competition. Here are some of the ideas that have already been posted:

A reviews site that allows citizens to rate and evaluate city government services and departments A site that makes government data more accessible and actionable An app that lists all San Francisco city legislation and allows residents to vote on it An app that notifies police of suspicious activity

Submit your idea today!

Muni Web 2.0 stars

Government Technology reports on the winners of a wonderful competition to create the best municipal Web 2.0 and social media technologies:

Dirty bonds?

Economic Musings has posted an excellent piece on “community development district” [CDD] bonds. CDD bonds, commonly called “dirt bonds,” were widely used to fund housing development infrastructure during the real-estate bubble. Needless to say, many have been hit hard due to the collapse of the housing market. Economic Musings outlines the legal and structural details of these bonds and then questions whether high-yield muni bond funds are accurately valuing the securities in their portfolio:

Lost in the implosion of the securitized markets sits an overlooked yet just as opaque remnant of the housing crisis – CDD or “Dirt Bonds”. Save for the rare fixed income aficionado, this segment is still to this day unknown. In general, a CDD is a local, special purpose government authorized by the state as an alternative method for managing and financing infrastructure required to support community development. In most cases, the community development is water, sewer, and drainage infrastructure to raw undeveloped lots. The CDD then levies assessments on the property.

These taxes and assessments pay the construction, operation and maintenance costs of the district and are set annually by the governing board of the district. The taxes and assessments are in addition to county and other local governmental taxes and assessments and all other taxes and assessment provided for by law.