MuniLand

I clicked on the live webcast of the U.S. Senate floor proceedings to find New Jersey Senator Robert Menendez pleading for Congress to take up H.R. 1, the Supplemental Appropriations Act that provides $60 billion in disaster funds for Hurricane Sandy. Unfortunately, Senator Menendez, in making his case for federal funding, was showing photographs of affluent Mantoloking, New Jersey. His advocacy shows why it is necessary for Congress to move slowly on the funding request to ensure that the spending gets to individuals and communities who really need assistance.

The proposed spending seems to fail to make distinctions between helping low income people who have no resources, and giving scarce resources to rebuild the summer homes of the wealthy. There was immense suffering in the aftermath of Sandy, but America is not rich enough to make the wealthy and the poor whole from the disaster. That is not the social compact that most Americans believe they have made as residents and citizens. How do we know exactly where the recovery monies will flow?

Mantoloking is a shore community with a year-round population of 296 (according to the 2010 Census) and a summertime population of approximately 5,000. Average income per person is $79,555,  versus average income of $35,678 per person in New Jersey and U.S. average income of $27,915, according to the U.S. Census. In a time when the U.S. is asking for sacrifices from its citizens, funding repairs for second homes would seem the last thing Americans can afford. When President Obama sent his funding request to Capitol Hill, one of the parameters he outlined was (emphasis mine):

As a Nation, we have always worked together to assist those who have suffered losses from disasters, and lack adequate resources to rebuild their lives and communities. Assistance should be targeted primarily to low- and moderate- income individuals and families, and limited to repairing and rebuilding primary residences only.

Rushing $60 billion of funds to states might make Congress feel good, but it’s likely that it will be paid for with cuts in other areas of the budget such as reducing cost of living increases for Social Security.

This week, former Harvard Law professor Elizabeth Warren rode to her election night victory in Massachusetts with an eight point margin as the people’s senator. Now, as she moves closer to her swearing-in at the Old Senate Chamber in early January, the political wags are speculating whether she will be given a seat on the Senate Banking Committee. Warren herself has said that she is in discussion with Senate leadership about her committee assignments, according to Reuters:

Senate Majority Leader Harry Reid likely won’t start considering committee assignments until the new year. Still, one Senate Democratic aide predicted that if Warren wants to be on the banking panel, the odds are good she’ll get it.

“The leadership and committee chairmen usually work together to try to accommodate incoming senators’ preferences, within reason,” the aide told Reuters. “If Senator-elect Warren indicates she’d like to serve on the banking committee, given her prominent work on those issues, she would certainly have a very good shot.”

MMA’s Posner: “It’s possible that the 28% #muniland tax cap could be brought up in the lame duck but not passed”#bbmash

— Cate Long (@cate_long) November 8, 2012

At the Bloomberg Link conference on Thursday, Matt Posner, of Municipal Market Advisors, said that discussion of the municipal bond tax exemption would likely be rolled over to the next session of congress, which begins January 3. Yes, the long awaited muniland battle is upon us. Strap on your armor.

Ever since President Obama created the National Commission on Fiscal Responsibility and Reform (Simpson Bowles) in 2010, the subject of reducing or eliminating the federal tax exemption for muni bonds has been kicked around. The administration proposed, in 2011, to “reduce the value of itemized deductions and other tax preferences to 28% for families with incomes over $250,000.” Muniland’s tax exemption has a big fat target on its back.

Municipal advisers, those muniland professionals who are hired by public officials to evaluate their needs for financing and guide them through the underwriting process, don’t receive enough attention. Generally, they are paid by a government entity but also receive fees from the banks who underwrite the deals. Dodd-Frank set out to restrain potential conflicts in this space by requiring municipal advisers to register as such and imposing a fiduciary duty on their activities.

Now, however, some members of the House of Representatives are trying to roll back the portion of Dodd-Frank that would impose this fiduciary duty. A first-term congressman from Illinois, Robert J. Dold, whose prior professional experience was operating a pest-control business, has proposed legislation to strip the fiduciary duty requirement from Dodd-Frank. His bill currently has 35 co-sponsors.

Typically, municipal officials have little to no experience in financial markets. A financial adviser is on hand to untangle the complexities of different financing structures, guaranteed investment contracts (GICs) and derivatives. For public entities to get a fair deal, it’s critical that they get conflict-free advice from their financial advisers. The big Wall Street banks have for years sold highly complex and expensive products to poorly informed governments. See, for instance, these episodes from 2008:

After the tragic murders in Aurora, Colorado last Friday, the debate over gun control in the U.S. has been reignited. Policymakers would do well to study the case of Australia’s gun-control laws, which were put in place following a comparably tragic incident in 1996. After a man killed 35 people and wounded an additional 21 with two semi-automatic rifles in the Tasmanian town of Port Arthur, Australia passed a law that banned all such rifles, along with semi-automatic and pump-action shotguns, and then created a restrictive system of licensing and ownership controls.

The national government also undertook a gun buyback program. This involved each state and territory establishing and operating a system through which gun owners and dealers could surrender the newly prohibited weapons in return for compensation. Arrangements were also made to compensate firearms dealers for loss of business related to these newly prohibited firearms.

Interestingly, the Australian government only set the policy parameters for the program and left it to each state and territory to establish how to enact it. Because of the variance in the territories’ methods, there’s an interesting data set researchers were able to use to analyze the effectiveness of the program:

Although Republicans have been insisting on cuts to federal spending, they are fighting to keep the defense budget off limits. They agreed to make cuts to military spending as part of last year’s sequester agreement, but there is a full-court press in progress to derail the cuts as the date on which they are set to take effect nears. This well organized campaign involves members of Congress, governors, mayors and military contractors. Here is what is involved, according to the House Armed Services Committee:

If sequestration takes effect in January, the defense budget would be cut an additional $55 billion per year from the levels established in Budget Control Act. That would mean an additional $492 billion in cuts on top of the $487 billion already being implemented [over ten years]. In total, over $1 trillion would be cut over the next ten years with disastrous consequences for soldiers, veterans, national security, and the economy.

This amounts to a reduction of around 14 percent to the defense budget. Even with the cuts, the U.S. will remain the biggest military spender in the world by far. In its pitch to put off the cuts, the House Armed Services Committee invoked the threat of job losses:

In a press conference last Friday, President Obama said that reasonable progress had been made in restoring the private-sector jobs that were lost since the financial crisis but that progress in restoring lost jobs in state and local government had been slower. As this observation is conventional wisdom at this point, it’s surprising that it got any media attention. The more interesting question to ask is why the hiring at the state and local levels has not bounced back as quickly as private-sector hiring.

A post on the New York Times‘s Economix blog by Ben Polak, chairman of Yale’s economics department, and Peter K. Schott, a Yale economist, attempts to answer that question. Polak and Schott begin by laying out the data:

[W]hile the latest recession was particularly deep, the recovery in private-sector employment, once it finally started, has not been particularly slow by recent historical standards….

“Have a drink out there, folks, and just know that your kids and grandkids will be out there picking grit with the chickens,” says former U.S. Senator Alan Simpson in the video above. Simpson’s quip is the best summary I’ve ever heard of the public’s lack of understanding of the severity of the nation’s fiscal crisis. The federal government is currently borrowing 42 cents of every dollar that it spends. Thanks to the Federal Reserve’s quantitative easing and the strong global demand for U.S. Treasury debt, the nation has been able to borrow heavily at low interest rates to cover its budget shortfalls.

But the debt is piling up so high that the country might face a borrowing shock if there were a black swan event or if bond vigilantes forced higher interest rates. It’s not a question of whether rates will rise – they certainly will. What we don’t know is when it will happen. The same politicians who created this fiscal quagmire have now tasked themselves with fixing it. Despite numerous proposals on how to get our debt under control, the political dynamics of the issue make it likely that nothing will be resolved in Congress until after November’s election. The Washington Post reports:

But once the election is over … the issue of the debt will quickly rise to the top of the agenda – and not just because of the debt limit. In January, policymakers also will be facing the first round of harsh, across-the-board spending cuts adopted last summer, as well as the expiration of a host of tax cuts that benefit every American household. Unless Congress agrees on an alternative deficit-reduction strategy, the policies threaten to deliver a fiscal shock that could throw the nation back into recession.

Last month, Puerto Rico Governor Luis Fortuño delivered a speech at the libertarian Reason Foundation on “how Puerto Rico avoided becoming “America’s Greece.” In his talk, the governor espoused the anti-government ethos of Grover Norquist, whom he cited as a friend in the first minute of his remarks. Fortuño has been a staunch advocate of “right-sizing” government: Soon after taking office, he laid off a substantial number of the commonwealth’s employees and reduced the island’s personal, corporate and property taxes.

Despite these cuts, Puerto Rico’s budget is still unbalanced. Fortuño has been relying on bond issuance through COFINA, the government’s off-balance-sheet, special-purpose vehicle, to make up for annual shortfalls to his budget.

Now, Republicans in Congress are working to blow another hole in Fortuño’s budget. As part of their effort to stave off the impending, automatic cuts to the defense budget, House Republicans passed legislation that kills a special provision of the Affordable Care Act increasing Medicaid grants to Puerto Rico. Faced with the threat of losing billions of dollars in federal payments each year, Fortuño now seems to think that lower federal spending is not that appealing. He pushed back on these cuts in an op-ed on CNN.com:

A huge win for muniland was finalized last week when the SEC approved new rules that will shine light on the municipal bond underwriting process. This Bloomberg headline says it all: “Bond-Disclosure Rules Backed by SEC to Protect States From Banks”:

The rules were proposed by the Municipal Securities Rulemaking Board last year and are aimed at preventing Wall Street underwriters from steering public officials toward complicated debt financing without disclosing the risks. They were approved May 4 by the SEC, which will enforce them.

The disclosures are part of the effort to reshape financial regulations to prevent a repeat of the credit-market crisis of 2008, and stem from Congress’s decision to provide added protections for state and local governments. The economic crisis hit taxpayers with billions of dollars in unexpected costs when complex bond deals, once pitched as money savers, backfired as credit markets seized up.