MuniLand

8 weakest U.S. states

According to the credit rating agencies and the bond markets, these are the 8 states with the weakest credit profiles. These states may be weak because their debts are too big, because their economy is flagging or because they haven’t adequately funded the retirement of their employees. If this were a school, these would be the students sitting in the back of the class. Maybe it’s time for these states to do a little more homework.

We start with the weakest Puerto Rico, a United States commonwealth. #1 – Puerto Rico

#2 – Illinois

#3 – California

#4 – Michigan

#5 – Nevada

#6 – New Jersey

#7 – District of Columbia

#8 – Rhode Island

Standardizing AAA

For many years, a AA-rated municipal bond did not have the same risk of default as a AA-rated corporate bond. In fact, the corporate bond was about 6 times more likely to default.

Over the last two years, credit rating agencies have standardized the municipal and corporate rating scales. This was a substantial change for the municipal bond market and had the effect of raising the credit rating of thousands of municipal issues. Many don’t understand why this large structural change was made, so I thought it would be helpful to share the history.

Many professionals within muniland have said that a substantial amount of “granularity” was lost in the municipal rating scale when it was equalized with the corporate bond scale. A municipal bond previously rated A2 was likely moved four notches up the rating scale to Aa1. This has the effect of “bunching” municipal ratings into a tighter band than they had previously been in, and it obscured the prior “granularity” that the muni scale had.

Muni sweeps: California’s first budget veto

Some thorny action in California on the state budget:

California Governor Jerry Brown, who failed to win Republican support of tax extensions in six months of negotiations, said he’d “move heaven and earth” in another attempt after vetoing a budget without the provision.

Brown, a Democrat who pledged to solve California’s fiscal malfunctions without gimmicks, didn’t say how he’d get the Republican backing needed to pass his plan. His budget veto was the first in state history.

Rocking back and forth

Chip Barnett of Reuters brings us the weekly numbers on muniland flows:

U.S. municipal bond funds posted $172 million of net outflows in the week ended June 15, according to Lipper data issued on Thursday.

Muni sweeps: Dirty bonds?

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.

Muni sweeps: Happy “Bike to Work” day

House Committee launches ‘YourWitness’ program

From YouTube:

The [House] Financial Services Committee has launched a new program, Your Witness, which allows Americans to submit questions they want to ask a witness during a hearing. During an Oversight and Investigations Subcommittee hearing on the Stanford Financial Ponzi scheme, Rep. Randy Neugebauer asks the first question of Julie Preuitt.

From the House Financial Services Committee website:

@RandyNeugebauer asks question at a hearing using #YourWitness, our new program that allows Americans to get involved

California goes after it’s “wall of debt”

From the Bond Buyer:

[Governor] Brown released a revised budget Monday that dramatically reduces planned bond issuance as part of an effort to curb overall borrowing by the state that he termed the “wall of debt.”

Muni sweeps: New growth or decay?


The New York Times food writer, Mark Bittman, has written the loveliest piece about his visit to our nation’s most devastated urban area, Detroit. He says there are little seeds of hope and change growing there:

Imagine blocks that once boasted 30 houses, now with three; imagine hundreds of such blocks. Imagine the green space created by the city’s heartbreaking but intelligent policy of removing burnt-out or fallen-down houses.

Now look at the corner of one such street, where a young man who has used the city’s “adopt-a-lot” program (it costs nothing) to establish an orchard, a garden and a would-be community center on three lots, one with a standing house. (The land, like many of the gardens, belongs to the city and is “leased” for a year at a time. But no one seems especially concerned about the city repossessing.)

Whitney’s new gloomy doomy

Mark Gongloff of the Wall Street Journal‘s Marketbeat blog wrote this today about Meredith Whitney:

Professional scary person Meredith Whitney took to the op-ed pages of The Wall Street Journal this morning to sprinkle some more of her fear dust on the muni-bond market:

Municipal bond holders will experience their own form of contract renegotiation in the form of debt restructurings at the local level. These are just the facts.

Don’t educate, don’t grow

New analysis from Daniel Berger of Thomson Reuters Municipal Market Data suggests that greater levels of advanced education equals higher growth and muni bond ratings.

Put more simply, smart communities do better.

From Municipal Market Data:

Most of America’s older and generally industrial Midwest and Eastern cities have rapidly changed during the past forty years.

For example, cities such as Minneapolis and Boston have become very attractive regions for innovative high‐tech and biomedical companies due, in large part, to the high numbers of college graduates (over 40% of residents aged 25 years and older have college degrees).

Would the real default rate stand up?

US_MUNIDEFAULT0411_SC Several of my Reuters colleagues sent over this graph. My editor said “it’s nice but doesn’t give much historical context.”

So let’s start with the big picture.  From Publicbonds.org:

In 1988, a study by Enhance Reinsurance Co. looked at historical patterns of municipal defaults from the 1800s to the 1980s and concluded that municipal defaults usually follow downswings in business cycles and are also more likely to occur in high growth areas that borrow heavily.

Following the 1873 Depression, when more than 24 percent of the outstanding municipal debt was in default, the greatest number of defaults occurred in the South, the fastest-growing region at the time.

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