MuniLand

I’m often critical of municipal bond issues that either appear to be configured to avoid the necessary approval processes or appear to benefit private interests over public interests. The opacity of muniland creates plenty of dark places for odd dealings to occur. But earlier this week I read about the small Massachusetts town of Leverett, which had just conducted the most open and transparent bond approval process that I’ve seen. What was being decided was a $3.6 million project to build a broadband network connecting the 632 households in the community. The whole process is about as commendable as you could hope for.

From the Daily Hampshire Gazette:

Construction of a municipal fiber-optic cable network is expected to begin later this year after residents Saturday voted overwhelmingly in favor of a $3.6 million bond measure to finance the project.

Bids are expected by the end of the summer with construction to begin soon after, officials said.

“We’re expecting everyone in Leverett to have access to this network by 2014,” said Peter d’Errico, a member of the town’s Select Board and a leading supporter of the municipal fiber-optic system.

The Proposition 2½ debt exclusion override was favored by a margin of 462-90, with one blank. The 83.5 percent vote to support the project was well above the two-thirds majority needed to approve the override.

For openness in finances, debt management and budget process, Massachusetts is the gold standard among states. The legislature and executive branch have collaboratively embraced a five-year budgeting process and committed to sharing the results with taxpayers and the public. Because of the state’s efforts to reach out to the investing community, I predict that its transparency will lead to lower borrowing costs and more stable funding sources in the future. The state is rated AA+ by credit rating agencies for creditworthiness, but I’ll assign it the highest rating, AAA, for transparency.

Several weeks ago, the state treasurer, Steven Grossman, launched a new Twitter account (@BuyMassBonds) that keeps the public informed about new financial filings and bond offerings. It’s a model of excellence for muniland in terms of keeping municipal bond investors informed through social media. Here is a recent tweet about an upcoming bond issue, the Massachusetts Water Pollution Abatement Trust State Revolving Fund Bonds:

Love clean H2O? Mass Water Trust is selling $230mill in bonds that fund it on Tues/Wed! Learn more at buymassbonds.com #muniland

Bloomberg ran an excellent story recently about JP Morgan making a very low bid to win the underwriting role for Massachusetts’ latest general obligation bond offering. The bid reduced the interest rate the state will pay for the borrowed funds and vaulted JP Morgan to the top of the league table to finish the year. Slashing fees to move up league tables happens all the time in financial markets, but it’s unusual to hear the particulars:

The competition between JPMorgan Chase & Co. (JPM) and Bank of America Merrill Lynch to be the top underwriter of municipal bonds offered by auction helped Massachusetts save $880,000 on a $400 million borrowing.

JPMorgan won the bid Dec. 20 for the general-obligation debt maturing from 2015 to 2027, offering an overall interest cost of 2.57 percent, according to state Treasurer Steven Grossman. Bank of America Merrill Lynch was the second-lowest bidder, offering 2.79 percent. With the Massachusetts deal, JPMorgan vaulted ahead of Bank of America for the top underwriter of competitive municipal bonds issued in 2011 by $141 million, according to data compiled by Bloomberg.

Muniland investors have been anticipating strong demand for new bonds being brought to market. Issuance has dropped dramatically, and generally this would create strong demand for new bonds. Massachusetts brought a bond deal yesterday that had a higher yield and lower amount than was anticipated. This is surprising since Massachusetts is a state with many high-income earners. Dow Jones reported:

The Commonwealth of Massachusetts on Tuesday sold a $ 469.8 million offering of general obligation municipal bonds via lead underwriter J.P. Morgan.

The deal size was $20 million smaller than initially planned. Randy Smolik, senior municipal analyst at Thomson Reuters, said the bonds came at yields that were slightly higher than expected, which raises questions about demand at a time of few new issues, and as muni bond funds prepare for a semi-annual period when coupon income necessitates reinvestment.

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.