MuniLand

Decades-long infatuation with financing our spending

Decades-long infatuation with financing our spending

Sheila Bair, who served as Chairman of the Federal Deposit Insurance Corporation for five years through the financial crisis, has completed her term. In a weekend op-ed in the Washington Post, she urges America to rid itself of its addiction to financing consumption and “growth” with debt. This is the core requirement for America to become financially stable again and to return to “real” growth. From Bair’s Washington Post oped:

Now that I’m stepping down, I want to sound the alarm again. The common thread running through all the causes of our economic tumult is a pervasive and persistent insistence on favoring the short term over the long term, impulse over patience. We overvalue the quick return on investment and unduly discount the long-term consequences of that decision-making.

Our decades-long infatuation with financing our spending through ever-growing debt, in the private and public sector alike, is the ultimate manifestation of short-term thinking. And that thinking, particularly in business and in government, is actually getting worse, not better, as we look for solutions to put our economy on a sounder footing.

Will pension transparency shake muniland?

Joan Quigley of the Bond Buyer is reporting on how proposed guidelines to place unfunded pension liabilities alongside other liabilities has shaken up municipal governments. It’s really just a proposal to clean up balance sheets and get the real numbers out where people can understand them. Many governments have buried these giant, problematic numbers deep in the footnotes. This proposal from the Governmental Accounting Standards Board would force the dirty laundry into the sunlight. From the Bond Buyer:

Currently, many governments disclose pension information in the footnotes to their financial statements and generally only report the contributions they are required to make in a given year, as well as what they actually paid.

Muniland is the most transparent bond market

Agnes Crane, a columnist for Reuters Breakingviews, wrote an interesting column today about ending the municipal-bond tax exemption. This tax exemption, granted at the federal level, makes the interest earned on municipal bonds free from taxation on the local, state and federal level if it’s owned by an investor residing at the place of issuance.

The “triple tax” exemption is baked into the structure of the municipal market. There are several proposals floating about how to modify the muni tax exemption. Agnes Crane, in her column, calls it an “accident of history.” Accident or not, there are 50,000 muni issuers who will actively resist any legislation to change the tax code. It’s hard to imagine any lobbying group with more clout since state and local officials are deeply embedded in the political web of every federal legislator’s district. But politics being what it is, every legislative term brings new possibilities.

But what I really wanted to write about was Agnes’ idea that repealing the muni tax exemption would make the muni bond market more transparent and efficient. The municipal bond market is already miles ahead of other bond markets in transparency. Since the Municipal Securities Rulemaking Board made their EMMA system operational, transparency in muniland is an order of magnitude better than other any bond market, including the U.S. Treasury market, which is liquid but not transparent. To see individual trades in the Treasury market you need an expensive Bloomberg or Reuters terminal. But for the muni market all you need is an internet connection to reach EMMA. At EMMA you can easily get all the documents for an issuer and their individual bonds, credit-rating downgrades, annual issuer reports and more.

The declining welfare rolls

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.

Muni sweeps: Hot times in Sacramento

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.

Datapooloza

The thing I hear most often about muniland is how murky the market is. It is rather astounding that the municipal market is so little understood given its size and its effects on state and local governments and tax rates. To help shake the market up and create more transparency, I thought it would be helpful to start gathering muniland data sets for people to start playing with. Have at it, friends. Please send over any interesting findings.

Data pools

USA.gov: Statistics at the State and Local Levels

Office of Management and Budget: Historical Tables

Bureau of Economic Analysis: Gross Domestic Product (GDP) by State and Metropolitan Area

US Census: Quarterly Summary of State & Local Tax Revenue

US Census: Government Employment & Payroll

Bureau of Labor Statistics: Local Area Unemployment Statistics Map

Bureau of Economic Analysis: Federal Recovery Programs and BEA Statistics

The National Association of State Budget Officers: Spring 2011 Fiscal Survey of States

Muni Sweeps: Muni CDS

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.

Muni sweeps: Weak Massachusetts demand?

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.

Muni sweeps: Education reform for Illinois

Happy Friday all!

Illinois passes landmark education reform

The Chicago Sun-Times reports that the Illinois state legislature has passed a substantial education reform bill. The legislation severely restrains the power of the teachers’ unions:

The measure continues to allow unions to strike in Chicago and the suburbs, but it imposes a requirement that school boards and unions take longer to negotiate and publicly disclose their bargaining positions before a strike can be launched.

In Chicago, no strikes could occur until as long as 120 days after the dispute goes to a special panel — and then, only if the Chicago Teachers Union has given a 10-day notice of a strike and has 75 percent of its bargaining unit members in agreement. Currently, a strike only requires a simple majority of everyone who votes.

Improved muni supermarket coming

Shopping for municipal bonds is tough.

Investors generally don’t know if the issuer is financially healthy or spiraling down to default. The media does not have useful data.

But the information is out there.

Towns and states, that issue municipal debt, are responsible to create thorough, audited documents such as annual financial statements and offering documents for new debt issues.

The Municipal Securities Rulemaking Board (MSRB) has a nice surprise coming for retail investors. It’s an expansion of the EMMA document repository system. And it will make bond shopping much easier.

Muni sweeps: “Picture a better America”

American City and County reports on a wonderful photo campaign launched by the Association of Equipment Manufacturers (AEM) to highlight America’s crumbling infrastructure.

I predict the category “One bumpy road” receives a lot of submissions. Here is how it is described by the AEM:

Disintegrating roads are a fact of life for almost everyone. Some have even rewarded us with a flat tire or worse! Send a photo of a decaying bridge or road; show Congress the consequences of their inaction.

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