That “loan” may be a “bond”

That “loan” may be a “bond”

In a groundbreaking announcement, the Municipal Securities Rulemaking Board (MSRB) has advised municipal bond market participants that many “bank loans” currently being structured for state and local governments are likely to be classified as municipal securities, even though these “bank loans” are often being privately placed.

In the market advisory the MSRB makes reference to the Exchange Act and a landmark Supreme Court case about the definition of a “security.” From the MSRB:

Many loans are evidenced by notes.  Section 3(a)(10) of the Exchange Act includes “notes” within the definition of “security.”  The principal legal authority on the distinction between a note that is a security from one that is not is the U.S. Supreme Court case of Reves v. Ernst & Young, Inc.[6] A note is presumed to be a security under the Supreme Court’s opinion in Reves unless it is of a type specifically identified as a non-security.

If a financial transaction is a “municipal security” then market participants must follow MSRB rules that apply to broker-dealers, which include the following:

    Broker-dealers must pay assessments on underwritings and placements of municipal securities Broker-dealers engaged in municipal securities activities must pass qualifying exams Broker-dealers must report purchases and sales of municipal securities There is a duty of fair dealing on broker-dealers and municipal advisors Broker-dealers must obtain CUSIP numbers for municipal securities issues Broker-dealers are banned from engaging in municipal securities business for two years following non-de minimis political contributions to certain “issuer officials”

Given all the oversight that the MSRB exercises when municipal bonds are issued and traded it’s easy to see why banks and broker-dealers were trying to escape oversight by structuring “bank loans” for municipal issuers. This market advisory is a very strong assertion of authority by the MSRB and effectively creates many protections for issuers and investors. The advisory will help illuminate the disclosure requirements and order of priority for municipal loan and bond investors. Outstanding regulatory effort by the MSRB. Kudos!

Smooth sailing in muniland

Lately a lot of big waves have washed over muniland. The national economy has slowed; the 2009 federal stimulus program to the states has ended; there have been loud headlines about bankruptcy cases in Jefferson County, Alabama and Central Falls, Rhode Island; and Standard & Poor’s downgraded the debt of the United States with potential effects on the borrowing ability of states and municipalities. It’s a laundry list of woes.

Considering all the strong forces facing muniland it’s interesting that the municipal bond market is still in such good shape and that interest rates on municipal bonds have remained low. There are two big reasons for this performance.

The first and biggest reason for smooth sailing is that muniland’s sister market, the U.S. Treasuries market, is having a tremendous rally as investors sail into the safe harbor of owning U.S. debt. Even though Standard & Poor’s downgraded U.S. debt to AA+ two weeks ago the U.S. Treasury market is both liquid and deep; it provides investors with security and a place to park assets. There has been so much demand for U.S. Treasuries that their yield (which moves in the opposite direction of the bond price) is nearing the ultra low yields of Japanese government debt. Bloomberg reports:

Oh Illinois!


Oh Illinois!

Illinois has massive problems: the state has more liabilities than assets, and the credit-default swap market says they are the number one state at risk for default (see chart above). The Bond Buyer ran an excellent story on how the liabilities of Illinois are rapidly increasing:

In a sign of Illinois’ ongoing fiscal challenges, its net assets deteriorated by $8.4 billion in fiscal 2010, pushing its deficit in that category of financial reporting up to a negative $37.9 billion, according to a new report from state auditor general William Holland.

The figure takes into account the state’s accounts payable that were $9.1 billion in fiscal 2010 and $55.1 billion of debt obligations, including outstanding bonds and pension obligations. The figures provide a wider view of a state’s overall long-term fiscal health than the snapshot provided by annual budget numbers.

“To win the future, we must dream big and build big”

America’s Interstate Highway System celebrates 55 years

This is the best example of how public infrastructure can really anchor tremendous economic growth. We can learn from history and use this time of economic challenge to conceive of equally profound infrastructure goals. From Fastlane, the blog of U.S. Secretary of Transportation Ray LaHood:

As President Obama has said, to win the future, we must dream big and build big. One of the best examples of dreaming and building big in our nation’s history is America’s Interstate Highway System, which marks its 55th anniversary today.

On June 29, 1956, President Eisenhower signed the Federal-Aid Highway Act of 1956, which established a program for funding and building the new system. This legislation has been hailed by historians as one of the top ten bills in American history, surpassed only by the Civil Rights Act and Medicare, and the Interstate Highway System has been called the greatest public works project in history.

Muni sweeps: Important deals for CA and NJ

New Jersey municipal employees to pay more for benefits

The Wall Street Journal is reporting that New Jersey Governor Chris Christie and the state Democratic leadership have reached agreement on reducing employee benefits:

In the face of heavy opposition from unions, the Democratic leadership of the New Jersey legislature and Gov. Chris Christie reached an agreement on major cuts to public-worker pensions and benefits…

…Democrats worked into Wednesday evening to get union support, offering weaker proposals, to no avail, a person familiar with the negotiations said. Instead, top lawmakers went ahead with a comprehensive bill submitted earlier this week that requires workers to pay more toward their pensions and new hires to work longer to reach retirement age, while eliminating annual cost-of-living increases for current and future retirees, among a slew of other changes.

Muni sweeps: Muniland hits the airwaves

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.


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 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

Debt loads

The panic surrounding municipal debt rarely references data from other government bodies, such as the debt of the U.S. federal government or European states. If we compare state debt loads to the sovereign liabilities of Western developed countries, they look eminently manageable.

One of the first posts I wrote for Muniland was about the relative debt loads of the states and the federal government:

To help us understand on a quantitative basis we have some useful data from the Securities Industry and Financial Markets Association (SIFMA). The data tells us that the municipal market is shrinking on a relative basis to other fixed income classes. Quelle surprise!

What is retail trading?

Bonddesk, an alternative trading system, has published an excellent report on what types of  muni bonds retail is trading.

Contrary to common wisdom revenue bonds, those NOT backed by taxing authority, were the clear winners as they captured 63% of retail trades.

Average yields in April are shown for bonds maturing in 10 years. (See the report for more yield data.)

Muni sweeps: Going once… going twice…


Kentucky sells assets on eBay

The Lexington Herald Leader reports that Kentucky Governor Steve Beshear has put up two aged planes from the states fleet of 15 for sale on eBay.

We laud the governor for rationalizing states assets but think his press conference is a little over the top considering the size of the state’s estimated budget shortfall for 2012 is $780 million.

Lexington Herald Leader says the Smart Government Initiative of the Office of Procurement Services estimates that $7.2 million has been saved through contract renegotiations and rebidding.

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