MuniLand

Puerto Rico’s governor Alejandro Garcia Padilla presented his new budget for the Commonwealth on Thursday. Caribbean Business reported on the details:

Puerto Rico Gov. Alejandro García Padilla unveiled a $9.83 billion operating budget Thursday night during a state of the commonwealth address in which he pledged to reduce crime, create jobs, boost school attendance and expand the U.S. territory’s tourism sector.

The proposed spending package is $783 million more than the current budget, which will be covered by new revenue and $200 million in deficit financing, he said.

García Padilla said that beginning in December, the sales & use tax (IVU by its Spanish initials) will be lowered to 6.5 percent from the current 7 percent level, without impacting billions of dollars in outstanding bonds backed by the tax.

The proposal was being undertaken in tandem with measures to widen the base of the IVU, eliminating some exemptions, which would end up raising additional revenue. The plan would continue to exempt items including prescription medicine, books and non-processed foods.

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Several professionals in muniland have jumped on SEC Commissioner Dan Gallagher for his recent warnings about the possibility of an “Armageddon” for retail investors in muniland.

Anonymous blogger @munilass berates Gallagher for his statements about retail investors:

In the interview, Gallagher said his concerns mostly relate to retail investors, who hold approximately three-quarters of outstanding municipal bonds. He then called the muni market a bubble (a term that becomes less useful every time someone utters it) and said “there are a lot of investors in the municipal bond market that aren’t supposed to be there.”  I take the latter to be a reference to credit risk, not interest rate risk, but Gallagher did not elaborate, so I am not sure what he meant by that.

There is a glaring gap in regulation – called Regulation Fair Disclosure – when it comes to protecting municipal bond investors. It appears that issuers may be in the habit of giving material nonpublic information to preferred institutional investors, while making retail and non-preferred investors sit out in the cold. Exhibit number one is the treatment of media members who have petitioned to attend the City of Philadelphia bond investor day scheduled for this Thursday. The Philadelphia Inquirer wrote:

Several news organizations led by Bloomberg News are protesting the exclusion of the news media from a two-day conference sponsored by the Nutter administration to stimulate investor interest in the city’s municipal bonds.

The Inquirer has joined the protest, signing a letter to Nutter that criticizes the city for refusing to let reporters attend the conference, scheduled to begin Thursday at the Comcast Center.

The Bond Buyer is holding its 2nd Annual Symposium on Distressed Municipalities in Providence, Rhode Island on March 18-19. Though I am not there, some conference attendees have done a great job of tweeting the highlights. Here is a selection as the conference continues into its second day:

What Ravitch saw in Albany: unions asking for more benefits; underwriters offering more #debt. “Pols rub their hands w/ glee.” #bbdistress

— Andrea Riquier (@ARiquier) March 18, 2013

Ravitch: City control boards are sometimes necessary because mayors won’t act responsibly or are “cowards.” #bbdistress #muniland

This is a guest post from Joseph Rosenblum, the Director of Municipal Credit Research at AllianceBernstein.

To stay solvent, hospitals run a numbers game, charging high prices to patients with private insurance to offset lower payments from Medicare, Medicaid and the uninsured. Some hospitals make a nice profit; others struggle. Now hospitals are facing a game changer – the Affordable Care Act, which expands Americans’ access to medical insurance, but changes the reimbursement rules to care providers.

How will this affect hospitals’ bottom lines and their ability to pay off debt?

Want to take a 30,000-foot flyover of municipal market trading? The Municipal Securities Rulemaking Board has published its 2012 Fact Book. Let’s have a look at some of the highlights.

By every metric, municipal bond trading has been declining since the first quarter of 2008:

In the meantime, yields on municipal bonds, in lockstep with U.S. Treasury yields, have been declining since the end of 2008. Note also the separation between the customer-bought trades  (blue line) and customer-sold trades (black line). This is the difference (or spread), and it equals the revenue earned by dealers on transactions. This spread has widened since 2011.

The debate surrounding the sacred cow of municipal bond tax exemption is reaching new heights. In a recent report from the National League of Cities, estimates by SIFMA (the dealer trade group) show that municipal governments would have paid an additional $173 billion in interest over 10 years with a 28 percent cap on municipal bond tax exemption. And if Congress had fully repealed the municipal bond tax exemption, municipal issuers would have paid an additional $495 billion in interest costs over the last 10 years. These amounts would be on top of the $1.09 trillion in interest paid on municipal bonds in the last 10 years under the current law.

SIFMA/NCL arrived at these projections using this method (page 6-7) emphasis mine:

The information in Chart C was determined by taking the amount of interest paid by each jurisdiction in the last fiscal year, with a median interest average of 4.69 percent over the past 15 years (Thomson Reuters), and applying a 70 BPS increase for what the interest costs would have been if the bonds were issued with a cap in place, and applying a 200 BPS increase for what the interest costs would have been if the bonds were issued without the exemption in place.

Here is the hottest thing in muniland disclosure right now: http://www.massbondholder.com/

The Commonwealth of Massachusetts has poured a lot of effort and creativity into figuring out how to keep its bond investors up to date with financial data. Today it consolidates lots of municipal bond data in one place. It’s a muniland “one stop shop,” and I hope it inspires other states and municipalities to improve their games on disclosure.

In an email, Colin MacNaught, the debt manager for Massachusetts, wrote this about the site (emphasis mine):

It is extremely rare to see a muniland market professional pitch a specific bond to the public. In fact, I’ve never seen an analyst or a portfolio manager do it in the general media. So I was more than a little shocked to see Alexandra Lebenthal pitching a newly issued unrated bond on Maria Bartiromo’s show on CNBC.

Unrated bonds inhabit a dark corner of muniland. An August 2012 study by the Federal Reserve Bank of New York highlighted that default rates for unrated bonds have historically been 36 times higher than rated bonds. Here is how the New York Fed puts it:

Our findings raise the question, what causes such markedly different default frequencies between rated and unrated municipal bonds? Our answer: Not all municipal bonds are created equal. Different types of municipal bonds are secured by very different revenue sources with varying levels of predictability and stability. Furthermore, we believe that rated municipal bonds tend to be self-selected: issuers are less likely to seek ratings if their municipal bonds are not likely to achieve investment grade ratings.

The state of California received some good news this week when credit rating agency Standard & Poor’s upgraded the state’s long-term rating to “A” on its $73 billion in general obligation (GO) bonds (a single A rating is four notches below AAA). It’s certainly a feel-good moment for Governor Jerry Brown and other public officials. The municipal bond market has been anticipating the state’s improving credit position for the last year, as you can see in the chart above. It shows that the extra interest cost (over the AAA gold standard) on the state’s bonds has declined in the last year. The Golden State is getting some sunshine in muniland.

A single “A” rating is not great for a state, especially one as large as California, which has substantial debt to service and relatively volatile tax receipts. Among the positive praise that Standard & Poor’s gave the state, there were also reminders of the risks that the state faces in achieving real fiscal stability. These risks include lawmakers loosening their fiscal restraints and restoring the social spending that had been cut during the fiscal crisis. Translation: Politicians will revert to promising more than they can afford. S&P explains (requires free registration):

But another part of the answer likely rests with state lawmakers. Given that fiscal restraint has been a crucial ingredient to the state’s strengthening financial position, we think the budget process itself contains some risk.