MuniLand

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.

“It deals with new hires, and right now we’re not hiring,” said John Moorlach, a supervisor in Orange County. “The only real change you can have is to go back to bargaining units” and negotiate increases from existing members, he said.

Blip blip

Chip Barnett of Reuters reports on the tiny inflow muniland-bond funds saw this week:

I had really hoped that Meredith Whitney had gone back to analyzing banks and trying to interpret how the new Basel 3 liquidity ratio would be phased in. Unfortunately, she is back touring the mainstream financial media with another shrill message for muniland.

Muniland’s loudest harpy threw out some real doozies yesterday on CNBC and in a Fortune interview. The most outlandish claims Ms. Whitney made related to the proportion of state’s budgets that were going to service their debts. The substance of her statements were expertly demolished by Nicholas Johnson of the Center on Budget and Policy Priorities:

Whitney wildly exaggerates what states are spending on interest, claiming for instance that “debt service absorbs half of Nevada’s budget.”

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.

CA Treasurer launches another derivatives investigation

We often see Wall Street selling sophisticated products to state and local governments which are not appropriate for them — think interest rate swaps and Jefferson County. So it’s always refreshing to find a government official who actually tries to keep Wall Street in line.

Sharp-eyed California State Treasurer Bill Lockyer has been monitoring the spread (price) levels for the state’s credit-default swaps. He noticed a very significant one-day drop in CMA Datavision (one of two muni CDS price aggregators) and wants to understand what caused this. Katy Burne at Dow Jones has done an excellent job reporting the story:

California’s state treasurer is looking into what he believes were erroneous prices reported last month for credit-default swaps tied to the state’s debt.

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

How does $775 billion of bonds go missing?

There is a sleeper story in muniland about a big pile of just-discovered municipal bonds. The story has some odd twists and turns. John McDermott of FT Alphaville scooped the details yesterday:

FT Alphaville typically estimates the size of the muni market at $2,900bn, based on year-end 2010 data from the Federal Reserve. The FT uses the same figure, occasionally rounding up to $3,000bn.

But the Fed is underestimating the size of the market by nearly $800bn, according to analysis by Citigroup’s municipal bond team.

Let there be no mistake: when you produce so many criminals that you can’t afford to lock them up, you are a failed state. Virtually every important civil institution in society has to fail to get you to this point. Your homes and houses of worship are failing to build law abiding citizens, much less responsible and informed voters. Your schools aren’t educating enough of your kids to make an honest living. Your taxes and policies are so bad that you are driving thousands of businesses away.

–Walter Russell Mead

Although we in America like to think of ourselves as the “land of the free,” we are actually the land of incarnation. If you study the map above you see we lead the world in the number of prisoners as a percentage of population. We jail more criminals than allegedly less developed countries like China, Russia and Mexico. We are spending so much of our scarce resources on imprisonment. What has gone wrong? Is our social fabric so frayed that criminality is increasing? Have corporate interests driven an incarceration agenda? Does America have a prison–industrial complex?

Prison population in the US has soared way ahead of population growth and is now about 240 percent higher than it was in 1980 (Graph from Wikipedia):

Downdraft

The colorful chart above is from Lisa Pollock of Markit and shows the states which have the most traded credit-default swaps and their spreads to the benchmark. Bloomberg has more on that theme.

Derivatives transparency for dummies

Much of the damage that occurred in the financial crisis of 2007-09 came through the use of derivatives. Wall Street sold these products to sophisticated and unsophisticated investors across the globe. I wrote about the efforts of the Pennsylvania Auditor General Jack Wagner to develop a database of swaps for local governments. This effort should be lauded and hopefully copied by other states. But the value of the information in the database is not as great as having near real-time trade information to compare the pricing of a new derivative.

The Dodd-Frank Act has authorized a lot of transparency for the derivatives market. It’s very complex and arcane, so don’t worry if you haven’t figured it out yet. The law firm Reed Smith has created a “derivatives transparency for dummies” chart and I thought it would help us understand the changes.

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.

When it comes to municipal derivatives, Wall Street has brutalized the poor Keystone State. Though many municipalities, such as Alabama’s Jefferson County, have suffered bigger losses from muni swaps, Pennsylvania is like a cancer cluster of bad derivative deals. State Auditor General Jack Wagner wants to do something about that, and last month he announced that Pennsylvania is creating a public registry of local government swaps. I hope this is a trend for other states. From the office of the Auditor General:

Auditor General Jack Wagner today asked the Department of Community and Economic Development to strengthen its oversight of school districts’ and local municipalities’ interest-rate swaps agreements to make the cost of these risky transactions more open and transparent to taxpayers.

In a letter to DCED [Department of Community and Economic Development] Secretary George Cornelius, Wagner asked the department to require all local governments, municipal authorities, and agencies of state government to file their swap agreements upon execution and to update the status and financial results of those swaps every three months. Taxpayers would then know how much was paid in fees and commissions for each swap, how much the swap costs the public entity each month, how much money the swap has lost, and how much could be lost under the worst case scenario, Wagner said.