MuniLand

The Fed’s data snafus

Most everyone knows that the Federal Reserve Board is responsible for making monetary policy, handling prudential oversight of many of the nation’s banks and keeping the clearing and payment system flowing. But the Fed has another fundamental function that often goes unnoticed: collecting financial and economic data.

Good policymaking flows from having fresh and accurate data. From my little experience with the Fed they are not doing very well at this task.

Reuters is reporting that Fed Governor Elizabeth Duke believes that household debt has declined since the financial crisis of 2008 and that this reduction in household balance sheets will position families to participate in the recovery when conditions tick up. From Reuters:

Households’ caution about taking on debt and spending will stand them in good stead when the economic recovery becomes more robust, a top Federal Reserve official said on Saturday.

Household debt-to-income ratios skyrocketed during 2001-2007, but households cut debt and spending significantly during the financial crisis that began in 2007, [Fed Governor Elizabeth] Duke said.

A drought of municipal bond issuance

All year long, muniland has been dragging its feet on issuing bonds. Budgets have been much too constrained to take advantage of historically low interest rates. At the end of the third quarter of 2011 issuance was 39 percent lower than 2010, according to Thomson Reuters SDC data. Nine-month issuance for 2011 was $160 billion versus $262 billion for the same period last year.

It’s a veritable drought.

Harrisburg has more than incinerator debt

The current bankruptcy drama in Harrisburg, Pennsylvania is just the third act of a long running effort to make the city something more than a corridor for those who commute into the city for work. Most of the current debt problems of Harrisburg stem from failed projects intended to revitalize the city and extremely bad business decisions.

The chart above shows the massive increase in Harrisburg’s population that occurred up to 1950 then starting falling steeply since mid-century. The city’s population was actually smaller in 2010 than it was in 1900. It’s just one of many American cities that has seen its vitality and population fade away.

Almost all the news coverage now is focused on the current players and their attempts to use the law to bend events towards their vision of the future. For example, the mayor, the county and the state are petitioning in bankruptcy court to halt the actions of the city council who filed for Chapter 9 bankruptcy. The bankruptcy judge will sort out these claims in an emergency court hearing on Monday. It’s high drama and makes for great journalism.

All high government approval ratings are local

This great graphic from Visually maps the public’s great discontent with the federal government using data from the Pew Research Center. It’s hard to imagine the numbers being any worse than this: 11 percent of the public is satisfied with the officials in Washington, DC.

Given Pew’s research, it’s somewhat counterintuitive that a recent poll from Gallup shows Americans pretty content with their state and local governments. From Politico:

Trust and confidence in local government has hovered around 70 percent for the past decade, and the recent gridlock at the federal level has done little to sully local impressions of government. In fact, 68 percent of respondents to a new Gallup poll on Monday said they had a “fair” or “great” deal of trust and confidence in their local governments.

The calmest seas you will ever see

Low issuance, low defaults and low rates

For issuers, conditions are just about perfect in muniland now. Many have defered or withdrawn planned bond offerings, leading to greatly reduced supply for the year. Bloomberg estimates that 3rd quarter total issuance will be about $67 billion. This follows the $117 billion in muni securities issued in the first half of the year (data from SIFMA, Excel file link). Through Q3 Billions 2010 $ 298 2011 $ 184

Defaults have also been puttering along at very, very low rates. This is due to some creative workout solutions, like Jefferson County’s negotiations with creditors, and many instances of postponement of problems, like Collingswood, NJ. I’ve seen estimates for total defaults for the year ranging from $1.8 billion (this number included unrated bonds) to $1.1 billion. Bloomberg says:

Municipal defaults have dropped this year to about $1.1 billion, a quarter of last year’s total, according to Bank of America Merrill Lynch. Local general- obligation bonds have accounted for only 1 percent of the 2011 failures [balance is revenue or conduit bonds].

More Whitney rebuttals

The media is full of municipal bond market participants rehashing Meredith Whitney’s prediction of muni collapse which began last September. From Bloomberg:

[Meredith] Whitney, the banking analyst who predicted Citigroup Inc.’s 2008 dividend cut, said on “60 Minutes” on Dec. 19, 2010 that there would be “hundreds of billions of dollars” of municipal defaults within 12 months.

Data from [John Hallacy, Bank of America Merrill Lynch’s head of municipal research in New York], Standard & Poor’s and Municipal Market Advisors show the opposite.

Part-time employment up in muniland

Incredible shrinking workforces

I’ve read in a few places that state and local governments were reducing the number of full-time employees and hiring more part-time workers. There is a story in the Dayton Daily News that nicely details the trend:

The data show that both the state and local Ohio governments attempted to get the work done by hiring more part-time employees. While local governments shed a little more than 11,000 full-time employees, they added almost 6,000 part-timers, a 4.6 percent increase. The state, meanwhile chopped close to 1,400 full-time workers and added 386 part-timers, a half-percent increase, according to Census data.

Ohio’s government job-shedding put it in the top third of the 50 states, although margins of error from the Census survey data make exact rankings impossible.

Cities: educated and indebted

Thomson Reuters Municipal Market Data muniland expert Daniel Berger reminded me of a report that I had forgotten about that shows the correlations between the low credit ratings of Ohio’s cities and the cities’ very low levels of college graduates. Dan posits that Ohio, as part of America’s Rust Belt, didn’t require high levels of education for staff at its manufacturing plants and, accordingly, didn’t develop large college-educated workforces. As manufacturing moved out of the region, it left behind cities where the workforce was not attractive to high-tech industries and other sectors that required more educated workers. The cities declined and their credit ratings suffered. Such is the devastating effect of globalization.

I thought it might be interesting to chart some of the data in Daniel’s report (page 6) for America’s largest cities. Interestingly the data suggests that, contrary to Daniel’s findings for Ohio cities, that the more educated a city is, the lower its credit rating (see chart above). Or put another way, the dumb cities are getting higher grades. Quelle surprise!

After posing this question on Twitter two responses stuck out:

Morally Bankrupt @groditi Morally Bankrupt  @cate_long maybe debt size? Do cities tend to borrow more as education levels rise?

Thumbs down on Obama’s muni tax

Thumbs down on Obama’s muni tax

Unsurprisingly, the Treasurer of California and Bloomberg’s editorial board are pushing back on the Obama administration’s proposals to reduce the municipal bond tax exemption for those earning more than $200,000 per year. I wrote previously how the Republicans are cool to the proposal. The California Treasurer says that the increased tax would raise municipal borrowing costs and estimates that over time the act could add $2.7 billion to $7.7 billion to statewide borrowing costs. Bloomberg’s editorial board goes further and suggests that any changes to municipal bond taxation should be done as part of a broader tax reform effort. From Bloomberg:

How disruptive would this new tax, which the administration estimates will bring in $30 billion a year, be for the muni market? A report from Morgan Stanley Research saw little impact, pointing out that the premiums investors demand to hold munis over Treasuries “have little direct relationship with tax rates historically.” A report from Citigroup Global Markets, by contrast, argued that curbing the exemption would “increase state and local borrowing costs significantly.”

On balance, we suspect the impact on interest rates will be relatively small initially. (Certainly the proposal has had little effect on the market since the announcement, according to Bloomberg pricing data.) Of course, that could change rapidly if historically low Treasury yields rise and munis start to look less attractive.

Municipal bonds are not just for rich people

This Bloomberg interview with John Miller, co-head of fixed-income at Nuveen Asset Management, is a good overview of the current state of muniland although I disagree with his comment that “many, if not most municipal bond holders are in the highest tax bracket”.

Actually IRS data tells us that about 75% of filers who claim exclusion for tax-exempt municipal interest earn less than $200,000 per year. As with all financial assets the richest own the most by quantity but municipal bonds are held pretty broadly. It’s not just a rich persons asset class.

Further: Citibank: US Municipal Strategy Special Focus

Big, big day for Jefferson County, Alabama

The Jefferson County Commission will hold a meeting today to determine whether to accept their creditors proposal for settlement of defaulted sewer bond debt or declare bankruptcy. My opinion is that they will settle and creditors will take a haircut of about 33 cents on the dollar. This will be a very important precedence for muniland workouts. Stay tuned. Here is some of the coverage:

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