MuniLand

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.

Here is how the MSRB describes EMMA:

The Electronic Municipal Market Access system, or EMMA, is a comprehensive, centralized online source for free access to municipal disclosures, market transparency data and educational materials about the municipal securities market.

The Electronic Municipal Market Access (EMMA) website was established to increase the broad comprehensive access to vital disclosure and transparency information in the municipal securities market.

Don’t borrow in the dark, Governor Christie

Every family encounters times when bills are due and they don’t have money. If this happens to a state or local government, they go to the municipal bond market where they can borrow short- or long-term. In the current market they are likely to find a lot of willing lenders.  These lenders will lend at very reasonable interest rates, and the terms of the borrowing will be made public so taxpayers can see what their obligations are.

Since there is so much demand in the muni bond market I was surprised to see that the State of New Jersey was going to set-up a “bridge loan” with J.P. Morgan Chase, one of Wall Street’s biggest banks. The specific details of the borrowing have not been announced, but tidbits released in the media suggest that the lending rate from the bank will be twice the rate from the muni bond markets.

The consumer analogy would be using a neighborhood payday lender rather than taking a cash advance on a credit card. The payday lender would charge you 10% and the credit-card company would charge 5% for the same loan. These are made up examples, but give a glimpse into the most important variable when comparing the state’s borrowing choices.

Has Chris Christie “fixed” the problem?

Has Chris Christie “fixed” the problem?

Joan Gralla of Reuters reports that Governor Chris Christie will be signing the pension and health-benefit reform law today. This is an important step for the health of New Jersey’s pension plans, and Governor Christie should be lauded for his accomplishment.

The state’s 2010 Debt Report (page 15) said that they have $87.5 billion in unfunded liabilities as of June 30, 2009 and that the rate of increase has gone up substantially in recent years:

    $30.7 billion for the seven major state pension funds $56.7 billion in unfunded post retirement health benefits

Unfortunately Governor Christie has skipped payments of $5.5 billion over the last two years and compounded these unfunded liabilities. One of these skipped payments was used to claim a “balanced budget.” Your household budget is not really “balanced” if you skip your car loan payment for a year.

The global spiderweb of debt

If you are not familiar with the municipal bond market, you may think that muniland is nothing more than states, municipalities and school districts offering plain bonds that mature on a set date and offer a fixed interest rate. That is the textbook description.

Actually the municipal bond market is a murky tangle of odd bond structures, variable-rate debt, multiple layers of issuers and bank guarantors. The lack of standardization of bond structures and relationships is one of the main reasons that the asset class has never migrated to the internet for retail investors.

Often the odd bond structures can create much more exposure to the tides of global affairs than plain vanilla bonds. The biggest example now is the Belgian-French bank Dexia, which is a big guarantor of U.S. muni bonds.The WSJ reported in an excellent article that investors are selling off muni bonds that Dexia insures:

Save the $100,000 that Meredith Whitney charges for research

Just the numbers please

You can save the $100,000 that Meredith Whitney charges for her research. Reuters has the data on municipal bond issuers with the weakest profiles by bond-market standards. Puerto Rico leads the pack as the least credit-worthy issuer. Issuer Weekly Yearly Outstanding Unfunded S&P Moody's Spread* Average Tax-supported Debt Pension Rating Rating Puerto Rico 225 203.7 $40 bln $24 bln BBB A3 Illinois 174 175.5 $24 bln $62 bln A+ A1 California 95 106.3 $87 bln $50 bln A- A1 Michigan 80 81.2 $7 bln $12 bln AA- Aa2 Nevada 70 68.0 $2 bln $2 bln AA Aa2 New Jersey 65 54.7 $32 bln $37 bln AA- Aa3 D.C. 60 57.3 $6.4 bln $0 A+ Aa2 N.Y. City 47 55.7 $61 bln $76-122 bln AA Aa2 Rhode Isl. 47 45.9 $2 bln $4 bln AA Aa2 Ohio 38 31.9 $11 bln $2.9 bln AA+ Aa1 *In basis points for the week ended June 17, 2011, Sources: Municipal MarketData, Moody's Investors Service, Standard & Poor's Ratings Services, local government budget reports, official statements

The roots of delusion

Small snippet from an excellent piece in the New York Times on the roots of the unfunded pension mess (emphasis mine):

No allowance if you don’t do your homework

Photo: California State Controller John Chiang

No allowance if you don’t do your homework

California’s Legislature rushed through a budget last week that they thought was balanced. The State Comptroller has ruled otherwise, and now he is withholding lawmakers’ salaries, the New York Times reports today:

California lawmakers will lose at least a week’s pay and living expenses because the state budget they passed last week was not balanced, the state controller said Tuesday.

When the Legislature approved the budget, several lawmakers praised themselves for passing it on time for only the second time in two decades. And they assumed that meeting the deadline would allow them to collect their full paychecks.

Muni swaps moving higher

Lisa Pollack of Markit in London sent over some interesting charts of U.S. municipal swaps. I put up this one which shows the market perception that risk is increasing again for some states, particularly Illinois and California. It is important to remember that these markets are thinly traded and that there is a large block of muni CDS written on California that is coming to market from the bankruptcy of Lehman Brothers.

National Totals of State Tax Revenue, by Type of Tax

The U.S. Census brings us these figures for taxes collected at the state level for 2010. You can see the substantial reliance on individual income and sales taxes (I left off some categories to fit the table in. Click through to the Census document to see more data): Quarter Total tax Individual income Corporate income Property tax State sales tax 2010 4Q $ 177B $ 61B $ 9B $ 4B $ 57B 2010 3Q $ 168B $ 57B $ 7B $ 3B $ 56B 2010 2Q $ 204B $ 72B $ 14B $ 3B $ 54B 2010 1Q $ 163B $ 52B $ 8B $ 8B $ 54B

 

Muni sweeps: Employment slightly better

We are making some headway on unemployment although some states still have substantial problems. For the larger, original version from Calculated Risk Blog click here.

Muni tax exemption “on the table”

Bond Buyer reports:

Two weeks ago, about a dozen issuer advocates met with staff members for Democrats and Republicans on the Senate Finance Committee to emphasize the important role tax-exempt bonds play in infrastructure development.

The issuer groups were told by staffers that the tax exemption of muni bonds was on the table as part of discussions on spending cuts, and that the committee may soon schedule hearings on this subject, sources involved with the meeting said.

Muni sweeps: California’s first budget veto

Some thorny action in California on the state budget:

California Governor Jerry Brown, who failed to win Republican support of tax extensions in six months of negotiations, said he’d “move heaven and earth” in another attempt after vetoing a budget without the provision.

Brown, a Democrat who pledged to solve California’s fiscal malfunctions without gimmicks, didn’t say how he’d get the Republican backing needed to pass his plan. His budget veto was the first in state history.

Rocking back and forth

Chip Barnett of Reuters brings us the weekly numbers on muniland flows:

U.S. municipal bond funds posted $172 million of net outflows in the week ended June 15, according to Lipper data issued on Thursday.

Chapter 9: Muniland’s long road to bankruptcy

There has been so much talk in muniland about massive defaults, but so far there has been very little discussion about the actual mechanism of default and municipal bankruptcy. Public entities generally try everything before resorting to default or bankruptcy. The video above is an excellent primer on the many choices that can be made leading up to the end game.

Bond defaults can happen with or without a bankruptcy. Here is Wikipedia’s definition of default:

In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant (condition) of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either unwilling or unable to pay their debt.

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