MuniLand

A little of this, a little of that

Minnesota reaches a deal

Minnesota agrees on a budget, ending a two week shutdown. But is it just accounting tricks? From the NewsObserver.com (emphasis mine):

Minnesota Gov. Mark Dayton and top Republicans agreed Thursday to end a budget impasse that prompted the longest state government shutdown in recent history.

Dayton said the state government would be back in business “very soon,” but he didn’t say exactly when.

The deal to erase a $5 billion deficit came after a big sacrifice from Dayton, who made new income taxes a central campaign message last year and the centerpiece of his budget. He dropped that and said he would accept – with conditions – an offer the GOP put forward on the eve of the shutdown to bring about $1.4 billion into the budget by delaying payments to schools and selling tobacco payment bonds.

Life after QE2

Some market insiders see a downgrade of the USA’s AAA rating as unlikely. Here’s what Daniel Berger, senior analyst at Thomson Reuters Municipal Market Data wrote in a client note:

Is muniland hiding its borrowing?

Several financial-media outlets ran stories today about state and local governments ramping up their bank borrowing in lieu of issuing municipal bonds. Often this is depicted as “emergency” borrowing to fill thin periods of cash flows. The story of California’s possible “bridge loan” to tide over their current “bridge loan” in Bloomberg was cast this way.

But other media accounts suggest this bank borrowing is growing beyond emergency needs and banks are actively seeking it. Michael Corkery of the Wall Street Journal reports:

Teams of bankers are blanketing the country pitching transactions like the one in Orange County, as well as traditional loans, to government officials, people in the industry say.

Transforming the social order

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity…”

A Tale of Two Cities by Charles Dickens

I view the new proposals for “social impact bonds,” financial instruments that try and address the problems of society’s underclass, as the latest iteration of “the epoch of belief” that Dickens was writing about. These ”social impact bonds” (SIBs) are monies raised from private investors and charities that pay rich annual yields and return principal only if prescribed social goals are met.

The pilot program for social impact bonds is an effort to reduce recidivism at the UK’s Peterborough Prison. The British Parliment describes the project:

If you’re bad, you pay

If you’re bad, you pay

Ever wonder why fixed-income investors are often called “bond vigilantes?” Just as a banker charges a homeowner with a bad credit history a higher mortgage rate, bond investors make borrowers pay more if they have a heavy debt load and weak revenue sources. Investors use higher interest rates to crack down on borrowers; the interest rate is higher because there is more risk.

I thought it would be helpful to visualize the credit quality data that Thomson Reuters Municipal Market Data regularly publishes for states and large cities. The higher the interest rate, the greater the perceived risk in lending to these public entities.


The chart above shows the additional interest rate that a public entity pays over the benchmark AAA interest rate. As you can see, Puerto Rico is far and away the riskiest borrower.

America will never recover when China builds our infrastructure

End game for America’s jobs

America will never recover if we outsource everything, including our public infrastructure. Bloomberg made the excellent video above about California outsourcing the construction of a portion of the San Francisco Bay Bridge to Shanghai Zhenhua, a Chinese firm. Shanghai Zhenhua is assembling the section and will then ship it to California for installation. The state is supposedly saving $400 million with this move. The workers at the Chinese facility are making $12 dollars a day.

In times of fiscal stress it’s easy to understand why public entities are trying hard to cut costs. But this “cost cutting” is really just off-shoring American jobs. Something has to give — we can’t recover without creating American jobs. It’s our choice, and I choose spending more and creating jobs at home.

Background on the project from Bloomberg.

Hungry market gobbles up new municipal bonds

Bond Buyer reports:

The week’s new inventory can’t seem to reach the muni market fast enough. One trader in Florida said there is little product anywhere. “There are fewer bonds than usual,” he said. “It’s hard to find anything to sink your teeth into.”

Decades-long infatuation with financing our spending

Decades-long infatuation with financing our spending

Sheila Bair, who served as Chairman of the Federal Deposit Insurance Corporation for five years through the financial crisis, has completed her term. In a weekend op-ed in the Washington Post, she urges America to rid itself of its addiction to financing consumption and “growth” with debt. This is the core requirement for America to become financially stable again and to return to “real” growth. From Bair’s Washington Post oped:

Now that I’m stepping down, I want to sound the alarm again. The common thread running through all the causes of our economic tumult is a pervasive and persistent insistence on favoring the short term over the long term, impulse over patience. We overvalue the quick return on investment and unduly discount the long-term consequences of that decision-making.

Our decades-long infatuation with financing our spending through ever-growing debt, in the private and public sector alike, is the ultimate manifestation of short-term thinking. And that thinking, particularly in business and in government, is actually getting worse, not better, as we look for solutions to put our economy on a sounder footing.

Muniland is tightening up the ship

Muniland has always been a sleepy corner of the financial markets. This all changed last winter when, from out of the blue, dire predictions of the market’s imminent collapse were made on national television. Since then, there has been a lot of uncertainty about the stability of state and local governments’ revenues and their ability to support their debt loads. States took steps to tighten up the ship and get ahead of the problems. Now the data is starting to come in, and although muniland has many problems to address, matters look much better than were predicted.

Sanity Prevails On CNBC

I took this headline from a note published this morning by Daniel Berger of Thomson Reuters Municipal Market Data. Daniel says:

Yesterday afternoon we were pleased to see CNBC finally air an articulate case about the value of municipal bonds. On CNBC’s Fast Money afternoon show we saw Alexandra Lebenthal present an intelligent case that municipal bond investors can find value in long-term municipal securities.

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.

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.

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