MuniLand

Kentucky sells assets on eBay

The Lexington Herald Leader reports that Kentucky Governor Steve Beshear has put up two aged planes from the states fleet of 15 for sale on eBay.

We laud the governor for rationalizing states assets but think his press conference is a little over the top considering the size of the state’s estimated budget shortfall for 2012 is $780 million.

Lexington Herald Leader says the Smart Government Initiative of the Office of Procurement Services estimates that $7.2 million has been saved through contract renegotiations and rebidding.

The cuts that are impressive were when the Governor, Lt. Governor, cabinet secretaries and senior staff took 10 percent pay cuts in 2009 and 2010. Now that is real leadership.

The planes, and a big assortment of pocket knives,  may be viewed at the Division of Surplus Property’s eBay store.

Are we looking in the wrong places?

John Carney of CNBC argues for the possibility of a black swan event for muniland.

He’s right about unknown risks but I think he is looking in the wrong place.

He doesn’t mention municipal derivatives in his analysis. I mean interest rate swaps not municipal credit default swaps.

I forget that the last recession was in the mid 2000′s.

We had a short, intense credit boomlet in between that and the crash of 2008.

The hangover from the housing and financial bubble has been tremendous.

Deficits, caused by the financial crisis,  are still a serious problem in muniland.

Remember that states must balance their budgets annually.

Here is a spreadsheet with the shortfall numbers for fiscal year 2012 from the Center on Budget and Policy Priorities.

The total shortfall for all states in 2012 is ~ $112 billion or approximately 17.6% of projected budgets.

Several of my Reuters colleagues sent over this graph. My editor said “it’s nice but doesn’t give much historical context.”

So let’s start with the big picture.  From Publicbonds.org:

In 1988, a study by Enhance Reinsurance Co. looked at historical patterns of municipal defaults from the 1800s to the 1980s and concluded that municipal defaults usually follow downswings in business cycles and are also more likely to occur in high growth areas that borrow heavily.

Following the 1873 Depression, when more than 24 percent of the outstanding municipal debt was in default, the greatest number of defaults occurred in the South, the fastest-growing region at the time.

It’s a glorious spring day in America and everything continues to bounce along. A little progress here and some fall back there. Oh and that unpleasant negative ratings watch on United States debt from Standard & Poor’s. Yeah that is not good. Welcome to a new week in muniland.

The sun sets over a pond in Rogers, Arkansas, November 8, 2009. REUTERS/Lucy Nicholson

Increasing the muni investor pool:

Marketwatch has an article which frames the proposed Wyden and Coates federal legislation for muni tax-exemption as having the effect of shrinking the investor pool.

She may not be the prettiest girl but at least she’s out there

The home of the famous Mummer’s parade struts its stuff for the bond markets.

The city of Philadelphia was named tops for transparency in a University of Illinois at Chicago survey of cities providing investors with financial information online.

Every municipality, like every person, has problems. Hiding them doesn’t instill confidence in investors. I’m glad to see Philly and other cities letting it all hang out. From the the Philadelphia Inquirer:

Congressman Darrell Issa’s Committee on Oversight and Reform meet today on state and municipal debt.

The hearing was really a dressed up fight over municipal pensions and collective bargaining rights.

The concern is that bond investors, worried about unknown pension liabilities, will increasingly require more yield for the risk of owning municipals. And some think a  solution is to remove the current form of guaranteed pensions.

We are a nation of states with differing political cultures and leaders.  Loud leaders and quiet leaders.

The loud ones get most of the attention. Do financial markets reward the loud ones too?  Not always it seems.

New Jersey Governor Chris Christie gets a lot of attention for his approach to governing. And has garnered a lot of political interest for his full-on attack on his state’s municipal unions. See the video above for an example.