States receive crumbs from mortgage settlement
The $25 billion mortgage-fraud settlement that was announced yesterday came after 18 months of coordinated action by the Department of Justice, the Department of Housing and Urban Development and 49 state attorneys-general. The settlement is carved up so that homeowners and governments at the state and federal levels each receive some compensation. Given the scale of national losses, it’s a tiny penalty for banks that engaged in egregious servicing and foreclosure practices, and it will do little to repair the widespread economic damage.
More important for states, the amount they are set to receive far from covers the shortfalls they will suffer from lower property tax collections, which are pegged to property values.
A little background: Municipalities and school districts collect substantial revenues from property taxes, and they benefited from inflated housing values during the boom. With higher property tax collections, they ramped up municipal services. Starting in the first quarter of 2010, property taxes began to flatten, but property appraisals did not, as they lag behind property values by several years. We are just now starting to experience what could be a big decline in property tax collections.
National residential real estate values have dropped from $22.7 trillion in 2006 to $16 trillion in 2011, according to the Federal Reserve. The Tax Foundation has calculated that the median nationwide property tax is 0.97 percent of home values. If residential real estate values were fully appraised at lower levels, losses to local and state governments would equal $60 billion a year.
The ability of communities to raise property tax rates to make up for this shortfall will vary tremendously. New Jersey, for example, already has the highest rates in the country and is seeking ways to reduce this tax burden.
Is Meredith Whitney a ratings’ driver for CNBC?
It’s more than a little frustrating that CNBC continues to feature equity analyst Meredith Whitney as she talks about municipal bonds over and over again. I’m not really sure she evens knows what she is talking about.
Matt Fabian, managing director at Municipal Market Advisors, shined on this same topic in this interview with Tom Keene on Bloomberg Television in May. Matt Fabian of MMA or Daniel Berger of Thomson Reuters Municipal Market Data would both be far superior in terms of talking accurately about muniland. Both have analyzed muni bonds for over a decade and can talk about the unique conditions each issuer is facing. Neither of them work for a sell-side firm, so they would not be arguing for issuers that they favor or that their firms hold inventory in.
Here is what the National League of Cities said in May about Ms Whitney (emphasis mine):
“In a piece that reads more like political commentary than market analysis, Whitney claims that fiscal pressures on states threaten economic recovery. But, this is hardly news. Over the last several years, NLC, a host of state-focused groups … have been calling attention to state-local fiscal pressures requiring layoffs and service cuts, and the potential drag on the economic recovery.
“But, fiscal pressure from cyclical revenue declines and pension liabilities does not add up to Whitney’s doomsday predictions of sizeable defaults and social unrest.
“Whitney’s op-ed is an example of the misinformation permeating the national dialogue about state and local finances. She’s in good company, as poorly constructed arguments about state-local insolvency have, in recent months, riddled airwaves and policy debates: confusion over structural deficits versus budget shortfalls, a lack of understanding of local municipal budgeting processes that place debt service payments above all else, and a near-total lack of understanding of the difference between municipalities with general obligation bonds as opposed to revenue bonds and conduit bonds.
“Once again, Whitney’s ‘call’ is a distraction from the real story, which is about the difficult choices local and state leaders are making about delivering services. There are real implications when the wrong information is pushed and repeated over and over in the media for ratings, report-sales, and celebrity status.
One of the real and substantial implications occurred last November when Ms. Whitney spoke on “60 Minutes” and the muni markets sold off. This caused losses to investors and raised borrowing costs for muni issuers.
Kate Marshall, the State Treasurer of Nevada, had even more pointed criticism of Ms. Whitney. CNBC itself reports:
I think the simple answer to your question is that they believe she may have a point or at least they want to get people talking about the issue and expressing opinions. I don’t think they have been one sided in their presentations. As for the issues, even if we close our eyes and stick our heads in the sand, the problems will not pass. Much of the pension liabilities are now turning into cash outflows as baby boomers are retiring in large numbers so if we are at this percent or that percent, not sure if it would matter.
8 weakest U.S. states
According to the credit rating agencies and the bond markets, these are the 8 states with the weakest credit profiles. These states may be weak because their debts are too big, because their economy is flagging or because they haven’t adequately funded the retirement of their employees. If this were a school, these would be the students sitting in the back of the class. Maybe it’s time for these states to do a little more homework.
We start with the weakest Puerto Rico, a United States commonwealth.
Rearranging the letters, and adding, say, Arkansas, you get, hmmmm, DAMNN PRICs. lol
Muni sweeps: How much job creation?
Job creation or program pass-through?
The Congressional Budget Office has published a new report entitled “Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from January 2011 Through March 2011.” It makes some large claims about how many jobs stimulus funds have created:
Various recipients of ARRA funds (most recipients of grants and loans, contractors, and subcontractors) are required to report, after the end of each calendar quarter, the number of jobs funded through ARRA. The law also requires CBO to comment on those reported numbers.
During the first quarter of 2011, recipients reported, ARRA funded more than 571,000 full-time-equivalent (FTE) jobs.
The CBO figure of 571,000 full-time-equivalent (FTE) jobs is slightly higher than the total non-farm jobs reported by the Bureau of Labor Statistics of 524,000 (see above chart). Something doesn’t add up!
Note how California distributed their Recovery Act funds. Many of the dollars were just “passed through” to support Medicaid and unemployment insurance in California. I’m not sure how to account for job creation for passing through funds.
‘Enormous Buying Opportunity’
Who were buying the municipal bonds that sold off in the winter panic? Mainly smart investment advisers. Heartland.org has an interview with one of them — Rick Ashburn, chief investment officer for Creekside Partners LLC, in Lafayette, California:
Let’s give Meredith some credit
Everybody beats up on Meredith Whitney for her muniland panic call.
Yesterday she doubled down on her prediction of “hundreds of billions of dollars’ worth” of municipal-bond defaults.
Whitney was speaking on a panel, Reading the Tea Leaves: What Lies Ahead for Financial Markets?, at the Milken Global Conference.
I want to give Whitney some credit.
Whitney has a very good macro view of the U.S. economy. At the Milken conference she said that housing has contracted for four consecutive years. States have spent at a 30% higher CAGR rate than consumers.
She says that 12% of the U.S. GDP comes from state and local government expenditures.
“States have been spending at two-and-a-half times their tax receipts…”
What does she mean by ‘States’? A number of state governments have constitutional or legislative prohibitions against deficit spending. But that is not true for municipalities, which have seen the state legislatures push responsibility for unfunded mandates down on them.
Muni sweeps: Riding the Federal cash flow
It’s an important week for the fixed income markets: Ben Bernanke, the chairman of the Federal Reserve, will hold his first press conference on Wednesday.
Bernanke joins his European Central Bank counterpart Jean Claude Trichet in the practice of fielding questions after the central bank announces its policy stance.
Pundits and bloggers are weighing in with questions and Reuters reporter Kristina Cooke (twitter handle @kristinacooke) is encouraging her followers to tweet her questions for the chairman.
Fixed markets are all about the linkages between the rate on the 10-year Treasury note and other classes of bonds so this is an important event for muniland too. Stay tuned.
Riding the Federal cash flow
Bond Buyer writes today about a large deal coming to market this week for the Broad Institute in Cambridge, Massachusetts. (Shown in photo).
The deal has an exceptional pedigree but primarily relies on federal funds for cash flow. In these times of excessive Federal debt and deficits this is an interesting funding approach.
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Resident Muniland expert
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