MuniLand

The weakest states are stronger than U.S. banks

The weakest states are stronger than US banks

I noticed something very interesting in some research that Markit, a data provider that tracks the credit-default swap market, released yesterday: the worst U.S. municipal credits (California, Illinois and New Jersey) are considered much stronger than all the major U.S. banks save JP Morgan. New York state is considered stronger than Mr. Dimon’s bank!

Why this is especially important in muniland is that these U.S. banks write a lot of credit-default swaps insuring the debt of these large states, which seems upside-down given that credit markets view the banks as weaker than the states they insure. This raises questions about the validity of the whole muni CDS market. I’ll dig around on this issue a little more.

Heavy political support for ending municipal-bond tax exemption

Bloomberg writes about several strong political forces in favor of ending the tax exclusion from municipal bond interest payments. I still haven’t seen a definitive cost analysis of the change though. Maybe the President’s proposal to reduce the tax exclusion on muni bonds for those earning over $200,000 is a signal to Republicans that the administration is willing to negotiate the issue. From Bloomberg:

The idea of phasing out the exemption has been raised in the past year as part of a broader discussion of ways to reduce the federal deficit. A proposal in the House of Representatives by Budget Committee Chairman Paul Ryan, a Wisconsin Republican, sought an end to the break.

A report from Obama’s 2010 fiscal commission led by Alan Simpson and Erskin Bowles, which the president embraced in December, also proposed ending the exemption, Bank of New York Mellon Corp. said in a report.

Solyndra’s funny money flow

Solyndra is the bankrupt solar company that received the first Department of Energy loan under the 2009 American Recovery and Reinvestment Act. It also is notorious in that its largest financial backer, George Kaiser, was a substantial supporter of President Barack Obama in 2008 and regularly visited the White House following the election.

Many media outlets have been covering the contacts between George Kaiser, Solyndra officials, administration officials and members of Congress. A rich paper trail will no doubt yield the facts of SolyndraGate. But my interest has always been in following the money trail and trying to understand how the United States, contrary to law, became subordinate to George Kaiser’s Argonaut in bankruptcy court. I previously quoted the applicible law:

US law 10 C.F.R. §609.10(d)(13), the government should have become first in line for repayment (page 2):

Who are the “job creators?”

As the congressional supercommittee begins its budget-cutting efforts, state and local governments are worried about looming cuts to their federal grants. From Bloomberg:

In statehouses across the U.S., a budget-cutting congressional supercommittee and the sputtering economy threaten a fledgling recovery from the worst fiscal crisis in more than 70 years.

To create a more balanced approach that includes revenue increases as well as spending cuts, President Obama has proposed to raise taxes on the highest earners by reducing their tax exclusions and deductions (of which the municipal bond tax exclusion is a relatively small part).

Municipals are a small part of the American Jobs Act

President Obama held a ceremony on Monday in the Rose Garden, complete with a backdrop of teachers and law enforcement officers, to promote his American Jobs Act. The President has insisted that his proposal would be fully paid for by tax increases on the wealthy. What was less reported was that the $447 billion of proposed tax increases, Section 401 in the legislation (page 134), would not occur until 2013 and would stretch over 10 years. So under the President’s proposal there would need to be tax increases of approximately $47 billion a year from 2013 through 2023.

It’s been reported that Republicans are cool to the President’s proposal and it’s likely that they will object to paying for new stimulus programs with revenue generated in the next decade. In addition, the President’s proposal for $447 billion in tax increases will have to be added to the $1.5 trillion of savings that the Congressional super-committee will be looking for. So if the President’s proposal is embraced, the super-committee will need to find $2 trillion of savings from the federal budget over the next 10 years.

The bulk of the proposed tax increases in the President’s plan will come from adjustments in the deductions allowed for municipal interest and itemized deductions for individuals earning over $200,000 per year. This would account for about $400 billion of tax increases over ten years.

The Infrastructure Privatization Bank

The first time many heard about the United States creating a infrastructure bank was in President Obama’s Thursday speech, but the idea has actually been floating around Congress for a number of years. Former U.S. Senator Chris Dodd of Connecticut proposed the idea in 2007 with inauspicious timing. From the American Water Works Association:

In an eerie coincidence, legislation to create a National Infrastructure Bank to address the need for financing of infrastructure projects was introduced with bipartisan support in the US Senate the same day a bridge collapsed in Minneapolis.

The horrific 2007 bridge collapse in Minneapolis is often used as the poster child to promote a national infrastructure bank. In 2007 there were 75,000 other bridges in America that had the same rating of “structurally deficient” as the Minneapolis bridge; the problem continues today. The need for massive spending on our roads and bridges is well understood by everyone.

Obama proposes direct aid to local governments

Obama proposes direct aid to local governments

Among the proposals made by President Obama in his jobs speech last night was his call for the federal government to fund the costs of public school teachers, firemen, policemen and first responders fully. This appears to be the only direct cash subsidy for jobs in his plan.

The American Jobs Act, if enacted by Congress, would specifically allocate $30 billion in funds for teachers and $5 billion would support the hiring and retention of public safety and first responder personnel. Using 2010 Census data this would provide a subsidy of approximately 12% to local governments for their elementary and secondary educator’s expenses and 8% for police and firefighters. The 2009 Recovery Act allocated $47 billion to local governments for teacher salaries so this proposal is about 40% less.

President Obama’s plan also includes “$25 billion investment in school infrastructure that will modernize at least 35,000 public schools.” While sounding good it’s important to point out this would give each school about $715,000 in funds for renovations. It’s helpful but not really a substantial amount.

The President’s argonaut

The FBI conducted a dramatic raid today on a California solar company, Solyndra, that received a loan of $527 million from the Federal Financing Bank (FFB), a subsidiary of the U.S. Treasury. The FBI raid followed the filing of Solyndra’s bankruptcy yesterday.

There are numerous parts of this story that don’t fit together well and suggest favoritism and political influence. Two executive branch agencies and a congressional committee are looking into the activities of the firm and their connection to the White House. The FBI raid was jointly conducted by the Department of Energy’s Office of Inspector General and the FBI. The House Energy and Commerce Committee’s investigative panel will hold a hearing on September 14.

Like many political scandals this one involves influence and money. There is a lot to sort out here.

Jobs or infrastructure?

America is a high-energy society — that is, we consume a lot of energy. According to Wikipedia the United States has long been the world’s largest producer and consumer of electricity, with a global share in 2005 of at least 25%. This consumption is a primary driver of growth. Energy is our economic blood.

The Energy Information Administration tracks and maps our current and potential energy sources. California is a big importer and converter of petroleum, which you can see in the excellent map above via the purple marks. Dependence on imported oil is something we need to phase out for a number of economic, political and environmental reasons.

The other thing that the map shows is a vast swath of California that is ideally suited for solar power (see the yellow shading in the southeastern area). It’s bloody hot out there, and that heat can create electricity.

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