MuniLand

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

 

Big step forward in New Jersey

Drowning in a sea of future pension liabilities, the New Jersey  Senate took a big step forward by agreeing to public-sector pension changes. Reuters reports:

[Republican Governor Chris Christie] Christie reached a deal this month with New Jersey’s two top Democrats, Senate President Steve Sweeney and Assembly Speaker Sheila Oliver, that would require the state’s 500,000 public employees to pay more toward their benefits.

Muni sweeps: Important deals for CA and NJ

New Jersey municipal employees to pay more for benefits

The Wall Street Journal is reporting that New Jersey Governor Chris Christie and the state Democratic leadership have reached agreement on reducing employee benefits:

In the face of heavy opposition from unions, the Democratic leadership of the New Jersey legislature and Gov. Chris Christie reached an agreement on major cuts to public-worker pensions and benefits…

…Democrats worked into Wednesday evening to get union support, offering weaker proposals, to no avail, a person familiar with the negotiations said. Instead, top lawmakers went ahead with a comprehensive bill submitted earlier this week that requires workers to pay more toward their pensions and new hires to work longer to reach retirement age, while eliminating annual cost-of-living increases for current and future retirees, among a slew of other changes.

Muni sweeps: Muniland hits the airwaves

Change can be glacial, but it happens

Bloomberg digs a little deeper into the story of pension-fund woes and finds California municipalities are already adopting changes, with more to come:

In a survey by the League of California Cities, two-thirds of the 296 localities that responded said they’re negotiating changes in their plans. Thirty-eight percent had increased pension payments from current employees, and 20 percent had created a new tier of benefits for future hires.

Some believe the changes at the local level, particularly lower benefits for future workers, don’t go far enough.

Datapooloza

The thing I hear most often about muniland is how murky the market is. It is rather astounding that the municipal market is so little understood given its size and its effects on state and local governments and tax rates. To help shake the market up and create more transparency, I thought it would be helpful to start gathering muniland data sets for people to start playing with. Have at it, friends. Please send over any interesting findings.

Data pools

USA.gov: Statistics at the State and Local Levels

Office of Management and Budget: Historical Tables

Bureau of Economic Analysis: Gross Domestic Product (GDP) by State and Metropolitan Area

US Census: Quarterly Summary of State & Local Tax Revenue

US Census: Government Employment & Payroll

Bureau of Labor Statistics: Local Area Unemployment Statistics Map

Bureau of Economic Analysis: Federal Recovery Programs and BEA Statistics

The National Association of State Budget Officers: Spring 2011 Fiscal Survey of States

Wall Street drives a truck through mile-wide hole in the rules

The Wall Street Journal and my fellow Reuters blogger Felix Salmon have both addressed the issue of the Bank of New York Mellon giving off-market or false prices on foreign-exchange trades to one of their clients, namely California pension fund Calpers.

Morally the actions of BONY, if true, are reprehensible. But are they illegal?  Felix describes the specific problem:

BNY Mellon’s clients put in FX orders, the bank executed those orders and reported back a price. Only it lied to its clients about the price it was getting, padding its own profits while so doing. This is doubly evil: not only did the bank lie, but it lied while serving as a fiduciary to its clients, with an affirmative duty to give them “best execution.”

Muni sweeps: “Intergovernmental downloading”

“Intergovernmental downloading”

Lisa Lambert of Reuters writes about a report issued by Fitch Ratings. From the Fitch report:

As has been the case in past times of financial strain, states are rethinking the size, cost, and role of their governments as they develop solutions to budgetary shortfalls. In many cases, this process has resulted in decreased local government funding. The extent to which local governments will feel the impact of these actions varies based on how dependent they are on state funding.

As such, Fitch Ratings believes school districts and counties will experience the greatest funding reductions. This report addresses the relationship between state and local government issuer ratings and discusses some of the main ways in which state actions can affect local government finances.

Solve the real problems

Unfunded municipal pension liabilities are getting all the attention now, but it’s the burden of Medicaid and health-care expenses that are really crushing state and county budgets. In California, for example, the state will make a $2.4 billion pension contribution to Calpers and spend approximately $16 billion on Medicaid. The federal government kicks in an additional $25 billion.

I first understood this when I listened to the governors of Vermont and Wisconsin testify to the House Oversight Committee on April 14.  Governor Peter Shumlin of Vermont explained his approach to bringing his state budget into balance:

This crisis is the result of the greatest recession in history. I didn’t start with changes to collective bargaining and pensions. Our first problem is that health care costs have doubled. Our second cost driver is that corrections have doubled in 10 years.

Let’s stack the deck

Deficits at state-pension funds are the real monsters threatening municipal stability. Estimates of shortfalls at these funds range from $1 trillion from the Pew Center on the States to $3 trillion from Orin Kramer, the former chairman of New Jersey’s State Investment Council.

There are numerous strategies that individual pension-plan sponsors are using to stabilize their funds, including:

    Reducing benefits Increasing employee contributions Making additional public contributions to “top up” the fund Trying to increase returns for the fundby increasing investment risk Changing to a defined contribution plans

The excellent graphic above, provided by the Pew Center on the States, shows how many states are adopting the first and second strategies listed above. The upside of these methods is they stabilize fund assets immediately.

Muni sweeps: Education reform for Illinois

Happy Friday all!

Illinois passes landmark education reform

The Chicago Sun-Times reports that the Illinois state legislature has passed a substantial education reform bill. The legislation severely restrains the power of the teachers’ unions:

The measure continues to allow unions to strike in Chicago and the suburbs, but it imposes a requirement that school boards and unions take longer to negotiate and publicly disclose their bargaining positions before a strike can be launched.

In Chicago, no strikes could occur until as long as 120 days after the dispute goes to a special panel — and then, only if the Chicago Teachers Union has given a 10-day notice of a strike and has 75 percent of its bargaining unit members in agreement. Currently, a strike only requires a simple majority of everyone who votes.

Muni sweeps: “People learn deterrence”

Professor John Coffee of Columbia Law School, who is considered one of the foremost legal scholars in the securities area, discusses the effect of the conviction of Galleon Group co-founder Raj Rajaratnam on insider trading:

“People learn deterrence from actual vivid examples of people going to prison.  And that is what it takes in every generation to overcome the tremendous temptation to make tens of millions of dollars.”

What about the municipal market? Are there instances where dealers are receiving inside information and trading on it ahead of others?

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