MuniLand

Philadelphia held its bond investor conference last week. Although the press was not allowed to attend, the city did post the presentations on its website. Philadelphia Inquirer reporter Joe DiStefano neatly summarized the city’s political and fiscal position, which is not as rosy as the presentations make it seem:

Philadelphia hopes to borrow more than $1 billion by selling or refinancing bonds over the next nine months. For all the city’s growth around Center City, the colleges and the Navy Yard, officials face some big challenges: the lowest credit ratings of the biggest U.S. cities (low credit ratings tend to boost borrowing costs, though current interest rates are near rock-bottom levels); the financial near-collapse at the School District; the scheduled end of the sales-tax surcharge; labor negotiations and court decisions that have mostly upheld city labor union positions and reversed Nutter administration cost-cutting schemes; a thwarted real estate tax reform; stagnant office growth; high poverty in worn city neighborhoods; and more.

Philadelphia’s most important fiscal problem is its relationship with the city’s unionized employees. The city summed up the problem in the investor presentation (page 19). Note that the city has had no new agreements with three of four municipal unions since 2009, and that most employees have the right to strike.

The city’s pension fund has about 48 percent of the assets needed to cover its liabilities. To fix the pension shortfall, taxes must be raised, employees must contribute more, or both. To make a significant dent in the $5 billion unfunded pension liability, the city would need to contribute at least $200 million per year to the fund. The city has previously deferred pension contributions, and it is forced to make it up in 2013 and 2014, as seen in the gray bars below. Instead of raising its pension contribution amount after 2014, it looks like the city intends to return to the pension funding levels it had in 2012 (page 1, line 10). Essentially, it looks like the city intends to let the pension fund run down further. No one can stop it from doing this unless the state steps in.

Instead, it appears that the city intends to issue around $800 million in new money bonds this year. It will use the money that paid for pension deferral obligations to service $400 million in new general obligation bonds and $200 million in Philadelphia Authority for Industrial Development (PAID) bonds. The city will also seek to issue $200 million in Water and Wastewater Revenue Bonds to be repaid with Water Department revenues.

There is a glaring gap in regulation – called Regulation Fair Disclosure – when it comes to protecting municipal bond investors. It appears that issuers may be in the habit of giving material nonpublic information to preferred institutional investors, while making retail and non-preferred investors sit out in the cold. Exhibit number one is the treatment of media members who have petitioned to attend the City of Philadelphia bond investor day scheduled for this Thursday. The Philadelphia Inquirer wrote:

Several news organizations led by Bloomberg News are protesting the exclusion of the news media from a two-day conference sponsored by the Nutter administration to stimulate investor interest in the city’s municipal bonds.

The Inquirer has joined the protest, signing a letter to Nutter that criticizes the city for refusing to let reporters attend the conference, scheduled to begin Thursday at the Comcast Center.

Across the nation cash-strapped municipalities are considering the sale of their public-utility systems. These moves are intended to raise cash and rid the municipalities of expensive liabilities such as debt service and pension obligations. But officials considering this approach might do well to look to France and other nations that are rapidly moving in the opposite direction with a “remunicipalization” of their utility systems. In 2010, Paris, in the best known case of remunicipalization, ended contracts with the world’s two biggest water service companies, Suez and Veolia, bringing an end to their 100-year private duopoly. The reversal of a century-old practice in Paris was an acceleration of an international movement away from private control. Per remunicipalisation.org:

In the 1990s many countries privatised their water and sanitation services, particularly in the [hemispheric] South, as a result of strong pressure from neoliberal mindset governments and international financial institutions, to ‘open’ up national services.

The promises that privatisation would improve the provision of drinking and wastewater services soon faltered. Many of the privatised operations quickly began to show weaknesses as they missed targets for expanding and upgrading networks, introduced excessive tariff increases alongside connection fees which were unaffordable for low-income families. Management activities were not transparent and accountable. As a result numerous contracts with private operators were terminated often following popular unrest. Many cities, regions and even countries have chosen to close the book on water privatisation and instead embarked on remunicipalisation or renationalisation of water delivery

Mayors take out the pitchforks

William Alden of Huffington Post writes about a “testy” encounter between mayors and federal officials. The federal dollars for municipalities from the American Recovery Act have basically ended and revenues for state and local governments remain weak. We should expect to see more of this.

The federal officials on stage were speaking in broad, theoretical terms. But the mayors wouldn’t stand for that. They knew what needed to get done, they said. What they wanted from Washington was the dollars to do it.

“We should not be expecting or depending on top-down permission from the White House or Washington to have us advocate for this stuff,” said R. T. Rybak, mayor of Minneapolis, who stood up and addressed the other mayors. Earlier, [Philadelphia] Mayor [William] Nutter had complained about the seeming hypocrisy of federal lawmakers who go to ribbon-cuttings and ground-breakings, even if they never supported the legislation for those projects. Rybak heartily commiserated.

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: