Massachusetts sets the bar for transparency
For openness in finances, debt management and budget process, Massachusetts is the gold standard among states. The legislature and executive branch have collaboratively embraced a five-year budgeting process and committed to sharing the results with taxpayers and the public. Because of the state’s efforts to reach out to the investing community, I predict that its transparency will lead to lower borrowing costs and more stable funding sources in the future. The state is rated AA+ by credit rating agencies for creditworthiness, but I’ll assign it the highest rating, AAA, for transparency.
Several weeks ago, the state treasurer, Steven Grossman, launched a new Twitter account (@BuyMassBonds) that keeps the public informed about new financial filings and bond offerings. It’s a model of excellence for muniland in terms of keeping municipal bond investors informed through social media. Here is a recent tweet about an upcoming bond issue, the Massachusetts Water Pollution Abatement Trust State Revolving Fund Bonds:
Love clean H2O? Mass Water Trust is selling $230mill in bonds that fund it on Tues/Wed! Learn more at buymassbonds.com #muniland
— Buy Mass Bonds (@BuyMassBonds) May 25, 2012
On the state’s Debt Management Department website, municipal bond investors have rapid and easy access to:
- Current Bond/Note Offerings
- Forward Bond Sale Calendar
- Ratings Reports & History
- View How Your Bonds Are Trading
- Official Statement Archive
The Municipal Securities Rulemaking Board’s EMMA site is the official document repository for the municipal bond market, but the Massachusetts site is streamlined and oriented solely toward its bond investors. The site makes finding the state’s bond information very simple. California does a good job of providing information about outstanding bonds, but the amount of information it provides doesn’t come close to what Massachusetts offers. I’m sure that California could broaden its pool of bond investors with an information flow as strong as that of Massachusetts.
When national and state data diverge
In our turbulent times, middle-income households are falling behind and national data depicts an economy that’s stagnating. But tax revenue data for many states hints that some earners have had substantial increases in their incomes.
Let’s start with the national numbers. There has been a lot of reporting this week about median personal income dropping since the official end of the recession in June 2009. Robert Pear wrote in the New York Times:
Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent.
If we isolate the period between June 2009 and June 2011, household income fell 3.5 percent nationally, or approximately 1.75 percent per year, according to the Sentier Reseach study quoted by Pear. This income reduction syncs up pretty closely with consumer expenditure data from the Bureau of Labor Statistics that was reported in September. From the BLS:
Average annual expenditures per consumer unit fell 2.0 percent in 2010 following a decrease of 2.8 percent in 2009, the U.S. Bureau of Labor Statistics reported today. While spending fell in 2010, prices for goods and services increased 1.6 percent from 2009 to 2010, as measured by the CPI.
So household incomes are down, spending is down and inflation is up marginally — it is an economy in stall speed for most Americans. What I’ve been watching and wondering about, though, is why state tax collections are making such massive gains. By focusing on the aggregated national numbers, a lot of observers have failed to notice how robustly state tax revenues are recovering.
Disclosure is the beat
Disclosure is the beat
On Tuesday at the SIFMA Muni Bond Summit in New York, much of the discussion by bond market participants related to transparency and disclosure issues. A lot of this was in response to new requirements in Dodd-Frank, but there was also an acknowledgement that many problems in the crisis of 2007-2009 came from a lack of information and data in many parts of the market. For example small municipal issuers had more trouble accessing the bond market to issue new bonds if their public reporting was deficient or out of date.
The heavy hitter of the bond summit was SEC Commissioner Elise Walter, who appeared by video link and broke news that the SEC would not ask Congress to overturn the Tower Amendment, a 1975 law that bars the SEC from interfering in the fiscal affairs of state and local governments. She discussed current legislation that would skirt the Tower Amendment and give the SEC authority to require municipal issuers to file disclosure, though it would grant no authority to review and approve those filings. From the Bond Buyer:
Walter repeated her call for Congress to increase the SEC’s authority so that it could set “baseline disclosure requirements.”
The Tower Amendment to the Securities Exchange Act of 1934 prohibits the SEC and the Municipal Securities Rulemaking Board from requiring muni issuers to file pre-sale disclosure documents.
A draft bill being circulated by Reps. Mike Quigley, D-Ill., and Patrick McHenry, R-N.C., however, would authorize the SEC to require issuers to disclose primary and secondary market bond documents directly or indirectly through dealers or others. It would also give the commission authority to direct the content and timing of those documents.
She also said that the SEC should more broadly examine the practices of the bond markets. The Bond Buyer reports:
“People who have not previously been tuned into what that board is doing really should pay attention,” [SEC Commissioner Walter] said.
Separately, Walter said the SEC’s muni hearings revealed “certain softnesses in practices.”
She said state and local governments need better training in municipal disclosure and better disclosure practices. In addition, she noted there are significant conflicts of interest that affect the pricing of swaps, as well as indications many muni officials do not understand swaps.
Walter said she also wants to persuade the SEC to take a “long-term, deep-dive look” at the fixed-income market and its current structure, but added that such a study and any resulting recommendations may not be completed until after she leaves the commission.
Walter was sworn in as commissioner on July 9, 2008. Her term expires in June 2012.
I’ll write more about the issues raised at the bond summit over the next few days. Although much of what was discussed was complex, the conversation helped illuminate many of the market moves that don’t necessarily make sense on the surface. Many of these issues are the bedrock of a more open and stable market structure.
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.
Several economists are out lauding the large impact in gross domestic product the plan will have. For muniland the proposal is helpful but not earthshaking. Of much greater fiscal importance will be the changes the President and supercommittee propose for Medicaid. Stay tuned.
State tax collections up 11% for 2Q over last year
Although the national economy continues at stall speed, state tax collections are rocketing ahead. From the Rockefeller Institute:
The mortgage crisis crusader
I dialed into a press conference today held by U.S. Congressman Brad Miller, a Democrat from North Carolina. He wanted to share his views on the suits filed by the Federal Housing Financing Agency (FHFA) against 17 banks over recovery on fraudulently misrepresented subprime mortgages. FHFA is seeking to cover losses on approximately $200 billion of mortgages purchased by Fannie and Freddie prior to their takeover by the government in the summer of 2008. Taxpayers have already covered $140 billion of FHFA losses from these bad mortgages and the amount is expected to go much higher.
The topic is pretty far afield from my regular Muniland content but I had met Congressman Miller several times on Capitol Hill when I lead Riski, the open source financial reform project, and I’d always been very impressed with his forward-looking efforts on the housing crisis. Once you are around Congress for a while it’s easy to see what special interests various members of Congress are promoting. Congressman Miller seemed genuinely independent and interested in America as a well-governed and fair nation. Sad to say these are not common traits on the Hill.
Congressman Miller is not new to the mortgage issue. In March 2007 he penned a letter to Forbes magazine about the scourge of predatory lending and its devasting effect on families:
The recent spike in defaults in subprime mortgages has caused a hiccup in the markets, but it is catastrophic for families now facing the loss of their home to foreclosure. Most mortgages help families build wealth, and the equity they build in their home becomes the bulk of their life’s savings. Predatory mortgages steal wealth from homeowners. Predatory mortgages are most often refinances.
Predatory lending and fraudulent home loans are the bulk of the assets that make up the securities that FHFA are disputing and that have frozen the financial system. This glut of bad loans has weakened the economy as families lost their homes and equity; neighborhoods have empty properties; and banks are stuck with billions of dollars of unsold properties on their books.
Because the bulk of these bad mortgages are concentrated in a handful of large banks there is a general sense that bank overseers have been practicing “regulatory forbearance” and that banks may not have adequately reserved for potential losses. In his press call Congressman Miller said that regulators have been very aware of legal liabilities and had specifically banned Bank of America from reinstituting their dividend after the second round of stress tests earlier this year.
I posted a bank scam I just was victim of on Rep. Miller’s FaceBook site. VISA provides a service for a fee called VISA UPDATE. What the service does is to take your bank-issued VISA card–credit or debit–and automatically updates the card number and expiration date to merchants when your card is either expired or otherwise invalid. I had to get a new Visa debit card from my bank in July because of fraudulent charges. In September, T-Mobile was able to debit my account with my new card and I never authorized them to use this card. Their customer support confirmed that my card information was updated by “an automatic process.” I am still working on how to protest this. I am awaiting paperwork from the merchant; and I am trying to contact VISA Updater. This is a truly violation of our privacy and clearly needs to be changed. Check your cards…what do you have in your wallet?
Money doesn’t make graduates
It is hard to make comparisons between different states’ data on public schooling because each one is faced with unique conditions. That said, the data above is pretty striking. The graph shows the public school dropout rate — the percentage of students dropping out annually — and the amount of public money spent per student per year, in thousands of dollars. You can see that there is not a lot of correlation spending and the dropout rate. Spending more doesn’t educate more students.
Of course this data only speaks to the dropout rate rather than educational achievement. So we can’t see the upside to higher spending. It’s always helpful to have bigger budgets but public schools, like all parts of muniland, will need to dig deeper and achieve more with less money. I’m confident that we can improve our educational system in the face of budget tightening.
I’m interested in all comments and references on the topic please leave them below.
Further:
US Department of Education: Public high school graduates and dropouts: 2007-08
For all the money and thought and resources we’ve poured into schools in impoverished neighborhoods, we’ve done little to raise the trajectory of those growing up in these communities. Brill believes that’s because of racalcitrant teachers’ unions. I believe it’s considerably more complicated than that.
http://blogs.reuters.com/great-debate/20 11/08/24/should-we-really-expect-schools -to-cure-poverty/
Lending by banks is running ahead of the law
Thou know’st that all my fortunes are at sea; Neither have I money nor commodity To raise a present sum: therefore go forth; Try what my credit can in Venice do
Antonio, The Merchant of Venice
Sovereign borrowing from powerful banks is centuries old. Venice was the Wall Street of the early Renaissance. The banks located in the watery grandeur there loaned money to faraway kings and traders. Kings didn’t regulate banks but they did often force repayment by raising an army.
Our government reaches far beyond the actions of kings, who merely wanted their money back, and attempts to regulate banks. The government borrows and it oversees. It’s a big effort as the new financial reform law, Dodd-Frank, more strictly regulates the capital adequacy of banks and enforces “fair dealing” and transparency. Reining in the practices of banks and securities firms is hard work but it’s vital to protect our public institutions, taxpayers and investors. Well regulated banks and the rule of law cancels the need for armies to be raised to have a functional financial system.
Cities and states use banks to raise money to build schools and sewer systems. This is primarily done through the municipal bond market which is becoming a well regulated area of the financial system.
Increasingly, though, public entities are borrowing directly from the banks in lieu of issuing bonds. New Jersey and California recently took out multi-billion dollar loans from banks instead of using the debt markets. This illustrates how powerful the banks are that they are big enough to lend to state as big as California. The problem is that this is done in the dark with no requirement for disclosure or fair dealing by the banks. The practice of direct lending by banks is running ahead of the law. And it poses two problems.
The first problem is that banks and securities firms do not have the same standards for “fiduciary” care imposed upon them by the law when they organize “bank loans”. The rules in this market, set forth by the MSRB, have historically related to publicly issued “municipal securities” not privately organized bank loans.
Regulator wants to require “fair dealing”
Regulator wants to require fair dealing
In a far-reaching proposal, the Municipal Securities Rulemaking Board (MSRB) has asked the Securities and Exchange Commission for permission to impose new rules to protect municipalities. These rules would vastly expand the disclosures that dealer underwriters are required to give their municipal clients who issue bonds.
MSRB’s executive director Lynnette Kelly Hotchkiss said in a statement:
Dodd-Frank explicitly requires the MSRB to protect municipal entities. This gives us the ability to establish detailed requirements for underwriters and make important information more readily available to state and local governments that sell bonds.
The rules would require disclosure of “conflicts of interest” to municipalities before they enter into contracts to issue bonds. Specifically the new rules would require banks to:
- disclose all “material risks” associated with bond financings
- disclose when floating-rate securities are coupled with interest-rate swaps
- disclose potential conflicts of interest
- disclose incentives paid to recommend transactions
- disclose payments they may get from other parties in a deal
- disclose if they have derivative contracts that only pay off if the borrower defaults
The blog Dodd-Frank.com points out the simple effect of the proposed rules:
Geeks for democracy
Geeks for democracy
“How do you enable people to have a louder voice within their communities?” asks Conor White-Sullivan. He answered his own question by developing Localocracy, a platform that hosts community-focused discussion boards seeking participants who are registered to vote and who use their real names. Localocracy gives citizens an opportunity to generate discussions to influence each other, their government and journalists.
Conor is one of 16 winners of “Champions of Change,” a contest the White House hosted in June that showcased the potential of Web apps that utilize data sets made available by federal, state and local agencies. Developers who were chosen to attend created applications that enable users to find and organize pick-up games at public facilities, guide citizens through zoning ordinances and direct parents to child-friendly locations, as well as numerous other services. See more of this wonderful project at GovTech.com.
Jefferson County part 6
According to the Birmingham News the court-appointed receiver over the Jefferson County sewer system, John S. Young, announced late Wednesday that the bondholders had a counter-proposal for the county commission. This was a few short hours before the commission’s 1:00pm meeting today to decide to declare bankruptcy.
Mr. Young had not shared the proposal with the commission as of last night, according to county officials. But he was quick to speak to the press. I think Mr. Young should be communicating with the debtors rather than the media. The time is long past for this kabuki. All parties in this transaction must deal in the highest standards of good faith.
Decades-long infatuation with financing our spending
Decades-long infatuation with financing our spending
Sheila Bair, who served as Chairman of the Federal Deposit Insurance Corporation for five years through the financial crisis, has completed her term. In a weekend op-ed in the Washington Post, she urges America to rid itself of its addiction to financing consumption and “growth” with debt. This is the core requirement for America to become financially stable again and to return to “real” growth. From Bair’s Washington Post oped:
Now that I’m stepping down, I want to sound the alarm again. The common thread running through all the causes of our economic tumult is a pervasive and persistent insistence on favoring the short term over the long term, impulse over patience. We overvalue the quick return on investment and unduly discount the long-term consequences of that decision-making.
Our decades-long infatuation with financing our spending through ever-growing debt, in the private and public sector alike, is the ultimate manifestation of short-term thinking. And that thinking, particularly in business and in government, is actually getting worse, not better, as we look for solutions to put our economy on a sounder footing.
Will pension transparency shake muniland?
Joan Quigley of the Bond Buyer is reporting on how proposed guidelines to place unfunded pension liabilities alongside other liabilities has shaken up municipal governments. It’s really just a proposal to clean up balance sheets and get the real numbers out where people can understand them. Many governments have buried these giant, problematic numbers deep in the footnotes. This proposal from the Governmental Accounting Standards Board would force the dirty laundry into the sunlight. From the Bond Buyer:
Currently, many governments disclose pension information in the footnotes to their financial statements and generally only report the contributions they are required to make in a given year, as well as what they actually paid.
“Recognition in the financial statements alongside other liabilities such as outstanding bonds, claims and judgments, and long-term leases, will clearly put the pension liability on an equal footing with other long-term obligations,” the board said in an overview released late last week.
Pennsylvania will open the kimono
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Resident Muniland expert
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