MuniLand

Make way for new muniland disclosure and market structure

The SEC released its long-awaited report on muniland disclosure and price transparency yesterday. Ten years from now, every retail investor will want to say a word of thanks to Commissioner Elisse Walter, even if only half her recommendations on transparency and investor protection are implemented. Unfortunately, her term as SEC commissioner expires June 5, 2013, which leaves her less than a year to get the ball rolling on her proposals.

The report is composed of two primary areas: The first part concerns better disclosures by municipal bond issuers about their finances, and the second addresses the market structure for trading municipal bonds. It’s the second part that contains the really game-changing parts of the report.

On disclosure, the report recommends institutional changes, such as the requirement that muniland participants adopt the standards of the Government Accounting Standards Board and make timely and audited financial disclosures. The report recommends that conduit borrowers (think non-public entities like non-profit hospitals and private colleges) be subject to the same registration and disclosure standards as corporate securities and barred from using exemptions that municipal issuers rely on. Conduit issuers happen to have the highest incidence of defaults, and investors need the greatest level of disclosure for these securities.

On market structure, Walter’s proposals attempt to fill a void, as there is almost no regulation in the muniland secondary market. Dealers usually push retail-size orders to alternative trading systems like Bonddesk, the MuniCenter or Tradeweb Retail. The report recommends that the rules be changed to require these systems to publicly disseminate the bid-offer prices for securities they have on their platforms. Furthermore, the report proposes that the MSRB could compile the bid-offer prices across these alternative trading systems into a quote feed, making the systems more like equity markets. That would be a giant step forward for the municipal markets. Here is the regulatory version:

Although there have been improvements in the availability of pricing information about completed trades (i.e., post-trade information), the secondary market for municipal securities remains opaque. Investors have very limited access to information regarding which market participants would be interested in buying or selling a municipal security, and at what prices (i.e., pre-trade information).

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:

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.

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.”

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 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:

Money doesn’t make graduates

Chart data

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.

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.

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:

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.

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