MuniLand

Bridges, budgets, bonds

Aug 26, 2011 19:13 EDT
Cate Long

We have everything we need to battle Irene

Hurricane Irene, an enormous storm of unimaginable power, is bearing down on the east coast. Although there could be loss of life and substantial property devastation, America has more than enough resources to meet her and survive mostly intact. Unlike third-world countries we have the people, equipment and money in reserve to clean up. But it maybe the human locusts that follow in her wake that are hardest to battle against.

Irene is expected to make landfall in North Carolina, but it is the northeastern states that have made extraordinary efforts to evacuate the population and shut down public transportation systems. The corridor stretching from New Haven, CT to Atlantic City, NJ is one of the most densely populated areas in America; 55 million people are currently preparing for this large natural disaster.

Cities, counties, states and utility companies are on standby. Funds have been reserved to respond to emergencies and the federal government has a large department, the Federal Emergency Management Agency, ready to provide local assistance. The public sector is ready to go.

But in the aftermath of disasters, bad things happen and authorities are often not around to help out. I’m sure that we will hear stories of looting and fraud following the hurricane — it generally happens after every natural disaster. The AP reported the following after tornadoes swept through Birmingham, Alabama in April:

Looters have carried off televisions, power tools and prescription pills. Elsewhere, unscrupulous businesses are charging double for a tank of gas or jacking up the cost of a hotel room. Authorities also warn of construction workers who leave with the cash before opening their tool kit and the danger that identities could be stolen off wind-blown documents.

Though the region has seen similar scams after hurricanes and the Gulf oil spill, the speed of flimflam men this time around has surprised authorities and survivors.

“We have received a surprising amount of calls,” said Noel Barnes, consumer protection chief for the Alabama attorney general’s office. “We’re not going to allow people to further victimize our citizens.”

Some residents are packing firearms to scare off the lowlifes. In Pleasant Grove, Ala., Mike Capps was guarding his parents’ house over the weekend with an M-1 carbine rifle.

Aug 26, 2011 12:33 EDT
Cate Long

Where are muniland’s cross-over buyers?

It’s an odd moment in muniland. There is an irregularity in the pricing of municipal bonds. Generally muni bonds have a lower yield than U.S. Treasuries because munis give investors a tax advantage. Investors use them to shield their investment income since coupon payments on municipal bonds from their state of residence are generally triple-tax-free — that is, they are not taxed at the local, state or federal level.

In this Bloomberg video Timothy Pynchon, a portfolio manager at Pioneer Investment Management, talks about how 30-year muni bonds are trading at 105 percent of the value of the 30-year Treasury. These bonds would usually trade at less than 100 percent of Treasuries because of their tax advantages.  This is a very unusual situation and would usually attract so-called “cross-over” buyers from other parts of the bond market. In the video, Cumberland Advisors’ David Kotok suggests that since U.S. Treasuries are mispriced (too expensive with low yields as a result of a flight to quality) it’s having a carry-over effect for long-dated municipal bonds. Basically the long end of the municipal bond market has moved away from its normal pricing relationships and is cheap relative to Treasuries.

Further:

Bloomberg: Colorado Refunds Transport Debt as Yield at Lowest Since 1994: Muni Credit

Bond Buyer: Muni Funds See Outflows for Fifth Straight Week

“What we had here was a wholly corrupt situation”

Aug 25, 2011 18:58 EDT
Cate Long

Yet another Bridge to Nowhere?

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Alaska got a lot of attention several years ago when members of Congress belittled and then stripped the funding for the infamous “Bridge to Nowhere.” You would think the issue would have faded away as quietly as the Alaskan wildnerness, but the state’s penchant for building bridges to places with few inhabitants has actually been reborn in the Knik Arm Bridge Project, or the Bridge to No Where Part 2. And this time it’s not only members of Congress who are skeptical– locals are pushing back on this new project with lots of facts.

I’m not Alaskan, so it’s not my place to argue whether building a two-mile bridge to an undeveloped area would spur economic growth in the future. But I can look at the proposed public-private partnership that’s financing the project and say that Alaskans will bear all the financial risk and private participants will get a great part of the gain. As was said frequently during the financial crisis, the losses will be socialized and gains will be privatized. This is two-mile long extension of that maxim.

After reading a number of documents related to the Knik Arm Bridge, I estimate the cost to be about $1.5 billion. The Alaska Legislature created a public agency called KABATA in 2003 to create a method to finance the construction, operation and maintenance of the proposed bridge. KABATA has sought Congressional funding and low-cost loans from the U.S. Department of Transportation and is now pursuing a unique setup whereby a private firm builds the bridge and maintains it but bears no financial risk. It’s not clear why it’s necessary to have a private firm involved; after all there is really no privatization involved.

The Anchorage Daily News lays out the story (emphasis mine):

When the Legislature created the authority in 2003 to pursue the project, the idea was for tolls paid by drivers who use the bridge to cover the costs. Motorists would be charged $5 each way to cross. The goal is still for the state to team with the private developer, who would borrow money to pay for the bridge construction and operate it in exchange for the state sharing revenue from the tolls.

But bridge planners now say those tolls won’t bring in enough money to pay the developer during at least the first few years the bridge is open.

So Wasilla Sen. Linda Menard, who is on the authority board, introduced a bill to provide an initial $150 million in state money for the project.

She also introduced another bill saying the authority’s financial obligations under its partnership with the developer are “obligations of the state,” a term that had some legislators concerned it could affect the state’s credit rating in the event of default.

So what began as a project for a private group to issue bonds, build a bridge, collect tolls and pay the state the surplus revenues has been reversed. Now, in essence, Alaska would guarantee the private bonds as general obligations of the state, pay for the shortfalls of toll revenues indefinitely and, if there ever is surplus revenue, stand in line to be repaid. Sounds like a very sweet deal for Citibank, which is spearheading the project.

COMMENT

I’m from Alaska (state motto: “The Pork State”) and this yet another felonious boondoggle of Stevensesque proportions. This unneeded 6+ billion dollar structure is proposed to be built directly on top of the location of the 2nd largest megathrust earthquake in all of recorded history and in the most seismically active region of the planet. Built on 20 miles of bayfill (see the AlaskaKABATA bridge-booster cartoon) that liquified during that 1964 earthquake. These people need to be taken off welfare so they can leave to find gainful employment elsewhere.

Posted by NewEarth | Report as abusive
Aug 25, 2011 12:56 EDT
Cate Long

Harrisburg, PA next?

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Bankruptcy for Harrisburg finally?

The fiscal troubles plaguing Harrisburg, Pennsylvania have been well telegraphed in muniland. Reuters detailed the problems earlier this month:

Pennsylvania’s state capital, a city of 50,000 about 100 miles west of Philadelphia, has been flirting with bankruptcy as it struggles to pay off $300 million in debt incurred through a financing scheme used to fund a revamp of its trash-burning plant.

In July, the city council rejected a rescue plan put forward by a state-appointed advisor that called on the city to sell the incinerator, renegotiate labor deals, cut jobs, and sell or lease its parking garage.

Bloomberg reports today that Harrisburg is likely to miss a municipal bond payment on September 15. When a bond issuer misses a payment, rating agencies give them 30 days to cure the missed payment; if they are unable to do so, the rater declares them in default. Municipalities are not required to file a Chapter 9 bankruptcy because of this, but generally that is the sequence of events. So if Harrisburg misses the bond payment, it is likely they are headeded to the federal bankruptcy courthouse. Bloomb erg reports:

Harrisburg may miss $3.3 million in general-obligation bond payments due Sept. 15, said Robert Philbin, a spokesman for Mayor Linda Thompson, in a phone call today.

The capital of Pennsylvania faces a $5 million deficit and is trying to arrange for a $7.5 million advance on a lease of municipal land to the Harrisburg Parking Authority.

“If the Parking Authority lease doesn’t go through, the city will not be able to make that payment,” he said.

More protection for municipalities

Aug 24, 2011 20:19 EDT
Cate Long

What Meredith Whitney was talking about

Meredith Whitney’s prediction last November of hundreds of billions of dollars in municipal defaults over the next 12 months was totally wrong. But she was right on one thing: pension plans for state and local workers are unsustainable. I totaled up the data in a new paper by Robert Novy-Marx and Joshua Rauh (page 50) and got a nationwide funding shortfall of approximately $1.19 trillion. This data is from June 2009; pension fund data is only reported every three years, so it wouldn’t reflect the large equity-market increases over the last two years. But it’s still a whopping sum. On average U.S. public pension funds are only 61% funded.

The chart above shows the ten states with the least funded pension plans on a percentage basis. Illinois has the worst problem, as it does on many muniland metrics.

There are not any easy solutions to this problem. Options for states include cutting other expenses or raising taxes to make larger pension contributions. States generally cannot lower or terminate already promised benefits as these are rights enshrined in state constitutions. There have been cases where future increases have been lowered or withdrawn, and this can help make up the shortfall.

Meredith Whitney was right about the pension issue but offered no solutions. This problem can simmer for decades before pension funds are exhausted, but not addressing the problem means it gets bigger and costs more to fix. This is one of muniland’s biggest problems, and one to be aware of since bond markets punish states for unsustainable pension loads.

Full data table here.

COMMENT

Cate,

Thanks for the feedback. As a municipal credit analyst, I am also very interested in this topic and look forward to reading any other future posts regarding unfunded pensions/opebs.

Andy

Posted by AndySpeight | Report as abusive
Aug 24, 2011 11:50 EDT
Cate Long

Who are muniland’s worst borrowers?

Who are muniland’s worst borrowers?

Reuters compiled this data to determine who pays the most to borrow in muniland. Puerto Rico leads the pack again by a wide margin. The spread means that they pay 223 basis points, or 2.23 percent, more than a AAA-rated issuer to find buyers for their bonds. This follows the fundamental bond market principal that if you are more risky, you must pay more to borrow. Curiously Bloomberg reported that Rhode Island paid below market rates yesterday to issue bonds. I guess the Central Falls bankruptcy filing didn’t spook the bond market on Rhode Island issuers after all.

Source:Municipal MarketData, Moody’s Investors Service, Standard & Poor’s Ratings Services, local government budget reports, official statements (Reuters)

Public sector largess

Bloomberg had a fascinating article yesterday about the pay levels for California prison doctors. Their compensation is over 20% higher than their equivalents in the private sector. This is not the only area when public sector workers are paid high salaries — think college sports coaches. From Bloomberg:

Today a prison doctor in California can earn $248,172 a year plus overtime or extra-duty compensation. A chief physician can make as much as $265,648 plus extra pay. According to the Bureau of Labor statistics, the mean annual wage of a physician in the U.S. in 2009 was $180,870; in California, it was $191,650.

Aug 24, 2011 10:21 EDT
Cate Long

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.

Further:

US Department of Education: Public high school graduates and dropouts: 2007-08

COMMENT

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/

Posted by Cate_Long | Report as abusive
Aug 23, 2011 15:56 EDT
Cate Long

Political heat at S&P for ratings downgrades?

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The Daily Show – What Are You Friggin’ Nuts Over There?

 

S&P replaces president after U.S. downgrade

The board of directors of McGraw-Hill met Monday and voted to oust Deven Sharma as president of their Standard & Poor’s rating division. This forced resignation comes approximately three weeks after S&P downgraded the debt of the United States. Jon Stewart, in the clip above, jokes about political pressure brought to bear on the company by the U.S. government. I think he is spot on with his humor.

Last week the U.S. Department of Justice just happened to discuss publicly an investigation of S&P and the other major raters about ratings assigned before the financial crisis to mortgage-backed securities, even though this investigation has been ongoing since 2009. Why the sudden need to reiterate this publicly? S&P’s downgrade was a brave action. It’s a pity that Deven Sharma has to pay for it with his job. As I wrote previously:

Standard & Poor’s took one of the bravest actions that I’ve ever seen a rater take when it downgraded the United States one notch. Furthermore, this marks a new beginning for accurate credit analysis and truth in fixed-income markets. Keep speaking the truth, S&P.

[...]

Bashing a rater for truth-telling is like punishing a child for speaking an unpleasant truth. It creates incentive to shade the truth, and the harsh truth is what is needed now more than ever.

COMMENT

oops. sorry about the triple; please delete two

Posted by klhoughton | Report as abusive
Aug 22, 2011 18:51 EDT
Cate Long

All men’s wealth will be equal

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It’s hot in Washington DC and Congress will return soon to figure out how to balance the federal budget. Part of the equation is likely to include raising more tax revenue. It’s easy to picture the thousands of lobbyists on K Street polishing their Gucci loafers and sharpening up their arguments to protect the interests they are hired to lobby for. There is no more epic battle in Washington than when tax benefits are being redrawn. The federal pie is getting smaller, and the battles will be fought in close combat.

As the struggle around taxation heats up you hear two recurring arguments. First is the idea that if you raise taxes on the upper-income earners you would kill the incentive to invest in job creation. And because job creation is the most essential need of our economy, raising taxes on the wealthy would kill the golden goose. Saying that raising taxes hurts the “job creators” is generally a Republican talking point. The other common argument is one of fairness. This is a liberal talking point, although it should be one embraced by all elected officials representing “the people.”

In his well-circulated New York Times op-ed, Warren Buffett talked about the unfairness of the low tax rate for those who earn income from their wealth as opposed to those who earn their income from their wages:

If you make money with money, as some of my super-rich friends do, your [tax] percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot.

New York Times columnist James Stewart dove deeper into the issue and began to address the legal difference that allows differential taxation:

The root of the problem highlighted by Mr. Buffett is the disparity between tax rates on capital gains and ordinary income. Were these rates the same, the debate over how to treat carried interest would vanish, along with much of the disparity between tax rates for the rich and people like Mr. Buffett’s secretary.

Both Buffett and Stewart are right in their thinking, but I want to suggest that much of this is a semantic mirage that has grown up over time. It’s really an issue of taxation on the capital of the rich versus the capital of the middle class, and it’s a prime example of how the privileged classes have twisted our tax code to benefit themselves in unfair ways.

COMMENT

“Taxes” means considerably more than “Income Tax” which just barely brings in more than the other “tax on income” — FICA low wage earner taxes. 45% of revenue comes from individual “Income Tax” while 36% comes from FICA or tax on low wage income. Wage earners who pay Income Tax (and most do) pay Income Tax and then pay FICA taxes out of the “after tax” (cute phrase, no?) remainder. So that the FICA tax also is responsible for the slice of Income Tax on FICA tax totals. Income Tax on 36% of Federal revenues. At a 15% Income Tax rate that would make the Federal take from FICA almost the same size as from Income Tax excluding FICA double taxation. No, the rich do not pay “most of the taxes”. They just make most of the money.

No, the rich do not pay most of the taxes. They just pay all the bribes directly to politicians. They don’t die in combat either. They don’t keep the highways repaired. They aren’t in the Police or Fire Departments, or the Water department either. They do own a large number of factories in other countries which used to be here. And they want a “strong dollar” so that their investments overseas will continue to be profitable. And so that even more jobs here will be lost.

No, they do not deserve special treatment. And yes, I would call someone who makes $950,000. “rich”. Sorry! How about getting rid of FICA altogether and getting rid of regressive taxation?

Posted by txgadfly | Report as abusive
Aug 22, 2011 10:40 EDT
Cate Long

Whither prison reform?

I expect to see a lot more discussion about reform of the state and local prison and jail systems in the coming months. Some states are privatizing jails, and the U.S. Supreme Court has ordered California to release prisoners due to overcrowding. Here is an interesting paper published in the journal Criminology and Public Policy that talks about how unions can be an impediment to change. From the abstract:

An unintended consequence of mass imprisonment is the growth of prison officer unions. This article shows how successful corrections unions in states like California and New York obstruct efforts to implement sentencing reforms, shutter prisons, and slash corrections budgets. They impede downsizing-oriented reforms by generating or exacerbating fear among voters and politicians. Policy makers in key states must overcome resistance from prison officer unions to downscale prisons. Through a combination of accommodation and confrontation, policy makers can relax opposition from the officer organizations and undertake prison downsizing efforts without busting the unions.

There are no simple solutions to this problem and all angles need to be investigated.

Too low for retail

We are starting to see the classic dynamic in the bond market where bond yields go too low and then investors back away from buying. The reduced demand causes bond prices to fall and yields to rise. In this case retail investors are not finding short-term municipal bond yields appealing and are turning to other asset classes. Bloomberg reports:

The low interest rates discourage some individual investors from purchasing municipal debt, said John Hallacy, head of municipal research at Bank of America Merrill Lynch in New York.

“The nominal levels are so low that it’s getting harder to get retail investors excited about the shorter end of the curve,” Hallacy said. “And of course inflation is not the fixed-income investor’s friend so you really can’t recommend going out very long on the curve, at least from the retail perspective, although there may be some of that.”

This episode is only 10 months old

COMMENT

There is actual “prison reform” going on in California, Thanks to the U.S. Supreme Cpurt! And the resulting prisoner realignment is really great news for taxpayers. It’s entirely due to the U.S. Supreme Court order requiring the State to reduce the prison population by 32,000 inmates. It will reduce prison costs by about $1 billion annually. Realignment involves returning low-level offenders, in prison rather than jail only because of jail overcrowding, back to counties. The transfers from jail occurred between 1985 and 1993. Annual savings of $750 million will occur because a jail bed costs $25,000 less than a prison bed. An additional $250 million will be saved because the violation rate will drop from 35% to 20%. The rate is artificially high because of a decision to move violation hearings to prison rather than deal with violations at the parole unit level.

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