MuniLand

The soft side of federal spending

It’s not clear that Congress is capable of doing its job of managing the nation’s purse strings. Capitol Hill failed at identifying a combination of tax increases and reductions in spending that would have lowered our growing debt burden. Now every constituency that draws funds from the U.S. Treasury is angling to push others away from the trough. A perfect example is the internecine warfare to come over defense cuts. Here is a slick ad against funding for the military’s nuclear arsernal obviously coming from the traditional munitions and equipment makers:

The military players are well versed at battling over the spoils. But it’s the soft side of federal spending, where social support and services are funded, that is less equipped to fight over its share of decreased funding.

The automatic cuts that kick in due to the failure of the supercommittee are aimed at defense, Medicare and Social Security, and other discretionary social programs. The legislation spares cuts for Medicaid payments to states. It’s interesting that this area was protected when other major areas of the budget will have reductions. Medicaid cuts were the reductions that governors and county officials feared most because they consume an increasing amount of state and local budgets. Maybe governors were the real winners of the lobbying game when the Budget Control Act of 2011 was being written.

Politicians seem to be stuck in the blame game and hyperbole about who would or wouldn’t raise taxes on millionaires. We do need tax increases and we must cut everywhere as precisely and wisely as we can. Enough with the soundbites. It’s time to start talking hard numbers.

November 22: Muniland Snaps

Good Links

Bloomberg : Sequestration mandate exempts programs that account for about three-quarters of federal aid to states, protects muni bond tax exemption

Bond Buyer: Confusion over municipal bonds and the Volcker Rule

Bloomberg: The coming showdown over pension accounting rule

Stateline: Primer on Chapter 9 municipal bankruptcy

Bloomberg: Major fight over control of Jefferson County’s sewer system in bankruptcy court

today’s the day harrisburg: The speed at which this Pennsylvania Commonwealth Court is moving is very strange

Don’t let the hawks win

The Supercommittee has failed. Their mandate to cut $1.5 trillion from the federal budget over 10 years was too great a hurdle for its members to climb. Now the automatic provisions of the Budget Control Act of 2011 will kick in. These require half of the $1.2 trillion in spending reductions to come from the Departments of Defense, Homeland Security, and Veterans Affairs; the National Nuclear Security Administration; some management functions of the intelligence community; and the international affairs budget from the State Department.

Already the fight over these required cuts is on. The war hawks in Congress are starting to circle in an effort to kill the automatic cuts to the military that are included in Budget Control Act. Reuters reports:

[T]he defense industry turns to lawmakers to undo the automatic cuts known as “sequestration.”

Top Republicans, including Senator John McCain, have already said they will pursue legislation to do just that, although President Barack Obama has said he would not support such a move

Republican Senator Jeff Sessions of Alabama, the ranking member of the Senate Budget Committee, says in the Bloomberg video above that across-the-board cuts would not apply to Social Security, Medicaid, Medicare beneficiaries, civil and military employee pay, or veterans. He says these areas need to equally share in budget cuts. There are certainly reductions that can be made in every area of the gargantuan federal budget. But I think we really need to dig deep when members of Congress fight to protect the U.S. military on grounds of global insecurity. In the case of Senator Sessions it’s useful to know a little about the dominance of military spending in his state. Bloomberg did a brilliant article last week that explained:

Overall defense spending in Madison County, [Alabama] jumped 76 percent over a decade to $15,889 a person, the sixth-highest in the country, based on data compiled by Bloomberg. In the six years since the nationwide base realignment, military contracts in the area have swelled 48 percent to $32 billion, bringing in 4,650 new government jobs.

The United States spent approximately $700 billion, or 4.7 percent of GDP in 2010, on the military. China, a much bigger nation, spent $114B, or 2.2 percent of their GDP.

November 21: Muniland Snaps

Don’t be scared when you see the inside of the information technology infrastructure at the Los Angeles Airport. Planes and baggage are still making it where they need to go. Unfortunately most of America’s IT infrastructure looks like this. Video source: Government Technology

Good Links

Reuters: SuperCommittee: Compromising on a deficit solution is just too hard

NYT: Nevada boom town now bust town

NYT: The mystery of fracking

WSJ: Today is the launch of municipal bond credit ratings on MSRB’s EMMA!

Harrisburg needs the bankruptcy option

Pennsylvania Governor Tom Corbett took the next step in the process of pushing the bankrupt capital of his state towards fiscal recovery today. Bloomberg reports:

David Unkovic, chief lawyer for the Pennsylvania Community and Economic Development Department, is set to run the finances of Harrisburg after Governor Tom Corbett nominated him as the state’s first municipal receiver.

Once approved by a state court, the overseer may act without the consent of the bankrupt capital city’s elected officials. Unkovic’s appointment may be reviewed as soon as Nov. 28.

Unkovic has 30 plus years of experience as a bond counsel. The governor has also hired a Washington law firm to assist Unkovic on his fiscal restructuring efforts. Harrisburg has an impossible pile of debt to service, and much of it needs to be discharged to make the city’s finances sustainable.

Fortunately the legislation that the receiver is working under relegates Harrisburg’s mayor, Linda Thompson, to a sideline advisory role. I’m sure the new receiver will have a few team photos taken with her and then promptly relegate her to parade and ribbon-cutting duty.

One of the biggest tasks that the soon-to-be-confirmed receiver has is to go down to the federal bankruptcy court on Walnut Street and withdraw the petitions that the mayor and state filed objecting to the city’s Chapter 9 bankruptcy filing. Bankruptcy should be the biggest tool in Unkovic’s toolkit to get Harrisburg to solvency.

The reason that Unkovic needs Chapter 9 is that as a state receiver he has no authority to “cram down” bondholders and bond guarantors. He has power to sell the assets of the city but it’s doubtful there will be enough to service the remaining debt even after a fire sale. It was always a little hard to figure this out because Mayor Linda Thompson had not presented a budget and there are no current financials for the city. It’s literally a fiscal mess.

November 18: Muniland Snaps

Meet the West Virginia Office of Technology Cyber Security Program. You will never think government work is dull after seeing this.

Good Links

Bloomberg: Even with Jefferson County bankruptcy, investors add to muni bond funds

Finextra: This is one major reason that there is no retail bond market

BD America: Trade association argues for licensing, training for muni financial advisors

Collingswood Patch: Near insolvent town of Collingswood, NJ gives away free holiday cash

Make Jefferson County’s receiver its salesman

The story of Jefferson County, Alabama filing the largest municipal bankruptcy ever last week is well-known. The county went into hock for about $3 billion to build an EPA-mandated sewer system. On the way to completing the system, every local crook and corrupt politician piled onto the project to skim off some pork. Many of these players ended up in prison and left the taxpayers saddled with a sewer system they really can’t afford.

Last year, amid the county’s fiscal and political meltdown, the Russell County Circuit Court appointed a water system professional, John Young, to take over the management and operation of the sewer system. This action came at the request of the bond indenture trustee, the Bank of New York, which wanted the bond payments protected. Now the county is fighting with the receiver and creditors for control of the sewer system in bankruptcy court. My advice to Jefferson County Commissioners is to stop fighting John Young and change his role into a salesman for the system. The sewer system is an albatross, and it should be sold and creditors repaid with the sale proceeds.

The Russell County Circuit Court’s mandate covered raising sewer rates and lowering costs but did not grant Mr. Young a role in facilitating a settlement with sewer debt creditors. According to Young, he took on that responsibility “unofficially.” He claimed to have traveled many times to New York City to negotiate potential haircuts on the outstanding debt, meeting repeatedly with JP Morgan, the biggest creditor, and other Wall Street banks. Young had a lot of experience dealing with Wall Street as the former president of the publicly-held American Water Works Company.

There is a lot of animus towards John Young in Jefferson County because he has been paid over $1 million in the last year and is perceived to be representing Wall Street instead of taxpayers. The Jefferson County political elite, from U.S. Representative Spencer Bachus to the Jefferson County delegation to the state legislature (shown in the video above), want John Young out of the county’s affairs. The Commissioners of Jefferson County filed a motion in federal bankruptcy to remove Young as the sewer system receiver. That motion will be argued on Monday.

I attended a luncheon yesterday of the Municipal Analysts Group of New York where John Young talked about his role running the sewer system, his trips to New York to meet with creditors and his current fight to retain control of the system in bankruptcy. What was clear from his presentation was that the sewer utility that he found when he stepped into the receiver role was run as a comfortable, good-ol’-boy operation with few management controls. He said that no income statement, balance sheet or long-term business plan had been developed for the system. As someone coming from a shareholder-owned company he first set to work getting operational metrics and cost accounting in place. Imagine transforming an utility that had just spent billions on infrastructure with few controls into a cost-driven operation. It’s a mighty feat.

November 17: Muniland Snaps

Good Links

Reuters: Sell-side report says most cities and counties will still be able to pay their debts in the near future

WSJ: Nevada AG files first criminal charges over robo-signing foreclosure scandal

Reuters: SEC says it lacks expertise policing areas of muni market

DJ: Prices of top-rated munibonds held firm Wed. even as week has record $13.2B new issuance

Bond Buyer: On day of shareholder meeting, muni bond guarantor says it may withdraw from some states

Bloomberg: Illinois adopts lottery system to determine bond underwriter rotation

Are teachers a protected class?

State and local employees have not been as hard hit as the general economy. At 19 million strong, this workforce comprises about 14.6 percent of total U.S. non-farm employment. It looks as if education workers are particularly being shielded from job cuts.

Chris Mauro, Head of U.S. Municipals Strategy at RBC Capital Markets wrote today in a privately circulated research note (emphasis mine):

[O]n a percentage basis, the state general government (non-education) sector has seen the largest decline in employment since December 2007. As of October 2011, it is down almost 6% from its recent peak.

Similarly, local education employment is currently down about 3% from the peak and has now also declined by a greater percentage than in any of the prior three recessions.

State education employment, which has historically been very recession resistant, has been growing at a moderate rate since December 2007 but, here again, the growth rate has been slower than in any of the previous three recessions.

I’m fine with this as long as student performance increases and America turns out high school and college graduates who are ready to meet the 21st century with good reading and comprehension skills. It would be a sad thing, though, to devote increasing amounts of precious tax revenues to school systems and universities that are graduating barely literate students. If America is making a bet on education, it really needs to pay off.

The tax collections that support education workers have bifurcated recently. State revenues have returned to pre-recession levels thanks to strong sales and income tax collections, while local revenues have been lagging due to lackluster property tax collections. Though teacher salaries are mainly funded by local taxes, states do pass through significant revenues to local school districts, and higher education receives big cash flows via state funding and loans that students take out to attend college.

Outside of teachers, local governments employ a lot of firefighters, police officers and health and hospital workers. If education workers remain a protected class, then the layoffs will have to come from these areas. RBC’s Mauro comments on non-education local employment:

November 16: Muniland Snaps

Good Links

WSJ: Congress is strangling the CFTC’s budget

Bloomberg:  Kroll Bond Rating Agency weighs in on muniland credit risk

Reuters: After possible losses in Harrisburg and Jefferson County, bond insurer may pull back

Bloomberg: Jefferson County appoints new manager to move county through downsizing

WSJ: NJ state economist’s study mirrors governor’s view on not taxing high-income earners

Bond Buyer: FINRA cracks down on six dealers for breaking  municipal bond trading rules