MuniLand Snaps: May 21
There is a new movement afoot on the fringes of urban society called “depaving,” or removing asphalt from small urban areas to make green, community spaces.
Good Links
Senator Jim DeMint: Saying no to state bailouts
Bloomberg: Pennsylvania’s tax windfall from gaming leads the U.S.
LAT: Los Angeles among most financially distressed areas in U.S.
Reuters: U.S. municipal bond sales to total $9 billion next week
MuniLand Snaps Join DiscussionWhat we’ve learned from municipal distress
This is a guest post from Joe Rosenblum, the director of Municipal Bond Credit Research at AllianceBernstein.
Is the municipal bond market on the verge of collapse? You might think so, given the blaring headlines about a few big disasters in the last year. But the truth is that poor decision making, not systemic issues, has caused the most serious problems.
Jefferson County, Alabama, and Vallejo, California, filed for Chapter 9 bankruptcy protection. Receivers were appointed for Central Falls, Rhode Island, and Harrisburg, Pennsylvania. Stockton, California, is deferring debt-service payments (though bondholders continue to get paid from other sources) as it goes through a state-authorized mediation process with its creditors. And most recently, Detroit agreed with the State of Michigan on a shared fiscal oversight process to avoid bankruptcy.
There is no question that state and local governments are facing financial hardship as a result of the weak economic recovery and its impact on tax receipts. But this is not the first time local governments have been challenged or have defaulted on their debt or filed for bankruptcy protection.
In the 37 years since New York City’s brush with default in 1975, there have been a slew of other bankruptcies, defaults and near-defaults. Prominent among them were cases involving the Washington Public Power Supply System (WPPSS); Cleveland, Ohio; Bridgeport, Connecticut; Yonkers, New York; Erie County, New York; and Orange County, California. All of them also grabbed headlines in their day.
Here are some lessons we learned from them:
- Municipal bonds are not risk free
Hi Mark:
It impossible to answer that question because there are so many variables both for mutual funds and individual bonds. If you wanted a perfectly risk free investment a portfolio of AAA munis would be as close as you could get.
Yes I agree with your point about “relatively” more stable.
Thanks for your comments.
MuniLand Snaps: May 18
The Upstate New York public media blog Innovation Trail has a tour of the Rochester City Hall’s new green roof.
Good Links
National Law Review: More munis, more problems: Increased regulation of the municipal bond market
WSJ: On “general obligation” munis, investors advise caution
Reuters: U.S. muni bond inflows slow at $805 million
Janney Capital Markets: Fixed-income daily market commentary
MuniLand Snaps Join DiscussionPresident Obama, the Ricketts family and Wrigley Field
Is the Ricketts family of Chicago bipolar? The patriarch, billionaire and Chicago Cubs owner Joe Ricketts, blasted onto the national stage yesterday, when the New York Times reported that his super PAC considered running an ad campaign entitled “The Defeat of Barack Hussein Obama: The Ricketts Plan to End His Spending for Good.” His super PAC, the Ending Spending Action Fund, also lobbies against excessive federal spending and special-interest earmarks.
Meanwhile Ricketts’s son Tom, the general chairman of the Cubs, has been lobbying Rahm Emanuel, the mayor of Chicago and President Obama’s former chief of staff, for $150 million in tax revenues to renovate Wrigley Field, the home of his family’s Major League Baseball team. The irony of Joe Ricketts blasting the president for special-interest spending while his son grovels for taxpayer support to renovate his baseball stadium is enormous. The Ricketts family needs to meet around their kitchen table and get this matter worked out, because it makes both the father and son look clueless.
Greg Hinz of Crain’s Chicago Business has the local scoop:
Did the Ricketts family just knee-cap its own plan to rebuild Wrigley Field with a healthy dose of Chicago taxpayer cash?
My phone has been ringing with just that question this morning in the wake of a stunning New York Times story about how a new super PAC headed by Joe Ricketts, patriarch of the Chicago Cubs’ owning family, is pondering a big, especially nasty ad campaign against President Barack Obama this fall.
[...]
The Chicago angle on this is that Mayor Rahm Emanuel, Mr. Obama’s former chief of staff, has been trying to put together a deal for the city to put $100 million or more in tax incentives into a Wrigley [stadium] rebuild.
The Wall Street Journal discussed the proposed renovation of Wrigley Field, for which Tom Ricketts wants taxpayer money:
Proposals include more premium seating near the field; a Jumbotron; a new building along Clark Street that could contain a restaurant, parking, and hall of fame; and game-day street fests open only to ticket-holders.
The father’s advocacy group, Ending Spending, describes itself like this:
The irony of Joe Ricketts blasting the president for special-interest spending while his son Tom grovels for taxpayer support to renovate his baseball stadium is enormous. Join DiscussionWe shouldn’t dread the debt limit
“Have a drink out there, folks, and just know that your kids and grandkids will be out there picking grit with the chickens,” says former U.S. Senator Alan Simpson in the video above. Simpson’s quip is the best summary I’ve ever heard of the public’s lack of understanding of the severity of the nation’s fiscal crisis. The federal government is currently borrowing 42 cents of every dollar that it spends. Thanks to the Federal Reserve’s quantitative easing and the strong global demand for U.S. Treasury debt, the nation has been able to borrow heavily at low interest rates to cover its budget shortfalls.
But the debt is piling up so high that the country might face a borrowing shock if there were a black swan event or if bond vigilantes forced higher interest rates. It’s not a question of whether rates will rise – they certainly will. What we don’t know is when it will happen. The same politicians who created this fiscal quagmire have now tasked themselves with fixing it. Despite numerous proposals on how to get our debt under control, the political dynamics of the issue make it likely that nothing will be resolved in Congress until after November’s election. The Washington Post reports:
But once the election is over … the issue of the debt will quickly rise to the top of the agenda – and not just because of the debt limit. In January, policymakers also will be facing the first round of harsh, across-the-board spending cuts adopted last summer, as well as the expiration of a host of tax cuts that benefit every American household. Unless Congress agrees on an alternative deficit-reduction strategy, the policies threaten to deliver a fiscal shock that could throw the nation back into recession.
Earlier this week at the Peterson Foundation’s Fiscal Summit 2012, House Speaker John Boehner gave a speech in which he laid out his plans for tax reform and vowed not to increase the borrowing limit:
Any sudden tax hike would hurt our economy, so this fall – before the election — the House of Representatives will vote to stop the largest tax increase in American history [the expiration of the Bush tax cuts]. This will give Congress time to work on broad-based tax reform that lowers rates for individuals and businesses while closing deductions, credits, and special carveouts. Eyebrows go up all over town whenever I talk about this, but when I say ‘broad-based’ tax reform, I mean it. We need to do it all … deal with the whole code, personal and corporate it’s fairer and more productive for everyone.
Meanwhile the Senate Republicans found an obscure Senate rule that allowed them to take control of the Senate for a day and hold a series of votes on their proposed budgets. From Bloomberg:
Endless borrowing papers over structural problems, such as excessive military spending, the 110 million people who are drawing Social Security and Medicare/Medicaid, and healthcare costs that are growing faster than the inflation rate. Join DiscussionIt’s not the debt limit people fear, it’s the politicizing of the debt limit. Neither Dems nor GOP will give one inch to the other in this battle, both wanting to achieve their own agenda.
Fear the results of a broken, entrenched political system trying to agree on anything.
MuniLand Snaps: May 17
The dirty side of consumption, or what happens to our trash? Hat tip: Boing Boing.
Good Links
ZeroHedge: That which is unsustainable will go away: Medicare
WSJ: Cities court bond investors with open meetings and more transparency
SEC: Statement regarding Commission approval of MSRB Rule G-17 Interpretive Notice
Davis Polk: SEC approves MSRB Interpretive Notice on municipal security underwriters
MuniLand Snaps Join DiscussionPuerto Rico’s black swans
Puerto Rico is a small island with a population of 3.7 million people and a municipal debt load of $104 billion. Only Florida, Illinois, New Jersey, New York, Ohio, Pennsylvania and Texas – states that are all substantially larger – have more debt outstanding. Puerto Rico’s government has been financing its deficits with bond issuance, although it recently vowed to put an end to this practice in 2014. The island’s economy has been contracting for several years, but recently it began to move slowly toward positive growth. Puerto Rico’s labor market is similarly weak, with an unemployment rate of 15 percent, nearly double the national rate of 8.1 percent.
In short, Puerto Rico’s debt-to-GDP load and unemployment rate are greater than those of any state in the country. It’s on a knife’s edge, and it’s easy to imagine several black swans that could precipitate real fiscal distress.
Puerto Rico’s bonds enjoy some special qualities that keep demand for it at high levels. The island’s municipal debt enjoys a triple-tax-free exemption across the country, meaning that investors in any state do not have to pay federal, state or local taxes on it. Wealthy bondholders in high-income tax states like New York and California can earn more yield by purchasing tax-exempt Puerto Rican debt than they could if they purchased the bonds of other states. Moreover, many municipal-bond single-state mutual funds are able to take advantage of this tax-exempt status and invest in Puerto Rico’s bonds. For instance, a mutual fund that is nominally invested only in California bonds is allowed to own Puerto Rico bonds as well, but not bonds from Texas or New York.
Despite being widely held, Puerto Rico’s bonds rank near the bottom of the investment grade scale, and there are a lot of opinions about how risky they are. A new bond investing website, Learn Bonds, recently interviewed two big mutual fund managers with opposing views on the island’s debt. Marc Prosser from Learn Bonds first interviewed BlackRock’s Peter Hayes:
Peter thought the credit risk on many PR bonds outweighed the benefits of extra yield. One of the concerns he has with Puerto Rico is that the economy is not diversified and focused heavily on tourism.
Prosser then interviewed Rochester Funds’ Scott Cottier, who oversees that firm’s municipal-bond mutual fund division. Cottier believes that Puerto Rico’s debt is a good investment because its government is reducing spending and increasing revenues; because pension liabilities have flatlined; and, most important, because the federal government would step in to backstop its debt if it were to default.
Despite being widely held, Puerto Rico's bonds rank near the bottom of the investment grade scale. There are a a number of trigger events that could possibly cause Puerto Rico to default. Join DiscussionI want to correct a few misconception by some of the “experts” quoted in this article.
First, when Mr. Peter Hayes says that the Puerto Rican economy relies heavily on tourism, he neglected to mention that tourism barely represents 6% of the Commonwealth’s GDP. The largest sector of the Island’s economy by far is manufacturing.
Regarding Mr. Cottier’s assertion that the U.S. federal government would bail out Puerto Rico, I highly doubt that it would, since it refused to bail out California, which is the 8th or 9th largest economy in the world.
In terms of the possibility of tax exemption being taken away, that is highly unlikely since this would require either a change in the country’s political status as a Commonwealth, or an explicit act of the U.S. Congress that would have far reaching economic implications in the U.S. as well as in Puerto Rico. Very slim possibilities that U.S. pharmaceuticals, the 4 million Puerto Ricans in the U.S., as well as other influential investors, and politicians would let that happen. Puerto Rico would also not likely want to shoot itself in the foot and eliminate its local tax exemptions.
What Puerto Rico needs is to stop financing its debt with more bond issuance and increase labor force participation through a restructuring of U.S. welfare transfers. In the short run, an additional U.S. tax incentive would produce needed growth. More economic autonomy provided by enhancing Commonwealth status or eventual independence would unleash Puerto Rico’s economic potential in the long run.
MuniLand Snaps: May 16
GovTech interviews some state and city chief information officers about their use of Twitter, Facebook, Foursquare and YouTube to change how government operates and interacts with citizens.
Good Links
NPR: 50 years of government spending, in one graph
Reuters: State income up in April, but may not be enough
Standard & Poor’s: California’s bigger fiscal-year 2013 budget gap increases pressure to adopt austerity
LA Times: Fitch on new California budget problems: Don’t panic
Muniland Snaps Join DiscussionDark clouds in the Golden State
In a YouTube address released last Friday, California Governor Jerry Brown shocked his constituents with an announcement that the state’s projected revenue shortfall had increased to $16 billion. This followed very weak April state income tax collections, which deepened the budget hole from the $9 billion that Brown had originally forecast in January. The new deficit is a result of a reduced revenue outlook for California, higher school funding costs, and decisions by the federal government and courts to block certain budget cuts. New cuts that Brown floated yesterday will reduce General Fund spending as a share of California’s economy to its lowest level since 1972‑73.
The $92 billion budget that Brown had proposed in January for the fiscal year 2012-2013 (which starts on July 1) looked like this: With the new revenue shortfall, almost every area of the state budget has been targeted for cuts; education, which accounts for 53 percent of General Fund spending, is the only category that was spared. In his revised proposal, Brown substantially increased K‑14 spending (i.e., includes two years of community college or vocational training) and protected the University of California and California State University from further, deeper cuts. School spending is mandated by Proposition 98, which requires that California pass through a substantial portion of state revenues to local governments to fund education.
Overall, Brown proposed that half of the budget hole should be plugged with spending cuts, 35 percent with tax hikes and 15 percent with financial gimmicks. Brown’s preferred budget cuts (pages 5-7) total $8.3 billion and include a $1.2 billion reduction to California’s medicaid program (Medi-Cal), an $880 million reduction to welfare (Temporary Assistance to Needy Families payments) and a 7 percent reduction in hours to in-home supportive-care-services providers.
These monies are the lifeline that millions of Californians rely on. It’s hard to get a sense of the human side of this, but it’s enormous. And without additional revenues, deeper cuts will be required.
Reuters’ Jim Christie picks up the story here:
California Governor Jerry Brown shocked his constituents with an announcement that the state's projected revenue shortfall had increased from $9 billion to $16 billion. Join DiscussionIn California, where local property taxes are limited by law, and local services, including schools, are thus largely funded by the state, the most important source of government revenue by far is personal income taxes. Capital gains income from the state’s wealthy residents helps fill the state’s coffers in good times, but falls sharply in bad times.
California’s larger-than-expected deficit did not faze traders in the $3.7 trillion U.S. municipal debt market, said Gary Pollack, managing director at Deutsche Bank Private Wealth Management in New York.
“The market is taking it in stride for the time being,” he said.
California bonds have been trading a little better over the last few weeks, aided by rising prices and falling yields in the overall municipal market, Pollack said.
California, the muni market’s biggest borrower, has about $80 billion in outstanding obligation debt, compared with its $1.9 trillion in economic output.
MuniLand Snaps: May 15
The Tax Foundation brings us a map showing that certain states have had much stronger increases in their percentage of wealthy taxpayers than others. North Dakota takes the top spot and is followed by other energy-rich states.
Good Links
St. Louis Fed: Map of failed banks – 2007 to present
Congressman Tom Reed: The Municipal Bond Market Support Act of 2012
Learn Bonds: The safety of state bonds: A historical perspective
The Times-Picayune: Louisiana is the world’s prison capital
MuniLand Snaps Join Discussion-
Resident Muniland expert
-
