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Alien (Pensions) Verse Predators (Muni Bondholders)

April 2nd, 2013

The Stockton, CA. example could encourage cities to view bankruptcy as something other than a last resort. Bond-holders, taxpayers and government officials throughout the country are perplexed and angered will by U.S. Bankruptcy Judge Christopher Klein’s ruling to pursue a plan that stiffs its bond-holders.

Here is a real time list of California’s largest defaulted municipal bonds. Adds up to billions.

Klein sided with the city, and perhaps now municipalities face a disturbingly low bar for pursuing bankruptcy. They will be emboldened to choose Stockton’s course—i.e., using bankruptcy as a strategic policy tool to dump debts without having to confront the main reasons that they went bankrupt in the first place, such as fat pensions. Bankruptcy will no longer be a policy of last resort. This should have an impact on bond markets but probably wont any time soon. Stockton’s defautled bonds are already in the toilet although some of their bonds are trading close to par.

Granted, no one should feel too sorry for the lenders (and their insurers) who provided the pension-obligation bonds to the city. They knew the risks when one lends money to a city—especially one controlled by the unions. But their argument is strongest. A city shouldn’t use bankruptcy as a means to get rid of uncomfortable debts. It should use this tool only when it has slashed its costs but still can’t get out from under the load.

As the attorney for the bond insurer noted in his closing comments on Wednesday, the city intended, from the outset of this process, to shortchange the bond holders. It has refused to address its biggest debt—the payments that it owes to CalPERS to pay for its pension obligations. It only modestly pulled back compensation from rates far above the market to somewhere near the average for public-sector workers in California.

Essentially, the city plan has put pension debt off the table, arguing that pension payments and benefits cannot legally be touched. A bankruptcy would be the place to challenge that assumption, but Stockton officials have no interest in doing so, figuring it’s easier to go after Wall Street than the unions. If Stockton gets its way, then cities can spend anything on pensions and there is no way to ever get out from under that debt.

Some of the most telling testimony came Wednesday morning, when bond-insurer Assured Guaranty’s attorney Guy Neal questioned city councilmember Kathy Miller about a July 2012 video that explained the fiscal situation to city residents. Here are some of her statements from the video:

In the 1990s, Stockton granted its employees some of the most generous and unsustainable labor contracts in the State of California.… Safety employees could now retire at the age of 50.… Many safety retirees today earn 90 to 100 percent of what they made when they were still on the job.

That’s common. But Miller noted that:

Stockton went even further than most other cities and granted things like unlimited vacation and sick time that could be cashed out when an employee retired, and added pay categories for almost everything imaginable.… Our public safety employees were costing us on average more than $150,000 a year each. That’s three times more than most of us in Stockton make in a year.

She described the “Lamborghini” health plan the city’s employees received:

This was free medical care for a retiree and a dependent for the rest of their lives. No co-pays, no generic requirements, no HMOs, and no premiums. See any doctor, stay in any hospital, purchase any drug, and just send the bill to the city of Stockton.

Absurd pay and benefits are common, and not just in Stockton. San Francisco Chronicle columnists Matier and Ross revealed recently that the Alameda County executive receives a $423,000 a year pay package for life. Compensation for California firefighters is in the $175,000 a year range. Some Newport Beach lifeguards receive $200,000 a year pay packages. As a friend of mine joked, revolutions have been fought over lesser instances of public pilfering.

Stockton pulled back on some abuses, but has left the main problem in place. Why is it OK that Stockton residents have to put up with closed parks, reduced policing and other cutbacks to protect outrageous pension and pay levels?

Currently, Stockton leaders are floating a tax increase plan to fund police officers. But money is fungible so this should be viewed as a tax designed to pay for past boondoggles. Whatever the court decides, it’s time for the public to stand up to these misshapen priorities.

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Distressed Munis, Buy, Sell or Hold?

March 26th, 2013

Detroit and Puerto Rico which have been on the market’s radar screen for quite some time. In early March 2013, Detroit announced a yet-to-be-named state-appointed emergency manager for the City of Detroit. Few in the muni market are unaware of the challenges facing the city, but it is worth mentioning that municipal market participants may view this step constructively, as past history shows that direct governmental involvement has been positive for bondholders in prior cases of distressed cities over the past 50 years.

Next is Puerto Rico, as their Government Development Bank announced a series of measures designed to help reform and bolster their underfunded employee retirement system. Here is a list of defaulted Puerto Rico bonds. Although Moody’s downgraded Puerto Rico general obligation bonds in December 2012 and more recent market action has resulted in price decreases since mid-January. Puerto Rico remains on credit watch negative from Standard & Poor’s and Fitch. Puerto Rico will be coming to market in Q2 2013 with new issues that will re-set the bar for existing Puerto Rico bonds. For anyone owning Puerto Rico bonds, this new issue will be worth watching. The media is reporting that Puerto Rico is marketing itself as a legal tax haven to US residents since there is no Federal income tax on residents

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The Painful Truth: Some Municipal Bondholders Will Take A Hit

August 13th, 2012

The Painful Truth is that as debt increases, so do the risks it will be politically, economically and financially worthwhile for borrowers to walk away from paying back their loans to bondholders. To see a real time list of the largest defaulted municipal bonds.

Municipal bankruptcy is very different than the two most common forms of bankruptcy protection under the Bankruptcy Code – Chapter 7 liquidations and Chapter 11 reorganizations. Like individuals and companies, municipalities can also file for bankruptcy protection under Chapter 9 of the Bankruptcy Code. California has had several municipal bankruptcy filings in 2012 including the cities of Stockton, San Bernadino and other. These are some of the largest cities to file for municipal bankruptcy protection following major municipal bankruptcy filings in Jackson County, Alabama and Harrisburg, Pennsylvania. While municipal bankruptcies remain few, but their numbers are increasing as municipal revenues decline and obligations such as pensions increase. Not only do municipal bankruptcies give us a window into the state of the public sector, but they may impact municipal bondholders even investors of General Obligation bonds.

Chapter 9 of the Bankruptcy Code changes this equation. Chapter 9 is the chapter of the Bankruptcy Code allowing for municipalities to file for bankruptcy protection and restructure their obligations in a manner similar to Chapter 11 bankruptcy for private entities. Like the other chapters of the Bankruptcy Code, Chapter 9 allows a municipality to gain “breathing room” from its creditors, including GO bond holders. Meanwhile, the municipality may reorganize its debts by reducing principal, extending maturity dates, or refinancing the debt. As in Chapter 11, the municipality submits a plan of reorganization to the courts for approval that can significantly alter its contractual obligations to various creditors as allowed under the Bankruptcy Code.

And this rule applies to General Obligation (GO) bondholders as well. Bankruptcy case law makes it clear: GO bonds need not be paid in full for a bankruptcy court to approve a municipal restructuring plan under Chapter 9. See, e.g., In re Sanitary & Improvement Dist. #7, 98 B.R. 970 (Bankr. D. Neb. 1989). In the District 7 case, the Bankruptcy Court approved a municipal reorganization plan that impaired the rights of GO bondholders. Even though the municipality could have, in theory, raised taxes to cover their bond debt obligations, the Bankruptcy Court refused to force them to do so. The Bankruptcy Court explained that “[i]f a municipality were required to pay prepetition bondholders the full amount of their claim with interest . . . and the [debtor] had no ability to impair the bondholder claims over objection, the whole purpose of Chapter 9 would be of little value.” Id. at 974. Other courts have followed similar lines of logic. See, e.g., In re City of Columbus Falls, Montana, Special Improvement District No. 25, 26, 28, 143 B.R. 750 (D. Mont. 1992) (allowing Chapter 9 debtor to impair GO bondholders so long as other requirements of Chapter 9 were met); see also In re City of Camp Wood, Texas, Case No. 05-54480 (Bankr. W. D. Tex. June 13, 2007) (allowing a municipality to write-down the principal amount and interest rate of municipal GO bonds and amortize payments over a longer period).
What this means for GO bondholders is that their investments are still generally safe, but once a municipality files for Chapter 9 bankruptcy, they are in the same boat as any general unsecured creditor. While Chapter 9 bankruptcies are relatively rare, they do happen. For example, Jefferson County, Alabama filed for Chapter 9 protection after accumulating over $3 billion in debt from a court-mandated upgrade to its sewer system. The sewer system upgrade was conducted in a blatantly illegal manner, and the former Mayor of Birmingham, Alabama and the President of the County Commission are both serving prison terms for bribery. Twelve others were convicted of bribery and conspiracy, and over twenty others are serving jail time on related counts. Despite the governor of Alabama attempting to work with the County to forestall bankruptcy, Jefferson County was forced to file for Chapter 9 protection.
Only 5% of Jefferson County’s municipal bonds were GO bonds, but those bondholders may be forced to take a haircut. When municipal bond markets were flush, it was easier for municipalities to hide fiscal problems. With the recession, that has changed. Now, municipalities are finding that their fiscal problems are straining budgets as tax revenue plummets. Municipalities in states from New York to California are also feeling the cash crunch, especially since state government coffers are insufficient to give municipalities a backstop.

Chapter 9 of the Bankruptcy Code may be a relatively little-known section of bankruptcy law, but some municipal bondholders are learning the hard way that it can have a major effect on their investments.

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Municipal Bond Bankruptcy. Why Its Different This Time.

July 11th, 2012

Is there an Evolving View of Bankruptcy in the Municipal Market?

The traditional view of municipal bankruptcy, and the defaults leading up to them, was that it had to be avoided at all costs. Cities, such as New York City, Cleveland and Philadelphia that were under severe stress, would accept some element of state control and oversight in exchange for assistance to avoid a bankruptcy. While bankruptcy is a commonly-used tool for corporate issuers of debt, the widespread view in the municipal market was that it had to be avoided at all cost, primarily because once an issuer went into bankruptcy, it would not be able to access the market for years, if ever. But is that the case and will it continue to be?

In today’s difficult environment, many cities are threatened with defaulting on their bonds, or bonds that they had provided guarantees for. The issues with Vallejo, Stockton, Harrisburg and Scranton, among others, are well known in the municipal market. With high levels of debt, large unfunded pension obligations and sluggish economic growth, it is clear that something has to give as municipalities cannot meet all their obligations while providing expected services to their citizens.

These municipalities have made large cuts in social services, public safety spending and other discretionary spending items, yet their problems continue. They are at, or will reach a point, where they cannot cut further with resulting in a major deterioration of the quality of life in their city. Public officials may face a choice of paying bondholders or their police force. In such a case, will they be able to pay a portion of their debt service, such as 50 cents on the dollar, rather than make draconian spending cuts or tax increases that would decimate the local economy. Bondholders of Greek sovereign debt agreed to a large haircut, will the same be done with municipal debt? And if they do, will a municipality be able to access the market in the future when it is financially stable?

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More Bond Defaults Starting To Hit As Taxpayers Pay The Tab

June 27th, 2012

The painful truth is that as debt increases, so do the risks it will be politically, economically and financially worthwhile for borrowers to walk away from paying back their loans to bondholders. Surprised local taxpayers from Stockton, Calif., to Scranton, Pa., are finding themselves obligated for parking garages, hockey arenas and other enterprises that can no longer pay their debts.
Officials have signed them up unknowingly to backstop the bonds of independent authorities, the special bodies of government that run projects like toll roads and power plants.The practice, meant to save governments money, has been gaining popularity without attracting much notice, and is creating problems for a small but growing number of cities.

Here is a real time list of the largest municipal bond defaults.

Thomson Reuters suggests that local taxpayers are backing so-called enterprise debt at five times the rate they did 10 years ago. The resulting municipal bonds are sometimes called “double barreled,” because they are backed by both the future revenue of a project and some sort of taxpayer backstop. The exact wording and mechanics can vary.

With many cities now preoccupied with other crushing costs — pension obligations, retiree health care, accumulated unpaid bills — a sudden call to honor a long-forgotten bond guarantee can be a bolt from the blue, precipitating a crisis. The obligations mostly lurk in the dark. State laws requiring voter pre-approval of bonds don’t generally apply to guarantees. Local governments typically don’t include them in their own financial statements or set aside reserves to honor them.

“These are debts that do not show up clearly, no matter how closely you look at the balance sheets,” said Carmen M. Reinhart, an economist at the Peterson Institute for International Economics who has written extensively about government debt. They “come out of the woodwork in bad times.”

In a number of communities, especially in New Jersey, Michigan and Washington State, local officials have recently scrambled to work out fiscal emergencies caused by guarantees and similar promises. Hoboken dodged a bullet last year, for instance, when a buyer was found for a bankrupt hospital whose debt the city had guaranteed. Buena Vista, Va., narrowly missed a creditor foreclosure of its city hall and police building, after a park authority failed to repay the bonds for a golf course.

In other places, bond guarantees have been time bombs, causing problems too severe to be solved in a workout. Stockton may be headed for Chapter 9 bankruptcy this week after pledging taxpayer money to backstop authorities’ debts for a hockey arena and other showcase buildings. Scranton, a faded former coal center, touched off a full-blown debt crisis this month, losing access to the capital markets when its City Council refused to honor a taxpayer guarantee for a parking authority’s bonds.

Residents of Pennsylvania’s capital, Harrisburg, recently learned from a forensic audit that their city’s fiscal woes could be traced to a guarantee issued in 1998, for the bonds of a trash incinerator project. Every few years after that, the authority running the project issued more bonds, and the city guaranteed those as well.

The audit showed that the authority had been selling new bonds for the cash to pay its older bonds — saving unwitting residents from having to honor their guarantees for a time, but blowing up their debt from the incinerator to an impossible $310 million. That’s more than three times what residents owe on the city’s own bonds.

Harrisburg tried unsuccessfully to declare bankruptcy last year but was blocked by the state. It is widely expected to try again.

The “full faith and taxing power” of communities, a solemn pledge, was being used to guarantee revenue bonds for nonessentials like solar-power projects, apartment buildings and a soccer stadium — things bailout-weary taxpayers might walk away from if the guarantees were called.

Moody’s cut several communities’ own credit ratings to junk, briefly making New Jersey the nation’s leader in junk-rated municipalities. (Now Michigan has that distinction.) The gritty town of Harrison, just across the Passaic River from Newark, had its rating cut a rare eight notches in a single year, when it couldn’t honor a promise to pay debts connected with construction of the Red Bull soccer stadium.

Harrison had to borrow from Hudson County to get through the crisis, but that in turn raised doubts about whether the county’s taxpayers would honor their guarantee of yet another project’s debts — $85 million for a faltering waste-disposal system.

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Bondview Announces Free Red Alert System for Defaulted Municipal Bonds

June 27th, 2012

New York, NY (June 26, 2012

Bondview.com has announced the availability of its new investor tools to provide expert real time analysis, alerting and trading information about defaulted municipal bonds. This new free tool is available now and gives investors a centralized web site to review information about defaulted bonds, a task that was previously difficult to do. Bondview.com is a leading provider of free information for investors and professional advisors in the municipal bond market.

Features include real time listings of the 1) Largest Municipal Bond Defaults, 2) Most Actively Traded Bonds, and 3) Bonds Trending Up or Down in price.

According to a media sources, a recent internal J.P. Morgan document raised doubts about the safety of municipal bond investments and suggested more potential defaults may occur amid ballooning unfunded pension and health care liabilities. A 2011 report from Roubini Global Economics highlighted the need for better bond default information and said “Tracking the total number of defaults can be difficult because they are concentrated among small bonds that aren’t rated by national rating firms.”

Robert Kane, CEO of Bondview.com said “Many defaulted or impaired bonds are concentrated among smaller bond issuers that trade infrequently, are no longer rated by the big 3 rating agencies and have minimal news coverage.” This has resulted in very little useful information being available for retail investors or professional advisors.

While few investors purposefully buy defaulted bonds, they may end up owning them after having purchased good bonds which later go bad. Deciding if and when to sell these bonds quickly becomes a concern since when a bond defaults or is impaired in some way, its price usually, but not always, declines. Historically many, but not all, defaulted bonds are eventually paid back. That said, the risk of a potential halt in bond interest and or principle payments results in steep price declines caused by natural investor selling which is often exasperated by marketplace illiquidity.

Bondview users can now easily see which defaulted bonds actively trade at or close to par (typically 100), suggesting the marketplace believes the problems are only temporary or will be worked out with minimal loss. However, there are many municipal bonds that trade at large discounts indicating the marketplace believes there is little value remaining.

Looking at the Bondview website for the Most Active List for defaulted bonds for the last 30 days shows a Florida Housing issue trading at 103, a California tobacco bond issue trading at $79.50 and an Illinois sports facility bond issue trading at just $3. This information can be used by investors to determine whether there is opportunity or not in select defaulted issues.

In the Trending Up & Down section, the complete trading history of all defaulted bonds are monitored 24 hours a day to identify patterns that may reveal a turnaround is occurring that merits further investor research.

During the two year period from July 2010 thru June 2012, the $229 million in bonds issued for a downtown Chicago luxury continuing-care tower defaulted. The bond known as Clare at Water Tower, fell into bankruptcy, was then restructured and finally re-emerged from bankruptcy after a heated auction process and is now under new ownership and management. During this time, there were large up and down price swings starting when the price fell from 100 to open at 25. Continued investor selling amid a lack of useful information and thin trading eventually helped pushed the price to $1 in March 2012. As of June 19 the bond had increased by more than 1300% last trading at $13.70. “An attorney involved in the case projected that the recovery rate would top 20 cents on the dollar” according to a recent Bond Buyer article on the case. Presumably most bondholders lost money on this investment but some made money.

Bondview analyzes the trading patterns of about 45,000 municipal bond transactions daily for unusual activity. Bondview is able to immediately identify so called “Story Bonds”, i.e., the Clare Water Tower bonds, that significantly decrease or increase in price, amid volume changes and little news.

Bondview also generates its own proprietary estimated 3rd party prices, market implied ratings and many other features including social networking forums where users rate and chat about individual bonds.

About Us: BondView is the leading free investor advocate for municipal bonds. Our mission is to promote smart, informed decision making about municipal bonds. We are dedicated to providing timely and accurate real-world market information to improve transparency for investors and professionals.

For more information contact: Craig Charlton at BondView, LLC. Telephone: 866-261-9533. news(at)bondview(dot)com , http://www.bondview.com. 207 Mineola Ave., Suite 217, Rosyln Heights, NY 11577.

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Will Silicon Valley Melt Down?

June 18th, 2012

Ironically in many cities taxes are going up regardless of home prices going rising or falling. The annual operation costs that towns must pay for schools, police, fire and other essential services are increasing. Much of the increase is fueled by pension and health care burdens and this problem is echoing across our nation.

A rather strange recent victim is San Jose, CA. (Silicon Valley) where they are currently paying 90% pensions to their police force after 20 years of work! This city houses Cisco, Intel, Apple, and probably hosts servers for Linkedin, has 2 new libraries that remain closed because they dont have the money to pay for staffing

Here is a San Jose tax revenue bond that just last week issued a notice of potential default.

Tax revenues are going towards bloated retiree pensions pensions. Whats wrong with this picture?

And here is the rub. While Silicon Valley is currently experiencing job growth and declining unemployment, revenue from property and sales taxes has been stagnant. This year’s gap is expected to be $25 million. By the end of the year, the city will have to pay $244.4 million to fund employees’ pensions, up 235% from 2001. That will likely come thru taxes or a pension overhaul.

In the past three years San Jose has laid off or cut the positions of more than 1,500 city employees, or more than 20% of the city’s work force, and cut dozens of services to help reduce costs.

“This forecast stands out because there’s a heightened sense of awareness among employees and residents as a result of the cuts we’ve done,” says San Jose Budget Director Jennifer Maguire. “There’s no wiggle room now.”

Union representatives for San Jose’s police and fire employees—two of the city’s largest unions—have objected to how pensions have been cast as a primary culprit for recurring budget deficits.

San Jose last year projected that the pension payout number would rise to $400 million by fiscal 2015, or about half the city’s budget.

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Lobbying Groups Try To Protect Tax Free Muni Bonds

May 2nd, 2012

Twenty five municipal market groups representing local governments are lobbying Senate Finance Committee leaders to maintain the federal tax-exemption for municipal bonds, ensure states maintain their authority to maintain their own tax policies and enable them to boost their coffers by collecting taxes from Internet retailers. The municipal market groups also want to maintain the tax-exempt status of muni bonds, claiming they are a vital low-cost financing tool for development of infrastructure, schools and affordable housing needs.

The groups made their pleas in two separate letters sent just before Wednesday’s Senate Finance Committee hearing and how tax reform affects state and local government fiscal policy. Here is the 1st rather interesting letter.

April 23, 2012
The Honorable Max Baucus Chairman, Committee on Finance United States Senate 219 Dirksen Senate Office Building Washington, D.C. 20510

The Honorable Orrin Hatch Ranking Member, Committee on Finance United States Senate 219 Dirksen Senate Office Building Washington, D.C. 20510

Dear Chairman Baucus and Senator Hatch:

The state and local government associations and other organizations listed above representing participants involved in the municipal bond market, commend you for holding a hearing on the impact of tax reform proposals on state and local governments. Our associations look forward to testifying in future hearings as government representatives and market participants. This submission is limited to a discussion of the importance of tax-exempt bonds. We urge Congress’ continuing support and commitment to tax-exempt bond financing in recognition of the critical role it plays in the ability of state and local governments to fund national priorities, particularly infrastructure.

Maintaining the tax-exempt status of municipal bonds is essential to help our national economy grow, create jobs, and best serve the constituencies of every community. Three-quarters of the total United States investment in infrastructure is provided by state and local governments, and tax-exempt bonds are the primary financing tool used by over 50,000 state and local governments to accomplish these infrastructure goals.

Our citizens and communities benefit in many ways from the issuance of tax-exempt bonds. They are used to build and maintain elementary and secondary schools, as well as colleges and universities, which help develop an educated workforce. They are used to build our roads and airports, all of which are essential for supporting commerce. They address the country’s water infrastructure, electric utility and affordable housing needs. Tax-exempt bonds also finance public safety infrastructure that ensures local and national security. Nearly four million miles of roadways, 500,000 bridges, 1,000 mass transit systems, 16,000 airports, 25,000 miles of intercoastal waterways, 70,000 dams, 900,000 miles of pipe in water systems, and 15,000 waste water treatment plants have been financed through municipal bonds. (National League of Cities)
States and localities determine if bonds should be issued to meet the needs of their citizens, generally through a vote by elected officials or through voter referenda. Placing the decision-making at the state and local levels ensures effective resource allocation and avoids inefficient decisions due to federal bureaucracy, cumbersome grant programs, earmarking and similar processes. An extensive federal legislative and regulatory regime exists under the Internal Revenue Code to ensure that tax-exempt bonds are used properly.

State and local governmental bonds have been issued since the mid-1800s, and the federal tax exemption was included in the country’s income tax code since its promulgation in 1913. Through the tax- exemption, the federal government continues to provide critical support for the development and maintenance of essential facilities and services, which it cannot practically replicate by other means. Without the tax-exemption, state and local governments would pay more to raise capital, a cost that ultimately would be borne by taxpayers, through reduced infrastructure spending, decreased economic development, higher taxes or higher user fees.
The ability to sell bonds with interest exempt from federal income taxes reduces the interest paid for borrowed funds by approximately 25 percent (SIFMA). Tax-exempt bond issuance has remained stable compared to GDP over the past 10 years, averaging around 14.8%, and has actually declined since the 1980s. State and local governments are not overextended in debt. In fact, debt service is typically only about 5% of the general fund budgets of state and municipal governments. The tax-exemption represents a fair allocation of the cost of projects between the federal and state/local levels of government. State and local borrowers are responsible for repaying the principal and interest on a bond. The federal contribution is provided in the form of theoretically foregone tax revenue and represents an important, but relatively small portion of total project costs. As a result, the federal contribution is significantly leveraged.

Municipal bonds offer a healthy investment for American families in America’s communities. Seventy percent of municipal bonds are held by individuals, directly or through mutual funds (Thompsen Reuters). Investors choose to purchase municipal bonds, even though the investment return is less than if they purchased corporate or other taxable bonds, because the tax-exemption results in an equivalent after-tax benefit. Furthermore, as a class of investment, all investment grades of municipal bonds have proven to be safer investments than AAA corporate bonds (Municipal Market Advisors).

Our experience informs that tax-exempt financing is a well-established market providing a cost-effective mechanism for financing infrastructure and meeting needs of our citizens. Any changes that would replace, compromise, dampen or eliminate tax-exempt financing immediately or retroactively, particularly those offered as deficit reduction alternatives, should be carefully and cautiously analyzed by the committee.
Thank you again for the opportunity to comment on this important issue. We look forward to continuing conversations with you and your staff about these important issues.

Sincerely,

International City/County Management Association, Elizabeth Kellar, 202-289-4262

National Association of Counties, Michael Belarimo, 202-942-4254

National League of Cities, Lars Etzkorn, 202-626-3173

U.S. Conference of Mayors, Larry Jones, 202-861-6709

Government Finance Officers Association, Susan Gaffney, 202-393-8468

National Assn of State Auditors, Comptrollers and Treasurers, Cornelia Chebinou, 202-624-5451

National Association of State Treasurers, Jon Lawniczak, 859-244-8175

American Public Gas Association, Dave Schryver, 202-464-0835

American Public Power Association, Joy Ditto, 202.467.2954

Council of Development Finance Agencies, Toby Rittner, 614-224-1300

Council of Infrastructure Financing Authorities, Rick Farrell, 202-547-1866

Education Finance Council, Vince Sampson, 202-955-5510 International

Municipal Lawyers Association, Chuck Thompson, 202-742-1016 Large Public

Power Council, Noreen Roche-Carter, 916-732-6509 National Association of

College and University Business Officers, Liz Clark, 202-861-2553

National Assn of Health & Higher Education Facilities Authorities, Chuck Samuels, 202-434-7311

National Association of Local Housing Finance Agencies, John Murphy, 202-367-1197

National Association of School Administrators, Bruce Hunter, 703-875-0738

National Council of State Housing Agencies, Garth Riemen, 202-624-7710

National School Boards Association, Deborah Rigsby, 703-838-6208

Bond Dealers of America, Mike Nicholas, 202-204-7901

Investment Company Institute, Jane Heinrichs, 202-371-5410

National Association of Bond Lawyers, Bill Daly, 202-503-3303

National Association of Independent Public Finance Advisors, Colette Irwin-Knott, 317-465-1504

Securities Industry and Financial Markets Association, Michael Decker, 202-962-7430

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Is Illinois Built On A House of Lincoln Logs?

May 1st, 2012

The State of Illinois is now at the bottom of the pack of fifty states. With a general-obligation rating lowered to A2, it is now the lowest-rated by Moody’s of all the states.

Illinois’ woes have been well documented. The state has a severe backlog of unpaid bills, both to vendors and to Medicaid, totaling $8 billion+. Many vendors are being paid with IOUs. The state’s pension fund system is reported by Bloomberg to be the lowest-funded state pension system in the US, with assets equaling only a little over 44% of projected obligations. These unfunded pension obligations total over $80 billion. The state covered its payments to the pension fund in 2010 and 2011 through borrowing.

The stress in the state can be seen in some widening in the value of the state’s bonds. In the taxable bond market, its general-obligation bonds (5.10s of 2033, with over $7 billion issued in 2003) have recently widened out to +250 basis points over US Treasury bonds, compared to roughly +220 a few weeks ago. To put this in perspective, these pension obligation bonds came to market in June of 2003 at a spread to US Treasuries of 72 basis points. Tax-exempt bonds have seen similar widening in the past few weeks.

The consternation over the state’s finances can also be witnessed in the market for credit default swaps, where 10-year credit default swaps (“CDSs”) for Illinois have widened this month from 240 basis points to 275 – a rise of 35 basis points. To be fair, all municipal-credit default swaps have widened this month, as concern over Europe has put some of the flight-from-risk trade back into the Treasury market. But compare this to California, a state rated A- by S&P, which saw its 10-year CDSs rise from 206 basis points to 235 – a rise of only 29 basis points.

So what has Illinois done to stem the tide? Last year the Illinois state legislature raised the state’s top income tax rate from 3% to 5%. That has provided additional funds, but not enough to reduce the drag created by pension costs and the reduction of federal funding to the state. The governor has introduced a plan that looks to increase employee contributions to pensions, limiting cost-of-living increases and extending retirement ages.

Clearly, more needs to be done across the whole spectrum of revenue raising as well as cost reduction. Illinois is planning to bring a $1.8 billion general-obligation deal this week (April 30th, 2012). The price talk on the deal is 175 to 200 basis points over the AAA scale (Municipal Market Data). This compares to a smaller $500-million-dollar deal in March of this year, which came at a spread of 150 basis points over MMD. Thus the markets are now saying things are going to get worse before they get better.

Aside from the state itself, who is getting hurt? Answer: all the local-governmental units within the State of Illinois that issue bonds. From the University of Chicago, to the City of Peoria, to Lincoln’s home of Springfield, to smaller towns and villages, all are paying higher debt-service costs because of the poor financial management at the state level.

At some point these issuers, sick of paying these additional interest costs, will take up the famous line from the movie Network, when Peter Finch shouts from the window, “I’m mad as hell, and I’m not going to take this anymore!” And call for real change.

Thanks to our friends at Cumberland Advisors

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Harrisburg, PA: The Outrage Continues

April 10th, 2012

As you watch this of video Harrisburg Mayor Linda Thompson trying to justify why she is suing her own City Controller Dan Miller over a minor issue, you can understand the political dysfunction in Harrisburg, the now bankrupt capital of Pennsylvania.

Talk about petty politics further ruining the city. Hopefully the voters can throw both of these quacks out of office come November and bring in someone that has the best interest of the public at heart. Here are some ruined Harrisburg bonds that are in default.

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