MuniLand

I often forget how exciting capital investment can be. Most of us in muniland think more about bond structures, credit ratings and yields than about the actual projects being built. A short report about the MTA from Morningstar Municipal caught my attention:

The MTA has released its long-term capital needs assessment for fiscal years 2015-2034. This 20-year plan serves as a planning guide for the authority’s development of its five-year capital plan.

As Washington lurches from debt crisis to fiscal squeeze, it’s easy to see how dysfunctional government can be. Seeing MTA, the public entity responsible for the subway system, bridges and tunnels, 4,600 buses, the Long Island Railroad and Metro North, plan ahead 20 years restores my faith. After reading how much the MTA intends to spend, $106 billion, you may get excited about how New York City’s transit infrastructure will be renewed and expanded:

Over the next 20 years, the system plans on engaging in projects aimed to restore the system as well as expanding and enhancing service provision. Roughly $106 billion in projects to address continuing needs have been planned. This number is partially driven by the significant backlog of assets that need rehabilitation as well as current assets that are expected to reach the ends of their useful lives over the plan’s time period. Between $25 billion and $28.6 billion in projects is planned for each five-year increment of the assessment.

Most of the spending will go to maintenance for MTA’s system, the largest in the nation:

Bloomberg: #PuertoRico tax revenues coming in above budget. Muni finances likely not as bad as investors think. #muniland

— Richard Bernstein (@RBAdvisors) October 4, 2013

Puerto Rico announced first quarter general fund revenues for fiscal year 2013/14. As you can see, revenues increased $71 million year over year. But the Puerto Rico budget projected that corporation taxes would increase $775 million for the full year. They need to rapidly increase.

If general fund revenues continue on this pace, they will annualize at around $7.3 billion for the year. Puerto Rico will need a massive surge in the coming quarters to meet the full year budget estimate of $9.7 billion in general fund revenues (page 14).

For those of us in muniland used to massively oversubscribed municipal bond offerings, this report from the Moscow Times came as a shock:

In its first municipal bond issue in recent years, Moscow managed to sell only 35 percent of the securities on offer, raising 6.85 billion rubles ($212 million).

The city floated three-year bonds worth 20 billion rubles on Wednesday with a yield of 7.12 percent, said Alexander Kovalenko, deputy head of the city’s finance department.

Louise Story of the New York Times made an epic journalism effort late last year when she documented the level of state business incentives made to corporate entities. The team arrived at the massive number of $80 billion per year of state and local inducements that go to private firms. From their reporting:

A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.

State tax collections totaled $794 billion in 2012. So the $80 billion figure would equal about 10 percent of state tax collections. Does spending 10 percent of state revenues spur economic activity? If it does, it could be a bargain. From the Times again:

Puerto Rico’s short term funding needs are sending out warning bells. The Padilla Administration has been pushing the Commonwealth Legislative Assembly to agree to an increase in the Sales Use Tax to 3.5 percent from 2.75 percent. With this diverted revenue, the government could issue a third series of Cofina bonds for approximately $2 billion. This third tranche would be subordinate to the first two series of Cofina bonds, but have higher ratings than PR general obligations bonds and other public authority debt. The additional Cofina debt may be needed for short-term borrowing done through private placements.

El Neuvodia reports on the action in the Legislative Assembly (translated from Spanish):

Although they stressed there is ‘no rush’ to go to the markets, the principal officers of the prosecution team of Alejandro García Padilla administration today defended the move in a joint public hearing of Finance committees in the House and Senate.

Hurricanes Katrina and Sandy left about $220 billion in total property damages in their wake. Katrina caused approximately $16 billion in flood damages and required the flood insurance program overseer, FEMA, to borrow from the U.S. Treasury to cover insured losses. Losses from Sandy could push FEMA borrowing from the U.S. Treasury to $28 billion when all claims are paid.

Congress acted in July, 2012 to restore the program to solvency with the passage of the Biggert-Waters Act. Now, as the new flood insurance premiums take effect, an outcry against FEMA and Congress has grown in force.

The new rates are tightly targeted. According to data from FEMA, approximately 250,000 households out of over 5 million households in the program will see substantial premium increases. Insurance Journal drills down more deeply:

Late Friday, the City of Stockton, California released its “Plan of Adjustment” for how it intends to treat its creditors in bankruptcy. The plan has been in the works since the city filed for protection under chapter 9 of the United States Bankruptcy Code on June 28, 2012. Stockton’s City Council will vote on the plan this week, on October 3rd.

On inspection, the plan looks a lot like the failed adjustment for formerly bankrupt Vallejo, California, which continues to suffer massive operating deficits. The lead bankruptcy attorney for both Stockton and Vallejo is Sacramento-based lawyer Marc Levinson, who seems to be failing both cities by not using bankruptcy to create a stable fiscal base. If it is approved by Federal Bankruptcy Judge Christopher Klein, the plan will keep Stockton perennially saddled with massive pension liabilities. I wrote in May about Vallejo:

The structural fiscal problems, which [Vallejo] could have addressed through the bankruptcy process and chose not to, remain. Even after spending an estimated $12 million on bankruptcy and legal fees, the city has fiscal problems. Standard & Poor’s Gabriel Petek led a cost benefit analysis on Vallejo’s bankruptcy and determined (emphasis mine):

Fiscally stricken Woonsocket, Rhode Island recently informed its firefighters union that it would be replacing 15 vacancies in the fire department with volunteer firefighters. The Woonsocket Call reported:

The Woonsocket Fire Department would become the only urban fire district in the state to employ on-call volunteers under a cost-cutting edict issued this week by the Budget Commission – under the threat of a lawsuit from the firefighters union.

The firefighters won’t allow this to happen if they can help it. It is common for small communities of less than 10,000 people to use volunteer fire fighters. I have never heard of a mixed department, though some might exist. Maybe this precedent should be established as debt-burdened cities struggle to provide essential services.

According to Moody’s latest report on local government pensions, Chicago’s adjusted pension and debt burden (relative to its tax base) is the largest in the nation. The city is now putting about 8 percent of its revenues toward its pension funds. But the pensions are so underfunded that if the city made the full annual pension payment it would amount to 28 percent of revenues. The city has seriously neglected funding its pension plans.

The problem is complicated by the fact that Chicago must work through the Illinois General Assembly to enact changes to pension contributions and benefits. There is little discretion at the local level on these issues. Chicago Mayor Rahm Emanuel should go to Springfield and twist arms in the General Assembly before credit rating agencies whack the city with more downgrades. Instead, Emanuel intends to push the issue off for several years and do nothing. The Chicago Tribune reports:

Faced with the prospect of a major tax hike or severe service cuts just as he stands for re-election a year from now, Mayor Rahm Emanuel told the Tribune Wednesday that his formula for fixing the financially out-of-whack government worker pension system requires ‘reform, revenue and time.’

The bonds of Puerto Rico’s fiscal agent, the Government Development Bank, are inexplicably blowing up today. After a trader alerted me to the sell-off I haven’t been able to find any public information that would explain why.

The GDB bond in the graph above is Cusip 745177FN0 due 2019. It was issued in 2012 for $500 million. The bond is taxable and its yield is hovering around 13.2 percent on inter-dealer trades today (trades done between dealers are the sharpest prices in the market).

In contrast, Puerto Rico tax-exempt general obligation bonds of the same maturity are trading at around 6.74 percent, or 11.16 percent on a fully-taxable equivalent basis. Why did the GDB bond move out 2 percent on heavy trading?