MuniLand

High-taxing states and debt

The Tax Foundation named names in a new report that details the states that have the heaviest tax structures. The report compiled personal and corporate income tax, sales tax, unemployment insurance and property tax rates, and it used this data to rank states by their tax burdens. The Tax Foundation describes the purpose of the effort:

State Business Tax Climate Index enables business leaders, government policymakers, and taxpayers to gauge how their states’ tax systems compare.

Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate tax, the individual income tax, or the sales tax.

I wondered if high taxing states also had high debt loads. In 2011, Moody’s published debt load data by state, and I pulled the numbers for the ten highest-taxing states. You can see the results in the chart above.

State debt loads vary from Iowa’s 0.7% debt as percent of personal income to New Jersey’s 7.9% debt load. High debt load states Rhode Island, New Jersey, New York and California are also on the high tax list, but other states like Iowa and Vermont, with relatively light debt loads, also rank high for taxes. States with low debt loads would have more flexibility and would be better positioned to reduce their budgets if the economy slowed again.

Illinois does not appear on the list of highest taxing states, and it has a high debt load of 5.7% of gross personal income. As Illinois, with their massively unfunded pension liabilities, wrestles with paying more into its pension system, it will be interesting to see if it appears on this list in the future.

I wondered if high taxing states also had high debt loads. In 2011, Moody’s published debt load data by state, and I pulled the numbers for the ten highest-taxing states. You can see the results in the chart above. Join Discussion

Puerto Rico’s pain stretches to its lack of assets

Juan Carlos Batlle, President of the Government Development Bank for Puerto Rico, does not like the way I characterized his comments at the Bloomberg State & Municipal Finance Conference last week.  Here is the transcript of the panel he appeared on, so you can read his comments for yourself.

My criticism of Mr. Batlle was that the citizens of Puerto Rico were getting very little benefit from the government’s auction of a 40 year concession to the Luis Munoz Marin International Airport (LMM). But as I delved further, the situation became much more troubling than I had thought. It appears that Mr. Batlle and Puerto Rico are desperate to raise funds to pay down their massive debt load. Here is what Batlle said at the Bloomberg conference about leasing the LMM (from the transcript):

BATTLE [sic]: So we – for that we need to – I mean, we have I guess many people here know Puerto Rico’s situation in terms of her high debt load. So we have to tackle the issue and we have to start lowering our debt load.

[Former Washington, D.C. Mayor Anthony Williams]: Right.

BATTLE: So we’re using most of the money, and we did it the same with the toll road -

WILLIAMS: Right.

BATTLE: – we use most of the money to pay down debt.

The Puerto Rico Port Authority, which includes LMM airport, raised $669 million in bonds on December 16, 2011, and warned investors that the LMM lease arrangement must be completed. The Official Statement (page 5) warned investors that unless the deal to lease LMM were complete, then the Government Development Bank (GDB) would have to make principal and interest payments on the LMM bonds under GDB’s Letter of Credit.

Risk disclosures in these statements tend to be full of hyperbole, but a look at the balance sheet of the GDB is not reassuring. Intergovernmental lending by the GDB has increased rapidly in recent years. The bulk of GDB assets are loans to Puerto Rico municipalities and intergovernmental entities. These loans stood at $7.211 billion as of June 30, 2011, having increased from $5.675 billion in 2009 (page 9) (a list of GDB loans not including PR municipalities are on page 15). The GDB has rapidly increased its borrowing from the bond markets as public deposits at the bank have decreased (see chart above).

The GDB balance sheet is only as strong as the ability of the government units to repay their loans to the GDB. With Puerto Rico’s economy so weak, this would require very close monitoring.

Mr. Batlle seemed to struggle with the basic terms of the LMM deal at the Bloomberg conference. He described the upfront payment for LMM airport deal as $650 million, when it has been widely documented as being $615 million. But he is sticking to his story that the funds will be used to pay down debt.

Juan Carlos Batlle, President of the Government Development Bank for Puerto Rico, does not like the way I characterized his comments at the Bloomberg State & Municipal Finance Conference last week. Join Discussion

What would Atwater gain with bankruptcy?

Atwater, California voted at a special meeting on Wednesday to declare a common-law fiscal emergency. This is the first step toward filing for municipal bankruptcy. It makes Atwater the fourth city in California to publicly declare fiscal distress. The city must now go through a 90-day mediation period with its creditors, public employees, bondholders, trade vendors and CalPERS, the statewide pension provider.

The bankruptcy process is well established, but very little cost benefit analysis has been done to evaluate whether the benefits of bankruptcy outweigh the costs. Vallejo, CA spent $13 million on bankruptcy costs and Jefferson County, Alabama’s  large and very complex Chapter 9 case still has enormous legal costs to contend with. Jefferson County Commission President David Carrington explained what the county faced:

“People look at our side in the courtroom and see five or six lawyers, which seems like a lot,” Carrington said. “It is, but the other side has 45, 46 lawyers over there working against us.”

Lawrence LaRose, a bond insurer lawyer and partner at Winston and Strawn who has been actively involved in the Stockton, Harrisburg and Jefferson County bankruptcy cases, said at a recent conference that bondholders are “lawyered up and organized” during bankruptcies. The forces facing Atwater officials in bankruptcy will be strong.

Standard & Poor’s did an analysis of the costs and benefits of the Vallejo, CA bankruptcy, and found that bankruptcy was not a cost-effective strategy given what the city has gained (emphasis mine):

We think that evaluating the city’s bankruptcy solely on its fiscal merits, therefore, renders an equivocal verdict. When indirect and long-term costs are added to the equation, based on our estimate, it becomes even less likely that the benefits of bankruptcy will come near the costs.

There are no easy choices for Atwater, but it’s important for city officials to weigh whether spending $10 to $12 million on legal costs for bankruptcy will reduce their costs adequately and get them to fiscal stability. Join Discussion

Puerto Rico’s airport giveaway

Puerto Rico is drowning in debt. It is now in the process of leasing its Luis Munoz Marin International Airport to a Mexican firm Aeropuertos del Sureste (Aerostar). The airport (LMM) is the largest in the Caribbean, and it could become an international gateway to Central and South American cities. The lease deal lasts 40 years. However, studying the financial terms of the deal, it is not clear that Puerto Rico will really benefit much financially from privatizing the airport.

ASUR, a Mexican airport operator with concessions to operate, maintain and develop several airports in the southeast of Mexico, is doing the deal in partnership with Highstar Capital, an American infrastructure investment firm.

Looking at the financial data, which is sparse and hard to find, the deal is unlikely to generate any substantial cash for Puerto Rico. From the FAA application (page 9):

Aerostar will make a one-time cash payment to the PRPA of $615 million (the “Leasehold Fee”) at the time of closing the Lease.

The deal is structured with tiny annual cash payments from ASUR to Puerto Rico for the first five years. ASUR will pay $2.5 million per year for five years, for a total of $12.5 million. In years six through 30, ASUR will pay Puerto Rico five percent of gross airport revenues. It will pay ten percent of gross airport revenues in years 31 through 40. ASUR will also reimburse Puerto Rico $2.8 million per year for the costs of police and fire services. This amount will be adjusted once actual costs have been determined.

The airport lease also calls for “General Accelerated Upgrades” to the airport, but it does not require any major capital improvements. ASUR is not obligated to offer employment to airport employees. If the conditions are worked out, then ASUR can take control of the Puerto Rico Air National Guard facilities also.

Puerto Rico is drowning in debt. It is now in the process of leasing its Luis Munoz Marin International Airport to a Mexican firm Aeropuertos del Sureste (Aerostar). The airport (LMM) is the largest in the Caribbean, and it could become an international gateway to Central and South American cities. The lease deal lasts 40 years. However, studying the financial terms of the deal, it is not clear that Puerto Rico will really benefit much financially from privatizing the airport. Join Discussion

Tweeting the Bloomberg State & Municipal Finance Conference

Yesterday I attended the always great municipal finance conference held by Bloomberg:

The Bloomberg State & Municipal Finance conference will convene public sector policy makers, labor leaders, pension fund managers, institutional investors and issuers for a full-day program covering current issues central to state and municipal finance and evaluate opportunities for investors and participants in the municipal bond market.

If you are not familiar with Twitter, this might give you a better idea of how it works. This micro-blogging format fit the form of the conference, which had 3-4 speakers on each of its fifteen panels. I tweeted from several of them:

The emcee, William Glasgall, Managing Editor of States and Municipalities for Bloomberg News opens the conference:

BBG managing editor Bill Glasgall opens conf describing #muniland as a cross between “Singing in the rain” and “Psycho” #bbmuni

— Cate Long (@cate_long) October 3, 2012

Michael Belsky of New Vernon Wealth Management and former mayor of Highland Park, IL on the “Illinois Treading Water” panel:

Belsky:”6,000 plus local govts in Illinois. Need to consolidate some govts to gain tax relief. More services to county”#bbmuni

— Cate Long (@cate_long) October 3, 2012

I lived-tweeted the Bloomberg State & Municipal Finance Conference. Join Discussion

CDS in muniland – There is no “there” there

 

Kamakura Corporation, a risk management firm in Honolulu, Hawaii, has updated their analysis of the volume of trading in municipal credit default swaps (CDS). Here is what they say:

On January 11, 2012, we looked at weekly credit default swap trading volume for subsovereigns and municipals among 1,090 90 reference names that had traded in the 77 weeks ended December 30, 2011.  We found, unfortunately, that (in the words of Gertrude Stein) “there is no there there.” In this blog,  we update our CDS volume analysis for subsovereigns and municipals for the 103 weeks ended June 29, 2012. Alas, our conclusion is unchanged.

Kamakura documents that there is very little volume in muni CDS trading, and most of it is done between dealers. Essentially it’s an artificial market with very few trades outside the dealer community.  Kamakura, in their analysis, strips away the trades that dealers are doing between themselves:

As always, our emphasis is not on gross trading volume. As of September 7, 2012, dealer-dealer volume was 76.00 percent in the single name credit default swap market and it would be nearly costless for dealers to inflate gross trading volume by trading among themselves. Instead, we focus on “end user” trading where at least one of the parties to a trade is not a dealer.

Kamakura’s findings put a recent article in the Bond Buyer in perspective:

Muniland does not need credit default swaps. They were developed by dealers and that is the only place that they have found any traction. I expect volume will continue trending down. Join Discussion

A new push for transparency in muniland

SEC Commissioner Elisse Walter spoke at the SIFMA Municipal Bond Summit yesterday, and her message came across loud and clear. She said that despite enormous advances in technology, decentralized muniland trading is still too hard to understand from the outside. She said that although 75% of municipal bonds are held by retail investors through direct ownership, money market funds, mutual funds and closed end funds, retail investors are still “afforded second class treatment.”

Walter led a two-year effort to assess the hurdles that retail investors face in the municipal bond market. The SEC held three field hearings on the municipal market over the last two years, and Walter said one thing that struck her were the retail investors who said that they couldn’t get pricing for their municipal bonds. Walter seems dedicated to fixing that problem. Transparent bond pricing – the bedrock of a stable and fair market – has been unavailable to investors for decades in muniland.

Walter’s statements echoed the findings of the SEC muni report (summarized by the law firm Bingham):

The report finds that “the secondary market for municipal securities is relatively opaque.” Pre-trade bid and ask quotes are not readily available. Market participants have sought greater insight into the value of municipal securities as they rely less on rating agencies or on bond insurance and other credit enhancements. The Report finds that lack of price transparency inhibits retail customers in assessing the fairness of prices offered by dealers. Further, the lack of price transparency undermines the ability of dealers to meet fair pricing obligations.

This is the core problem of the muni market. In summary, the report says that retail investors can’t get price quotes, and they don’t know if the prices that they are offered by dealers are fair.

Here are the specific steps being advocated by SEC Commissioner Walter (summarized by the law firm Bingham):

• Improve pre-trade price transparency by amending Regulation ATS to require alternative trading systems (ATS’s) with material transaction or dollar volume in municipal securities to make publicly available best bid and offer prices and responses to “bids wanted” auctions on a delayed and non-attributable basis
• Improve pre-trade price transparency by the MSRB requiring broker’s brokers to make public best bid and offer prices on electronic networks and to publish responses to “bid wanted” auctions on a delayed and non-attributable basis
• Improve post-trade price transparency by the MSRB requiring municipal bond dealers to report “yield spread” information to its RTRS, in addition to existing interest rate, price, and yield data.

A recent report says that retail investors can’t get price quotes, and they don’t know if the prices that they are offered by dealers are fair. This is the core problem of the muni market. Join Discussion

Municipal officials rise to the challenge

A wave of innovation is sweeping American cities. Hard fiscal times and inexpensive technologies are prompting many governments to develop new and innovative programs. New York City’s mayor, Michael Bloomberg, and Harvard University’s Ash Center for Democratic Governance and Innovation are leading nationwide competitions to showcase innovative public programs, while two other states have rolled out tools for their cities and taxpayers. Righting the muniland ship will require stabilizing budgets and creating innovative ways to deliver public services.

Last week I wrote about local officials needing governance resources, and this week two of the largest states, Texas and New York, rolled out a few. The Houston Chronicle reported on the efforts of Texas State Comptroller Susan Combs to inform taxpayers about how much local debt they are responsible for:

Local governments are loading down Texas taxpayers with debt without providing them enough information about the amount already owed for roads, schools and other public projects, State Comptroller Susan Combs contends in a report released Wednesday.

The report, “Your Money and Your Debt,” notes that the current level of government debt approved by Texas cities and counties soared from 2001 through 2011, with tax-supported debt of cities increasing 126 percent to $27 billion. Tax-supported county debt, the report said, grew by 131 percent to $10.3 billion. “As taxpayers step into a voting booth to approve new debt, government should tell them how much they are already responsible for repaying and how much debt service is included,” Combs said in a statement.

In New York State, Comptroller Thomas DiNapoli announced plans to implement an early warning monitoring system to identify municipalities and school districts experiencing signs of budgetary strain. From the Comptroller’s press release:

Using data already submitted by more than 4,000 local governments, DiNapoli’s office will calculate and publicize an overall score of fiscal stress for municipalities and school districts across the state. These scores will be used to classify whether a community is in “significant fiscal stress,” “moderate fiscal stress,” or “nearing fiscal stress.” This system is based on a process that DiNapoli’s auditors have been using to detect financial problems in communities.

The proposed system was announced in conjunction with a report released by DiNapoli today that examines the demographic and financial trends of New York’s 61 cities (excluding New York City) over the past three decades. The report found that many of New York’s cities are struggling to balance budgets and revitalize deteriorating local economies.

Harvard University’s Ash Center for Democratic Governance and Innovation has spent the last year accepting nominations for the smartest and most innovative government programs across the nation. On Wednesday they released their list of winners in a report “111 Bright Ideas.” Here are some especially compelling projects that help make governments more efficient and better serve their citizens:

• Rhode Island Business Quick Start makes it easier for entrepreneurs to quickly identify the regulatory forms needed to start a business in Rhode Island. The tool boasts a searchable form library with forms grouped by popular business types, and a business wizard that asks questions based on the entrepreneur’s individual business needs and suggests applicable state forms to complete.
• San Diego County’s Health and Human Services Agency launched video interviewing with community partners to improve customer service, enhance access to public assistance, and increase the efficiency of service delivery for clients who face transportation challenges or other barriers. Targeted populations include pregnant women, migrant farm workers, homeless clients, residents of battered women’s shelters and transitional housing, and both tribal and rural clients.
• Community Choice Aggregation is a sustainability program that allows the village of Oak Park, Illinois to aggregate residential and small commercial electronic accounts to seek a better power supply rate. In the first quarter, Oak Parkers saved more than one million dollars. More than 200 Illinois communities followed suit, representing one third of the utility’s customers.
• Bloomberg Philanthropies launched the Mayor’s Challenge to “find and spread innovative local solutions to national problems.” Of the 305 applications that the challenge received, the one judged to have the most innovative program will win $5 million. Tulsa, Oklahoma was chosen as a great example of creativity and team work:

A wave of innovation is sweeping American cities. Hard fiscal times and inexpensive technologies are prompting many governments to develop new and innovative programs. New York City’s mayor, Michael Bloomberg, and Harvard University’s Ash Center for Democratic Governance and Innovation are leading nationwide competitions to showcase innovative public programs, while two other states have rolled out tools for their cities and taxpayers. Righting the muniland ship will require stabilizing budgets and creating innovative ways to deliver public services. Join Discussion

Pay to play beyond Goldman Sachs

The SEC caught a big fish in muniland that was clearly breaking the “pay-to-play” rules. Pay-to-play is when municipal bond underwriters give contributions to politicians to win underwriting business. Reuters has the story:

Goldman Sachs Group Inc will pay more than $14 million to settle federal and state charges after it violated “pay-to-play” rules, in a case involving campaign contributions to former Massachusetts gubernatorial candidate Timothy Cahill.

Neil Morrison, a former vice president in Goldman’s Boston office, worked extensively on Cahill’s 2010 campaign while also soliciting underwriting business from the Massachusetts treasurer’s office, the Securities and Exchange Commission said. Cahill at the time was Massachusetts state treasurer.

It appears that Goldman Sachs hired the former deputy treasurer of Massachusetts, Neil Morrison, who then proceeded to use his time at Goldman and the firm’s resources to help elect his former boss as governor. The quid pro quo to Morrison and Goldman was the state would direct lucrative underwriting to Goldman Sachs. The SEC described the case as its first “pay-to-play” case involving contributions other than cash.

Goldman Sachs paid a massive fine. The Financial Times picks up the story:

“Morrison’s work for Cahill’s campaign during his Goldman Sachs’ work hours was remarkable in its breadth,” the SEC said in its order.

The SEC alleged that from July 2008 to October 2010 Mr Morrison made both personal cash payments and in-kind contributions, including fundraising, writing campaign materials, attending Mr Cahill’s press conferences and approving the hiring of campaign personnel as well as their salaries.

Mr Cahill was in a position to influence which banks were hired to underwrite debt for several municipalities. During the period, according to the settlement documents, Goldman’s underwriting business increased with Massachusetts, with the bank winning the lead underwriter position for three of 11 transactions it worked on for the state’s Housing Finance Agency.

This story makes you wonder if Goldman Sachs either doesn’t supervise its employees or just looked the other way in this case. Goldman, like many other Wall Street firms, has a habit of hiring former regulators and politicians. Former SEC Chairman Arthur Levitt serves as a senior policy advisor for the firm and the former U.S. Senator from New Hampshire, Judd Gregg, serves as an international advisor.

The Goldman case may be a shining example of the revolving door between government and Wall Street, but it is also unique because it did not involve direct cash payments from someone working at a bond underwriter. There have been several previous high profile pay-to-play cases, most specifically Jefferson County, Alabama which is now bankrupt. From the AP in 2009:

The SEC caught a big fish in muniland that was clearly breaking the “pay-to-play” rules. Pay-to-play is when municipal bond underwriters give contributions to politicians to win underwriting business. Join Discussion

More budget illusions in New Jersey

Last Friday, New Jersey Governor Chris Christie proposed to levy a $10,000 fine on anyone who leaked the state’s fiscal data ahead of official announcements. Politicker NJ quoted New Jersey state Senator Barbara Buono (a Democrat from Middlesex):

“Governor Christie came into office promising ‘fiscal transparency’ and signed an executive order [in 2010] requiring his Treasury Department to issue revenue reports on the 10th business day of each month,” Buono noted. “But now that revenues are coming in below the governor’s wildly optimistic projections, revenue numbers are suddenly a state secret and the governor wants total control over the flow of information.”

“Whether New Jersey taxes are coming in as expected should not be kept secret from New Jersey taxpayers and it should not be kept secret from New Jersey legislators who are responsible for ensuring that the state budget remains in balance. Like the United States Constitution, the 1947 New Jersey Constitution established a government with three equal branches. It did not establish an imperial governorship.”

New Jersey has been struggling this fiscal year to meet those “wildly optimistic” budget projections. Christie’s used a projection of seven percent growth in state revenues to push for income tax cuts, would go mainly to the wealthiest taxpayers. They nonetheless would earn Christie his coveted mantle of tax-cutter. I wrote in May:

Since February, when Christie proposed his budget for fiscal year 2013 (beginning July 1, 2012), he has been very optimistic about the state’s revenues and has been fixated on cutting the state income tax. Moody’s and others warned at the time that the tax cut was imprudent because New Jersey’s budget was based on fanciful assumptions.

Now Christie’s revenue projections are not happening, and with no money to fund it, his tax cut is unlikely to pass the Democrat-controlled legislature. Rather than going back to the drawing board, Christie is trying to muzzle the public release of tax revenue data.

There are no “insider trading” or “material non-public information” provisions in the municipal bond market like there are in the equity markets. Internal budget data is released all the time to credit rating agencies, underwriters and others on Wall Street. New Jersey’s problem is not that the public is seeing data too early. New Jersey’s problem is that its Republican governor wants to create the illusion that he can cut taxes, even while state revenue this year does not nearly support a cut.

There are no “insider trading” or “material non-public information” provisions in the municipal bond market like there are in the equity markets. Internal budget data is released all the time to credit rating agencies, underwriters and others on Wall Street. New Jersey’s problem is not that the public is seeing data too early. New Jersey’s problem is that its Republican governor wants to create the illusion that he can cut taxes, even while state revenue this year does not nearly support a cut. Join Discussion