Broke New York municipalities have more choices than bailouts or bankruptcy
Things are heating up in Albany, New York’s capitol. Someone close to Governor Andrew Cuomo appears to have been whispering into the ear of New York Post reporter Fredric Dicker:
Several of New York’s biggest cities — including Yonkers, Rochester and Syracuse — are “close to bankruptcy’’ and are looking for a bailout from Gov. Cuomo’s administration, The Post has learned.
Mayors of the three cities, all of which face runaway labor, pension and education costs and shrinking property-tax bases, have held secret talks in recent weeks on their financial options, and the possibility of “bankruptcy’’ has been discussed, a source close to the mayors said.
Meanwhile, aides to Cuomo are working on a new plan to link any future aid to the ailing cities to “workout plans’’ that reduce local costs, the source said.
The mayor of Yonkers, Mike Spano, is telling a similar story to the local paper in his city:
Yonkers Mayor Mike Spano said he and several upstate mayors plan to meet privately with Gov. Andrew Cuomo later this month to discuss ways the state can help their financially-distressed cities stave off insolvency.
Since mid-July, the mayors of Yonkers, Syracuse, Rochester, Albany and Utica have been convening to hash out ideas to reduce local costs, including more state school aid, pension relief and help with the costs of employee benefits.
Spano told The Journal News on Monday that a state “bailout is not an option” because it would “just kick the can down the road.”
Yonkers already received $137 million in the fiscal year 2010-2011, of which $20 million was a non-recurring advance (page 26). New York State combines general purpose aid, emergency funding to cities, emergency funding to eligible municipalities and supplement municipal funding into one category in its budget called “Aid and Incentives to Municipalities (AIM).” The total 2011 general fund revenues were $600 million. Of this, 23% of the budget was state aid.
Meanwhile, Yonkers continues to face increasing budget shortfalls, and the state seems unwilling to continue topping them up. From The Journal News again:
The vigilante force of the Internet
America has lined up in support of Karen Huff Klein, a 68-year-old grandmother in Greece, New York, who was tormented by four teenagers while working as a bus monitor. Her ordeal was brought to the public’s attention with three postings on YouTube by CapitalTrigga that stated:
Note: I had nothing to do with this, I saw the video on Facebook and uploaded it here to show the world how messed up these kids are.
New York City’s public-private partnerships
New York seems to have developed the best form of public-private partnerships in the nation. The city revitalized itself, after its rapid decline in the 1970s, by allowing private, non-profit interests to take a larger role in public affairs. For example, the city hosts 67 business improvement districts (BIDs) and two major park privatizations, and these show that cities can receive support from the private sector without having to hand over, in exchange, major profit-seeking opportunities and assets to private interests.
Most of the current national discussion about public-private partnerships (P3s) is about selling public assets or leasing them long term to private investors. A recent example is the long-term lease of two major Puerto Rico toll roads to a consortium led by Goldman Sachs whose investors will likely reap revenues of $3.6 billion over 40 years for a $1 billion investment. In the project, the Commonwealth of Puerto Rico granted a monopoly right to private investors to control the asset and charge users for access.
In contrast, the New York City P3s to date have been true partnerships between the public and private sectors with no profit motive. The largest P3 is the Central Park Conservancy:
Governor Cuomo has the privatization flu
The governor of New York has announced his intent to ask the state legislature for a new law allowing him to auction off the cash flows of the state’s public assets. Bloomberg reports:
Governor Andrew Cuomo is seeking legislation that would allow private-equity firms to help finance construction of public-works projects, including a new $5.2 billion Tappan Zee Bridge.
The bill would authorize the state to lease bridges, roads and state buildings to help pay for construction, maintenance and operations of infrastructure, said Thomas Madison, executive director of the New York State Thruway Authority. Cuomo doesn’t want to sell state assets, said Karen Rae, deputy secretary of transportation. Carlyle Group LP (CG) and Macquarie Group Ltd. (MQG) are among companies expressing interest in the Tappan Zee.
Fracking’s externalities
Fracking is under increased scrutiny in the U.S. and in Australia, in the state of New South Wales. Both nations have undertaken studies to examine the effect of fracking on groundwater supplies. But there are other potential socialized costs that need to be included in these public studies, including the possible cost of wastewater treatment plants, damage to local roads, air and water pollution and the linkages to earthquakes. The costs of these possible side effects to local communities may exceed the gains they’ll receive from extraction royalties and increased tax revenues. We need some accounting.
In the U.S. the Environmental Protection Agency has begun a study on fracking and water supplies, and it released a status report in December 2011. The EPA anticipates a first round of results by the end of 2012 and a final report to be released in 2014. The agency has conducted literature reviews, requested data from manufacturers of fracking fluids and scheduled case studies with landowners. It also released a startling preliminary report on possible groundwater contamination in Wyoming. From USA Today:
The EPA found that compounds likely associated with fracking chemicals had been detected in the groundwater beneath Pavillion, a small community in central Wyoming where residents say their well water reeks of chemicals. Health officials last year advised them not to drink their water after the EPA found low levels [of] hydrocarbons in their wells.
[...]
The fracking occurred below the level of the drinking water aquifer and close to water wells, the EPA said. Elsewhere, drilling is more remote and fracking occurs much deeper than the level of groundwater that would normally be used.
Muniland’s most active states
In the municipal bond market, one of the most insightful ways to examine a state is to look at how actively its bonds trade. Broker-dealers make money by trading, so naturally they go where the action is and commit market-making resources to those states. It’s generally true that the most populous states are the ones with the most traded bonds, but if we map the wealth of a state’s citizens to how often that state’s bonds trade, we get some interesting results. For example, New Jersey, which has only 2.8 percent of the national population but a high proportion of its wealthy citizens, might have the highest number of municipal bond owners as a percentage of state population.
The municipal bond market does not trade on an exchange but rather on “alternative trading systems” (ATS). These are systems where dealers post inventories of bonds to be aggregated. The largest of the retail ATS is Bonddesk, which does some excellent data analysis for both the municipal and corporate bond markets.
Reading the muni CDS tea leaves
I saw a strange tweet this morning that said “State CDS blew out yesterday per Bloomberg. Not sure what I missed here.” The anonymous tweeter attached the image above of graphs of credit-default swaps for 9 big states. Notice the very sharp one-day spike for every state except Ohio. Those spikes mean that those who trade muni CDS suddenly thought U.S. states were riskier, by anywhere from 2.09 percent to 17.02 percent, in one day. That is a big gap up.
Municipal CDS reference the equivalent cash bonds of the obligor. So a NY10Yr CDS references New York State general obligation bonds that mature in 10 years. CDS and cash bonds use different units of measurement but generally move proportionally to each other. So if investors no longer want New York State general obligation bonds and their price declines, one would usually see the CDS sell off too.
Let Europe kill municipal CDS
The solution to Greece’s debt crisis that Europe’s leaders announced on Thursday has market participants and commentators howling. It includes a provision that changes long-established rules for credit-default swaps mid-game. Mike Dolan, Reuters’ Investment Strategy Editor in Europe, said this:
For all the ifs and buts about the latest euro rescue agreement, one of its most profound market legacies may be to sound the death knell for sovereign credit default swaps — at least those covering richer developed economies.
I’d suggest that death knell just rang for U.S. municipal credit-default swaps (CDS), too. They’ve recently been on their last legs amid collapsing volumes, but actions in Europe just might have delivered the deathblow.
State taxes on fire
State tax collections are hot, hot, hot. The taxman rustled up 16 percent more in state income taxes for the second quarter of 2011 compared to the same period in 2010. Where is this phenomenal growth coming from?
Based on the most recent data collected by the Rockefeller Institute, states are raking in about $900 billion a year from their three major tax categories: the sales tax, personal income tax and corporate income taxes. Revenues from these three taxes total about 6.25% of U.S. GDP.
Vermont rebuilds while Congress fights
The state of Vermont is struggling to gather funds to repair the flood damage from Hurricane Irene, the state’s worst natural disaster since the floods of 1927. Generally the state would rely on support from the federal government to replace and repair this infrastructure, but the U.S. Congress is locked in a fight over funding the Federal Emergency Management Agency as part of a larger fiscal battle that could shut down the federal government. From CBS News:
Congress is headed for a showdown over disaster relief funding that could bring the government to the brink of a government shutdown again.
House Speaker John Boehner has scheduled a vote tomorrow on a bill that would keep the government operating through Nov. 18. If the Senate and the House do not approve the stopgap measure, known as a continuing resolution, before the fiscal year ends Sept 30, the government would be forced to shutdown.
The House bill includes $1 billion in immediate funding for the Federal Emergency Management Agency and $2.65 billion for next year, but the Republican measure also includes a provision to offset the FEMA funds with cuts to the Energy Department’s Advanced Technology Vehicles Manufacturing Loan Program.
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Resident Muniland expert
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