Posts tagged ‘munis’

Munis – still staying away

Written September 9th, 2010

Harrisburg’s well-publicised default on $282m in debt on an incinerator project it partially guaranteed already sparked concern. But the far smaller sum of $3.3m, the coupon on its tax-free general obligation (GO) debt, has really spooked the market. Bond-insurer Ambac put its backing behind the issue, the sort of backstop that was criticised as taking money for nothing, since cities’ and states’ power of the purse were thought to make additional guarantees redundant.

To read the full article, click here.

We haven’t visited muni land in a while, but some recent developments made me shudder. Defaulting on a GO bond? That is never supposed to happen. But then again, for those who remember, in 1997 Russia defaulted on ruble denominated bonds, which also wasn’t supposed to happen. The Russia event brought down Long Term Capital Management and supposedly almost brought down the entire financial system, prompting the Fed to step in for a quick save.

In the case of munis, what’s the end game? Well, municipalities will take the long term risk of increased cost of capital for current funding needs and by extension political necessity to appease current voters. Current bond holders, however, tend to be retail investors who need the after-tax income of muni’s, so really, their putting the politicians between a rock and a hard place – on the one hand, voters don’t want to see decreases in municipal services, on the other hand, they face a decrease in the price of their bonds and decreased income from lack of payments. There’s the problem – no one wants to sacrifice on any aspect.

So, politicians will be forced to take the short term beneficial route of rallying the base against corporations, assuring bond holders that their bonds are insured, and putting future town residents on the hook for higher interest payments. In the meantime, the federal government will need to bail out Ambac and the other bond insurers in what will be called a black swan event, but which is so predictable Warren Buffett wanted to stay away from it at any price.

Simultaneously, of course, tax receipts are dropping as real estate values, capital gains, and income taxes get squeezed. Thus, states will not have the ability to backstop the municipalities and local governments. The federal government will be the lender of last resort and with limited ability to increase taxes, will be forced to print. Inflationary? Maybe – certainly on a theoretical level if jobs remain, but could just be desperate if wage inflation doesn’t show up and velocity stays low. If nothing else, it will lead to an increased debt burden and eventually lead to increased rates across the debt markets and all along the curve. While munis won’t be the trigger (I believe lack of foreign buying will be), weak local and municipal positions will certainly contribute.

Suburbanization of Poverty

Written January 26th, 2010

What are the policy implications of this study? I’m not sure, but I can see strains on local governments, especially with reduced tax collections. A recent column on CBS Marketwatch concludes that muni’s might be a better deal right now, but given the strain on local governments and the inability to print their way out, maybe the bond market is trying to tell us that local governments are in deeper trouble than we might think (

The Suburbanization of Poverty: Trends in Metropolitan America, 2000 to 2008

Elizabeth Kneebone, Senior Research Analyst, Metropolitan Policy Program
Emily Garr, Senior Research Assistant, Metropolitan Policy Program

The Brookings Institution

January 20, 2010 —

An analysis of the location of poverty in America, particularly in the nation’s 95 largest metro areas in 2000, 2007, and 2008 reveals that:

By 2008, suburbs were home to the largest and fastest-growing poor population in the country. Between 2000 and 2008, suburbs in the country’s largest metro areas saw their poor population grow by 25 percent—almost five times faster than primary cities and well ahead of the growth seen in smaller metro areas and non-metropolitan communities. As a result, by 2008 large suburbs were home to 1.5 million more poor than their primary cities and housed almost one-third of the nation’s poor overall.

  • Midwestern cities and suburbs experienced by far the largest poverty rate increases over the decade. Led by increasing poverty in auto manufacturing metro areas—like Grand Rapids and Youngstown—Midwestern city and suburban poverty rates climbed 3.0 and 2.2 percentage points, respectively. At the same time, Northeastern metros—led by New York and Worcester— actually saw poverty rates in their primary cities decline, while collectively their suburbs experienced a slight increase.
  • In 2008, 91.6 million people—more than 30 percent of the nation’s population—fell below 200 percent of the federal poverty level. More individuals lived in families with incomes between 100 and 200 percent of poverty line (52.5 million) than below the poverty line (39.1 million) in 2008. Between 2000 and 2008, large suburbs saw the fastest growing low-income populations across community types and the greatest uptick in the share of the population living under 200 percent of poverty.
  • Western cities and Florida suburbs were among the first to see the effects of the “Great Recession” translate into significant increases in poverty between 2007 and 2008. Sun Belt metro areas hit hardest by the collapse of the housing market saw significant gains in poverty between 2007 and 2008, with suburban increases clustered in Florida metro areas—like Miami, Tampa, and Palm Bay—and city poverty increases most prevalent in Western metro areas— like Los Angeles, Riverside, and Phoenix. Based on increases in unemployment over the past year, Sun Belt metro areas are also likely to experience the largest increases in poverty in 2009.

Over the course of this decade, two economic downturns translated into a significant rise in poverty, nationally and in many of the country’s metropolitan and non-metropolitan communities. Suburbs saw by far the greatest growth in their poor population and by 2008 had become home to the largest share of the nation’s poor. These trends are likely to continue in the wake of the latest downturn, given its toll on traditionally more suburbanized industries and the faster pace of growth in suburban unemployment. This ongoing shift in the geography of American poverty increasingly requires regional scale collaboration by policymakers and social service providers in order to effectively address the needs of a poor population that is increasingly suburban.

The Coming Collapse of the Muni Bond Market

Written November 4th, 2009

We have written multiple times on the lurking dangers in the municipal bond market, but this article by Phillip Greenspun articulates and summarizes the dangers even better than we have. Here are some excerpts:

…Sheehan notes that “spending is rising and revenue is collapsing” for all levels of government. Pension fund losses will require governments to double their contributions to pension plans (see my blog posting on public employee pensions). Spending is rising, e.g., in New York City from an average of $65,401 in compensation per public employee in 2000 to $106,743 in 2009. The number of full-time employees in NYC grew as well, despite falling school enrollment. The number of state and local government workers grew from 4 million in 1955 to 20 million in 2008 (5x growth, against less than 2X growth in U.S. population). Those workers receive an average of 43 percent more pay and benefits than a private sector worker…

…Without bankruptcy protection, a city that couldn’t pay bondholders would be forced to raise taxes until it could. This happened to West Palm Beach, Florida in the Depression and property tax rates rose to 42.5 percent of assessed value. Potentially bondholders might demand that the city hand over real estate to satisfy its debts. With bankruptcy protection, it is unclear what happens. Vallejo, California went bankrupt 18 months ago and their obligations have not yet been resolved (story). If courts allow municipalities to walk away from debt they’ll have every incentive to declare bankruptcy and start afresh. There are no shareholders in a municipality to wipe out and therefore the only negative consequence of a bankruptcy filing would possibly be having to pay higher interest rates for future borrowing. If on the other hand, governments are not allowed to walk away from many of their obligations, they will simply run out of cash. Are bondholders senior to pension obligations or not? It may be up to the individual judge. This is “uncharted territory for investors” as my money manager put it (he does not buy U.S. muni bonds)…

The article continues to outline statistics and implications of default, but I will take it a step further. The municipal bond market is a retail market. It is made up of mostly local (in-state) residents and diversified muni bond funds, the holders of which are individual investors. Because of the tax exemptions, public pensions and institutions tend to prefer taxable bonds. This has an interesting implication for politicians: they will have to raise taxes on the same investors that are holding the muni bonds – which is political suicide. Instead, the federal government will have to step in, along with politicians needing to find a way to influence the courts when thinking about some workouts. The question of state pensions and benefits will be addressed in the coming years, one way or the other as states face the prospect of default with limited ability to raise taxes.

If anyone has any information to counter or make me a believer in the sustainability of the currency tax and borrow regime, PLEASE forward it along, because the way things are looking now, I’m very wary of the muni market.

Poll Results Spur Infrastructure

Written November 7th, 2008

dollars in state bond issues backing major proposed infrastructure
projects and programs across the U.S. as well as other initiatives,
which we expect will have positive long-term implications for select
companies in our coverage universe.

Although the timing of construction
on these projects is not likely to begin for several months or years,
and is also contingent on demand for new issues in the municipal bond
markets, we believe several companies within our coverage universe
could ultimately benefit. We highlight some of the major approved
propositions and potential beneficiaries within the Engineering &
Construction and Construction Products groups below.

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