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  #631  
Old 06-16-2019, 09:37 AM
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Mary Pat Campbell
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http://us.beyondbullsandbears.com/20...-flat/#new_tab

Quote:
Municipal Bonds: When Full Faith and Credit Falls Flat

Spoiler:
Once upon a time, US municipal bonds were generally considered less risky than corporate bonds. Backed by the full faith and credit of state governments, investors had confidence they would receive their principal plus interest without fail. Times have changed. For some states and local governments, decades of financial mismanagement and massive pension liabilities are threatening to upend the full faith and credit pledge. In this article, Franklin Templeton Fixed Income takes a look at the situation, with Illinois being an example of a particularly dire case.

As municipal bond analysts, assessing pension risks hinges partly on the willingness of elected officials to implement tangible pension reforms. Absent that, large pension obligations can significantly degrade budgets, credit quality and eventually impair bondholders.

Here’s the good news: after excluding some local bond exposures, like Chicago’s, that still leaves well over 85% of the general municipal market available for investment. In some instances, we think essential-service revenue bonds offer more stability than general obligation bonds.

A Global Challenge that Feels Very Local
If there’s one issue where frictions between budget reforms and politics burn brightest, it’s pensions. With the proportion of retired pensioners and lifespans increasing across the globe, many governments face a challenging dilemma: how to raise enough tax revenues from the young to pay for the pensions promised to the retired? It’s a vexing issue that impacts our firm’s sovereign bond research as much as it does our municipal bond analysis.

Consider Brazil, for example. Pension liabilities currently absorb a third of Brazil’s federal tax receipts and fuels chronic deficits. Transitioning to a sustainable glidepath means Brazil’s new president, Jair Bolsonaro, must pass sweeping reforms that require changing Brazil’s constitution. Even if the reforms make it through congress this year, there’s nothing stopping a future president from reversing them.

Case in point: Italy. After passing reforms in 2011—increasing the retirement age to 67, shifting more workers to defined contribution schemes, and stopping inflation indexing of pensions above a certain income level— Italians elected a new government in 2018 that promised to overturn them.

In the United States, unfunded pension liabilities loom particularly large at the state and local level, making them a key focus for our municipal analysis. The scale of the liabilities is unnerving.

In August of last year, Moody’s reported that adjusted net pension liabilities across US states spiked to $1.6 trillion in fiscal 2017—increasing 25.5% from the prior year and representing 147.4% of state revenues.1 When Moody’s and the US Federal Reserve add up unfunded pension liabilities across state and local US governments they total around $4 trillion.2

Bankruptcy Still Taboo?
Pension liabilities didn’t rattle US municipal bond markets much before the financial crisis a decade ago. General obligation bonds, after all, are senior in the capital structure and backed by the full faith and credit of state and local governments. Even when major cities faced insolvency—New York City in the 1970s, Cleveland in the 1980s, and Philadelphia in the 1990s—filing for bankruptcy and impairing bondholders was taboo. In these three cases, each city’s state stepped in to ensure all obligations were paid; either by creating a financial bail-out vehicle or by installing a state-controlled board to oversee local finances.

That practice changed after the financial crisis. For cities like Chicago, decades of chronic pension underfunding and unsustainable benefit enhancements had grown silently into giant and toxic pension liabilities. Faced with unescapable budget shortfalls—set in motion by long-retired predecessors—several cities filed for bankruptcy, including Detroit, Michigan in 2013.

In some cases, pensioners received preferential treatment over bondholders. Most Detroit bondholders, for example, eventually recovered 14–74 cents on the dollar after the bankruptcy, whereas pensioners recovered 95 cents per dollar. The new reality is this: pension obligations may hold a senior position to a bond’s full faith and credit pledge.

Bankruptcies and defaults are still rare overall, thankfully. In today’s political climate, however, we’ve seen cities and policy advocacy groups threaten bankruptcy to wring more funding from state governments; or utilize bankruptcy filings to restructure their debt, renegotiate union contracts and reform pensions.3

As municipal bond analysts, our main question now is not just whether a city or state is able to pay their debts (we do the math), but this: are politicians willing to impair bondholders in order to honor their predecessor’s pledge to pensioners? Willingness to enact meaningful pension reforms is harder to analyze than the mathematical ability to pay debts.



Chicago’s Pension Beast
Consider Chicago, Illinois. In 2015, Chicago became the only major metropolitan US city outside Detroit to receive a junk rating from the Moody’s bond rating agency, largely because of its escalating pension bills.

Chicago’s then-mayor Rahm Emanuel promptly fired Moody’s from rating the city’s new bond issues and castigated them in the press. The mayor publicly attacked Moody’s again in 2017 during a run-up to a $1.2 billion bond sale, over frustrations his city had to pay higher interest rates.4

We’re interested to see how Chicago’s new mayor, Lori Lightfoot, responds to rating agencies like Standard & Poor’s—particularly if they drop Chicago below investment grade because of pension challenges as Moody’s did. Lightfoot spoke bluntly about the city’s pension dilemma during her campaign. The situation is indeed dire. The city’s four pensions are about $28 billion short of being fully funded.

By state law, Chicago must produce an additional $1 billion in revenues annually starting in 2023 to feed the beast—an enormous increase for an already strained budget. It’s also a heavy burden for a tax base of Illinois voters already reeling from (and moving away from) recent Chicago property tax increases to pay for these pensions.

State Constitutions
Chicago proves just how challenging large pension liabilities can be. The risks, however, vary significantly across the United States. Since the financial crisis, 74% of state pensions and 57% of local government plans have taken positive actions by either reducing pension benefits and/or increasing contributions.5

A common reform involves reducing cost-of-living adjustments (COLA), which shrinks future liabilities and frees up money to service debt obligations. The Colorado state legislature, for example, capped COLAs at 1.5% last year, and increased state and employee pension contributions.

Cutting pension benefits is dicey for politicians who fear voter backlash. It’s especially challenging for states that legally shield their pensions from reforms. Illinois’ state constitution, for example, says existing pension benefits “shall not be diminished or impaired”—effectively ruling out solutions like COLA adjustments unless the legislature amends the constitution. That presents Illinois’ governor with a big challenge: absent amending the constitution to reduce pension benefits, the governor must raise substantial new revenues in order to feed the $250 billion of unfunded pension liabilities (the largest of any US state).

Drowning in Liabilities
The bond market is aware of pension shortfalls in states like Illinois ($250 billion), Connecticut ($71 billion) and New Jersey ($116 billion), and prices in that risk through higher spreads.6 Our analysis shows Illinois’ bondholders (and Chicago bond holders, for that matter) are in a uniquely dangerous situation the market isn’t fully pricing.

Illinois’ pension payments are mandated by state law to grow annually—rising 10%, for example, to $9.14 billion in 2020. Illinois is already struggling to keep its head above water to meet this year’s pension payment, let alone successively larger ones over the next 30 years. Here’s the real kicker: for as large and painful as these payments are, they still aren’t big enough to stop Illinois’ pension liabilities from growing even larger—something ratings agencies call negative amortization. That means Illinois’ pensions (a fire-breathing monster that dwarfs Illinois’ revenue-generating capacity) will still be at risk for insolvency if we head into a recession or have a market downturn.

Illinois bond ratings are already skating just one notch above “junk” status. If Illinois gets downgraded, the pain could be sharp.



The Illinois Exodus
In our view, the writing on the wall lies with Illinois’ collapsing population. According to the US Census Bureau, Illinois saw the second biggest drop in residents in 2018 after New York, losing 45,116 residents. Since 2013, over half a million Illinois residents have left the state seeking lower taxes, nicer weather and better economic opportunities across the US.7 From a revenue perspective, many of the people leaving are of working age while the population left behind is aging, according to the Northern Illinois University’s Center for Governmental Studies.

Chicago’s taxpayers face an especially onerous dilemma having two pension beasts to slay at once. They’ve seen record property tax increases to help pay for (but not resolve) the city’s pension crisis, and now face a state income tax hike to forestall (but not resolve) the state’s pension emergency.

Will Illinois’ governor and Chicago’s mayor eventually impair bondholders rather than push for sensible pension reforms? We think it’s more likely than not, unfortunately. Neither has been willing to broach the subject of reforms, focusing mostly on new taxes or selling off capital assets like land, buildings and infrastructure. When we add up the projected revenues, the math still doesn’t work. It’s for this reason that we have not and will not own uninsured general obligations of the State of Illinois, or bonds from the City of Chicago and Chicago Public Schools.

This doesn’t rule out investing in Illinois entirely, however. Essential-service revenue bonds—which finance income-producing projects such as toll roads and airports—help eliminate questions about willingness to pay. The returns these bonds generate come from the usage fees these services charge, which are specifically assigned to pay debt service. The bonds aren’t backed by a full faith and credit pledge, but issuers can increase user rates if the dedicated revenue stream falls short.

In past bankruptcy cases, revenue bonds proved to have stronger protections than some general obligation bonds. Is there something that could change our minds about Illinois’ pension dilemma? Yes—a willingness of elected politicians to educate the public on the true scope of the situation and enact sensible pension reforms.

What Are the Risks?
All investments involve risks, including possible loss of principal. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in lower-rated bonds include higher risk of default and loss of principal. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Municipal bonds are debt securities issued by state and local governments and are generally exempt from federal income tax and also from state and local taxes for residents in the state where the bond was issued. They typically offer income, rather than capital appreciation potential. Corporate bonds are issued by corporations. Bonds with lower ratings and higher credit risk (risk of default) typically offer higher interest rates to compensate investors for the higher risk associated with the investment.

Important Legal Information
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments opinions and analyses in the material is at the sole discretion of the user.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

______________________________________

1. Source: Moody’s Investors Service, “Medians – Adjusted net pension liabilities spike in advance of moderate declines,” August 27, 2018.

2. Source: Moody’s Investors Service, “Federal Reserve revision pushes unfunded pension liabilities to more than $4 trillion,” September 26, 2018.

3. Source: T. Dabrowski and J. Klinger, “Pensions 101: Understanding Illinois’ massive, government-worker pension crisis,” Illinois Policy Institute, February 3, 2016.

4. Source: J. Holman, “Chicago Mayor Pushes Moody’s to Rescind City’s Junk-Bond Rating” Bloomberg, January 11, 2017.

5. Source: J. Aubry and C. Crawford, “State and Local Pension Reform Since the Financial Crisis,” Series on State & Local Pensions, no. 54. Boston: Center for Retirement Research at Boston College, January 2017.

6. Source: Moody’s Investors Service “Medians – Adjusted net pension liabilities spike in advance of moderate declines,”August 27, 2018

7. Source: Moody’s Investors Service “Illinois (State of): Pensions, taxes, out-migration top list of credit issues facing new governor,” February 5, 2019.

Posted in Fixed Income, Perspectives
Tagged Franklin Templeton fixed income, muni bonds, municipal bonds, Sheila Amoroso, tax-free investing
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This is mainly about Illinois, but I figure it may as well go here.

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  #632  
Old 07-02-2019, 12:23 PM
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https://www.forbes.com/sites/investo.../#91e94e7bdd52

Quote:
Post Platte Default: Sell All Your Appropriation-Backed Municipal Bonds?

Spoiler:
The failure of Platte County, Missouri to appropriate funds to pay debt service on the Zona Rosa Retail Project raised questions as to the enforceability of the security pledge of appropriation bonds in general in the municipal bond market.

Appropriate Appropriation

Municipal borrowers’ issue annual appropriation-secured debt to fund various projects for numerous reasons. The central reason is that annual appropriation debt is not general obligation debt. It doesn’t count against the general obligation debt caps, constitutional, or statutory limits most municipalities have. Not being directly secured by property taxes, there is no immediate economic consequence to residents.


Equally, there may be other revenues pledged to pay debt service. In Platte County, it was expected the sales taxes from the Zona Rosa shopping area would cover debt service. The appropriation was viewed as a back-stop security.

Paying The Price For Not Paying

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Platte County’s failure to pay got the immediate attention of the municipal bond market’s standard setters, the bond rating agencies Moody’s and Standard & Poor’s. They were swift to act. Moody’s dropped Platte County’s general obligation bond rating to Ba3, Standard & Poor’s went further, lowering it to B-. No matter that the bonds were issued by a separate entity of the county (bonds were issued through its Industrial Development District in 2007). The downgrades on the general obligation of the county by the rating agencies pointed directly at willingness to pay—or in this case, unwillingness. It is a clear and unambiguous message that payments secured by annual appropriations are not optional. Treating them as such has serious consequences.

The swift and encompassing rating agency actions play another role other than enforcer. Putting the town’s entire credit rating at risk (and therefor its access to the capital markets) is a big red flashing beacon to be prudent and cautious before pledging public revenues to private projects. If an economic development project is anticipated to be that successful, the margins should attract private investment capital. It shouldn’t need the tax-exempt funding subsidy.

But Wait, There's More.

This is not the first appropriation-secured bond issue to run into the failure-to-appropriate issue. For example, Lombard, Illinois failed to fund an appropriation for debt issued through its Public Facilities Corporation for a hotel and conference center. In that case as well, the rating agencies were swift to act. Moody’s withdrew its rating; Standard & Poor’s dropped Lombard’s rating down to a speculative grade B.

But wait. There’s more. Moberly, Missouri failed to pay on appropriation bonds for an economic development project. The sugar-substitute manufacturing plant never was completed and the city did not fulfill what was viewed as its obligation to pay. Standard & Poor’s dropped the city’s general obligation bond rating to below-investment-grade BB-. Although the matter was resolved a few years ago, it wasn’t until 2018 that the rating was upgraded to BBB.

Essential Public Purpose vs. Economic Development

Observing these events, one might conclude that since these projects were not for the traditional essential-public purposes that municipal bonds generally fund, such as schools, hospitals, or infrastructure, they were inherently less secure than appropriation-secured bonds issued for essential government services.

It is true municipal bond investors do look to that essentiality of municipal purpose as a critical stabilizing credit and security influence. This stems from the fact that municipal bonds generally fund projects designed to have long life-spans because the borrowers also tend to be long-term. Towns, cities, counties, or states don’t just roll up the sidewalks or get sold off for parts in the event of financial problems. Problems are usually temporary, get resolved, and the government entity continues on. It has to. The residents still need the services.

(For a more detailed examination of funding public services during a municipal bankruptcy, please read “What ‘Adult Entertainment,’ Puerto Rico and Chapter 9 Bankruptcy Have In Common” Forbes.com 9/6/2018)

However, bonds for economic development projects don’t fall under the essentiality umbrella. Initially municipalities may enthusiastically embrace issuing bonds seen as creating jobs in their community. But if the project stumbles, the municipality is often less enthusiastic about spending public dollars to support a failing private enterprise.

Investors taking comfort that the rating agencies will act swiftly to enforce the standard must balance that view with the consequences of what happens in the interim. The bondholder gets subjected to a below-investment grade bond, a decline in valuation, and likely loss of liquidity—to say nothing of potentially losing interest payments (and likely principal as well) for an indeterminate period of time. No fun there.

Measure The Risk

It’s not just economic development bonds backed by appropriations that are at risk. Theoretically, any bonds secured by annual appropriations, even if proceeds fund public services, still run some risk of delay or outright non-appropriation. There is always the possibility of political grid-lock, economic reversal, or a “bad-actor” event. As noted in about any disclosure statement, every investment has some measure of risk. However, it remains very rare to have an outright default of an appropriation secured bond. While tempting, it isn’t reasonable to make sweeping generalizations based on some one-off distressed situations.

Do Your Homework.

Investors who read the word “rare” and thought they’d get to slack off in doing their homework, think again. Credit risk needs to be correctly quantified and assessed. Investors holding bonds secured by annual appropriations would be well-served to examine the municipal entity as a whole. Factor in the total debt burden—general obligation debt, appropriation debt, leased-backed debt—or any other debt that sits on the liability side of the balance sheet. As demonstrated, a dual security pledge can distract the investor—and the borrower—from making an accurate assessment of the risk each is taking on.

Security provisions are important. Essentiality of public purpose may be an indicator as to willingness to pay. But having the economic and financial wherewithal to pay on all outstanding debt, regardless of security or purpose, is the strongest measure of credit strength.


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Old 07-02-2019, 01:49 PM
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LOS ANGELES, CALIFORNIA

https://www.citywatchla.com/index.ph...rational-theft

Quote:
The Structural Deficit Leads to a Service Deficit/Bankruptcy and Intergenerational Theft
LA WATCHDOG--The following is a summary of my remarks on Budget Day, Saturday, June 29, at City Hall to more than 250 Angelenos that packed the Council Chambers at City Hall.


Spoiler:
There are three concepts that will help you understand the City’s budget and finances. They are Structural Deficit, Service Deficit/Bankruptcy, and Intergenerational Theft.

The Structural Deficit is when expenditures (primarily salaries, benefits, and pension contributions) increase faster than revenues, resulting a river of red ink for many years.

The Service Deficit/Bankruptcy is when the City is forced to cut back on basic services such as road maintenance and repair to fund the projected deficit caused by the increase in personnel expenditures.

Intergenerational Theft is when current obligations are dumped on future generations. This includes unfunded pension liabilities ($15 billion) and the Deferred Maintenance Backlog (estimated to be north of $10 billion).

Before proceeding, the City Administrative Officer and the Mayor’s budget team have done an excellent job in developing the budget, sifting through over 14,000 pages of departmental budget memos. The problem lies with Mayor Eric Garcetti, City Council President Herb Wesson, and the other Councilmembers who are unwilling to make the tough decisions and say NO to the campaign funding leaders of the City’s unions.

While Los Angeles is the second largest city in the country, our city government is not as complex as other big cities.

LAUSD is responsible for education.

Metro is responsible for transportation.

The County is responsible for public health, hospitals, social services and welfare.

The Sheriff is responsible for the jails.

The District Attorney is responsible for criminal justice.

The City of Los Angeles is basically responsible for public safety and our infrastructure.

Our City is benefitting from record revenues.

For the fiscal year beginning on July 1, General Fund revenues are expected to be $6.6 billion, an increase of over 6% from the previous year. The City claims to have a balanced budget. But this does not include raises for the police and firefighters whose contracts expired on June 30. Unaccounted for raises are expected to be at least $25 million this year. So much for the balanced budget.

Since Eric Garcetti became mayor in 2013, General Fund revenues have increased by over $2 billion, a 44% bump.

Yet we still have a Structural Deficit!

The City claims to have solved the Structural Deficit. I disagree.

For the first time in recent memory, the City’s Four Year Budget Outlook shows that the City will have a surplus for each of the next four years, thanks to record revenues. But this omits a few inconvenient items such as raises for the city employees; the need to build-up of our rainy day funds; the required care of our streets, parks, urban forest, and the rest of the City’s infrastructure; and adequate funding of the City’s two underfunded pension plans.

Rather than barrage you with too many numbers, let’s analyze the budget surplus of $78 million for the fiscal year 2023-24, where revenues of $7.3 billion are $700 million more than the current year’s revenue of $6.6 billion, an 11% increase.

This surplus turns into a deficit of over $200 million when you factor in modest raises for City employees of $300 million over the next four years.

The City does not fund the build-up of its rainy day funds to a level equal to 10% of General Fund revenues as recommended by the Government Officers Finance Association and the City Administrative Officer. This will require an additional $50 million a year.

The City is underfunding the repair and maintenance of our streets and the rest of our infrastructure by at least $250 million a year.

And then there is the elephant in the room: pensions. If the City used a lower investment assumption of 6¼% instead of the overly optimistic rate of 7¼%, the annual required contribution would increase by at least another $500 million a year.

The net result is that a $78 million surplus turns into a Structural Deficit of more than $1 BILLION.

To finance the Structural Deficit, the City will need to cut back on basic services, resulting in a Service Deficit/Bankruptcy. The City will also continue to underfund its two pension plans and the repair and maintenance of our streets and the rest of our infrastructure., dumping these obligations on the next generations of Angelenos.

This is Intergenerational Theft.

What to do?

For openers, the City can implement two of the recommendations of the LA 2020 Commission that were actually endorsed by City Council President Herb Wesson, the same Councilman that refused to schedule hearings to discuss them.

The first is to establish a commission to analyze the City’s two pension plans and develop solutions to slow the growth of pension contributions and eliminate the $15 billion unfunded liability.

The second recommendation is to create an independent, well financed Office of Transparency and Accountability to oversee the City’s budget and finances and to increase transparency into the City’s complicated finances.

The City also needs to develop a long range financial plan in an open and transparent manner, where Angelenos can have meaningful input. This includes creating a comprehensive plan to repair and maintain our streets, some of the worst in the nation, and address our parks, urban forest, street lights, and rest of the City’s infrastructure.

The City needs to develop a policy to increase its rainy day funds to a level equal to 10% of General Fund revenues and a plan to cope with a downturn in the economy.

The City also needs to benchmark the efficiency of its operations, similar to what the Department of Water and Power is doing.

The Mayor should also consider presenting his budget on February 1 instead of April 20 as required by the Charter. This would give us an extra 80 days to review and analyze the budget and provide meaningful comments and suggestions.

We also need to get our Neighborhood Councils to make the City’s budget and finances a priority and to pound on the Mayor and the City Council to eliminate the Structural Deficit.

Mayor Garcetti and Council President Herb Wesson have not endorsed these common sense recommendations. We have tried. The LA 2020 Commission tried. We need to tell the Mayor Garcetti, the Herb Wesson led City Council, and the campaign funding leaders of the City’s unions that they work for us, not the other way around.

It is time to make our voices heard.

(Jack Humphreville writes LA Watchdog for CityWatch. He is the President of the DWP Advocacy Committee and is the Budget and DWP representative for the Greater Wilshire Neighborhood Council. He is a Neighborhood Council Budget Advocate. He can be reached at: lajack@gmail.com.)

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  #634  
Old 07-05-2019, 02:53 PM
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https://www.governing.com/topics/fin...borrowing.html

Quote:
How Federal Tax Reform Is Changing Government Borrowing
Fearing more changes from Congress, states and cities are turning less and less to the municipal bond market.

Spoiler:
While the most direct effects of the 2017 federal tax overhaul have been on tax revenue, the law has also impacted the way governments borrow money.

With banks making fewer direct loans to governments, many expected them to turn to the municipal bond market. But that hasn't happened.

Governments have continued to be reluctant to increase their debt, a trend that started following the Great Recession. According to the latest report from Moody's Investors Service, the total net tax supported debt issued by all 50 states in 2018 was essentially flat for the eighth straight year with just $523 billion issued. This puts average annual state debt growth since 2011 at just 0.6 percent.

RELATED
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Moody's said in its analysis that lagging infrastructure investment has contributed to limited growth in state debt. "State governments are remaining cautious when it comes to bond issuance," the report continued, "and are increasingly relying on operating revenue to meet their transportation infrastructure needs."

As a result of this quiet market, the cost of borrowing has dropped -- saving governments millions even as interest rates are rising.

Governments have been reluctant to issue municipal bonds in part because officials fear that Congress may once again meddle with the bonds' tax-exempt status, says Hilltop Securities analyst Tom Kozlik. The 2017 law already eliminated the federal tax-exempt status of advanced refunding bonds, which effectively killed them. Advanced refunding bonds allowed governments to refinance debt earlier and thus take advantage of lower interest rates years sooner.

Koxlik warns that Congress will be looking for more ways to save money this fall because it will likely face another debate about how to reduce the deficit. "Time could be running out on the municipal bond tax exemption," he says, "and it's possible that the advanced refunding repeal is just the beginning."


Other Programs at Risk
Ksenia Koban, vice president and municipal strategist at the investment firm Payden & Rygel, is more worried that Congress will do away with grant or matching fund programs.

State and local governments use the money from these programs in two main ways. They can use grant money to directly pay back bonds they have issued. Matching funds, on the other hand, offer an incentive for states and localities because money raised by issuing bonds can be at least partially matched by the federal government.

Municipal bonds are commonly used to finance infrastructure projects. Combined with tax reform, Koban says the uncertainty around the federal government's commitment to infrastructure funding is also creating uncertainty in the municipal bond market. "It's definitely changing the landscape," she says. "We're already seeing a lot more hybrid projects or public-private partnerships while local governments are stepping back from traditional types of projects."


Banks Bowing Out
Meanwhile, the 2017 tax law gave banks less of an incentive to invest in municipal bonds. The law slashed the corporate income tax rate from 35 percent to 21 percent. That, combined with rising interest rates, has made low-interest-rate munis less attractive to banks.

Bank holdings of municipal bond debt in 2018 were down $40.9 billion for the year, reports George Friedlander, a managing partner of the Court Street Group.

At the same time, banks' direct loans to governments have also drastically declined. The loans spiked to $40.2 billion in 2017 but are on pace to total just under $7 billion this year.

The severity of this development has been masked by the lack of investment in the municipal bond market. "The implications of this shift would be far greater in a 'normal' muni market, with more total issuance," Friedlander says.


Low Supply, High Demand
2018 was one of the slowest years for municipal bond issuance in the past decade. The market hasn't picked up this year, either.

Through the first half of this year, government issuers have sold more than $166 billion in bonds. That's nearly identical to the $165 billion sold halfway through 2018, according to figures compiled by The Bond Buyer.

But even though governments aren't issuing as many bonds, the demand for them hasn't changed. In some places, such as California, demand has increased because of the federal tax overhaul's cap on state and local tax deductions. Taxpayers are looking to shelter more of their income in municipal bonds.

All these events have led to lower interest rates for governments that are selling bonds -- despite the fact that the Federal Open Market Committee has raised interest rates by a percentage point since early 2018.

"There's so much more demand than supply," says Koban, "the market's actually sort of behaving unintellectually. It's just not pricing uncertainty and risk the way it should. It shows there's not a whole lot of other places to go if you're looking for quality-adjusted, positive-yield instruments."


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Old 07-10-2019, 03:43 PM
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https://www.heritage.org/budget-and-...ilout-fiscally

Quote:
Senate Resolution Cautions Against Federal Bailout of Fiscally Irresponsible States
Spoiler:
Most of the public was outraged when, during the financial crisis of 2008, Congress provided a massive financial bailout, including $70 billion of taxpayers’ money to insurance giant AIG and $80 billion to U.S. automakers General Motors, Chrysler, and Ford.

Even most politicians who voted in favor of the bailouts did so begrudgingly, in part because they considered it a way to contain the damage from arguably unforeseen circumstances.

By contrast, state and local governments have accumulated many trillions of dollars in debt with clearly foreseeable consequences.

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If states want to make good on their obligations, many will have to drastically increase taxes, severely cut services, or default on their debts and lose access to credit.

However, it’s only a matter of time before state policymakers, not wanting to face those consequences, seek a federal bailout.

That’s why Sen. Tom Cotton’s sense of the Senate resolution (S. Res. 268), expressing the position that the federal government should not bail out any state, is so important.

Considering that states cannot declare bankruptcy, many states’ failure to confront absolutely unsustainable pension and other obligations shows that they are counting on a federal bailout.

In fact, then-Illinois Gov. Pat Quinn included a federal guarantee of Illinois pension bonds in his 2012 budget proposal.

Cotton’s succinct sense of the Senate resolution says that the federal government should not take any “action to redeem, assume, or guarantee any debt of a State” and that the secretary of the Treasury “should report to Congress any negotiations to engage in actions that would result in an outlay of Federal funds on behalf of creditors of a State.”

As the resolution points out, every state in the U.S. is a sovereign entity with its own authority to collect taxes and to issue debt, with a legal obligation to fully disclose its financial condition to investors.

Moreover, Congress has already rejected past requests for bailouts of defaulted state debt, and back in 1842, the Senate requested that the Treasury report any negotiations that discussed federal assumption of state debt “to ensure that promises of Federal Government support were not proffered.”

Although nonbinding, the resolution from Cotton, R-Ark., is important, because unless Congress takes a bailout off the table, lawmakers in fiscally irresponsible states will have the incentive to keep racking up more debt—and taxpayers in fiscally responsible states would pay the price.

While all states have sizable debt—primarily from unfunded pensions and other public employee benefits—some have dramatically more than others.

Take states’ estimated $6 trillion in unfunded pension promises. That works out to about $18,300 for every man, woman, and child—or $73,200 for a family of four—in America.

The five states with the greatest unfunded pension obligations—Alaska, Connecticut, California, Illinois, and Oregon—have per-capita pension debts ranging from $28,000 to nearly $47,000. That’s two to five times as high as the five states’ with the lowest pension debts, which range from $8,500 to $10,000 per capita in Tennessee, Indiana, Nebraska, Florida, and Idaho.

If Walmart were facing bankruptcy, Congress wouldn’t require Target to cover its payrolls. But that’s what a federal bailout would be like, by unfairly forcing taxpayers in states such as Tennessee and Florida to pay for pensions and other public-sector workers’ benefits in Illinois and California, even though they don’t live in, or receive any services from, those states.

The fact that governments don’t face bottom lines is already problematic enough for workers, families, and businesses whose incomes seem like an open spigot for politicians to tax.

Expanding lawmakers’ reach into the pockets of people they do not represent would only exacerbate what economists call “moral hazard”—essentially, the consequence of removing personal responsibility.

States that want to protect their current and future residents by getting their fiscal houses in order have plenty of options.

For starters, they can look to the sensible pension reforms enacted in states such as Michigan and Oklahoma that significantly curbed costs and to fiscally responsible states such as Nebraska and Tennessee.

While the federal government had no role in state and local governments’ debts, it should make clear that it also has no role in paying for them.


https://www.govtrack.us/congress/bills/116/sres268/text
Quote:
S.Res. 268: A resolution expressing the sense of the Senate that the Federal Government should not bail out any State.

Spoiler:
116th CONGRESS

1st Session

S. RES. 268

IN THE SENATE OF THE UNITED STATES

June 27, 2019

Mr. Cotton submitted the following resolution; which was referred to the Committee on Finance

RESOLUTION

Expressing the sense of the Senate that the Federal Government should not bail out any State.

Whereas every State in the United States is a sovereign entity with a constitution and the authority to issue sovereign debt;

Whereas the legislature of every State in the United States has the authority to reduce spending or raise taxes to pay the obligations owed by the State;

Whereas officials in every State in the United States have the legal obligation to fully disclose the financial condition of the State to investors who purchase the debt of the State;

Whereas Congress has rejected prior requests from creditors of a State for payment of the defaulted debt of a State; and

Whereas, during the financial crisis in 1842, the Senate requested that the Secretary of the Treasury report to the Senate with respect to any negotiations with any creditor of a State relating to assuming or guaranteeing any debt of the State, to ensure that promises of support by the Federal Government were not proffered: Now, therefore, be it

That it is the sense of the Senate that—
(1)the Federal Government should take no action to redeem, assume, or guarantee any debt, including pension obligations, of a State; and
(2)the Secretary of the Treasury should report to Congress any negotiations to engage in actions that would result in an outlay of Federal funds on behalf of creditors of a State.
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Old 07-22-2019, 07:39 PM
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This is ostensibly about Illinois, but it's really about the muni market in general (going to collapse the thread)

https://twitter.com/Caitlindevitt/st...88834710806528

Quote:
Caitlin Devitt


@Caitlindevitt

Illinois Gov Pritzker, Treasurer Frerichs and Comptroller Mendoza file 22-page response to early July complaint filed by hedge fund Warlander and head of Illinois Policy Institute that attempts to invalidate $14.3bn of state GO bonds 1/6

3:38 PM - 22 Jul 2019


State says premise of lawsuit-that state debt act limits bonds to be issued only for specific purposes related to capital projects - is wrong & not that restrictive; complaint brought too late (bonds issued in 2003 & 2017); Warlander lacks standing; that the bulk of the complaint

is really a ideological debate over fiscal policy, which has no place in the courts and is "seemingly trying to appeal to a nonjudicial audience"...


"Petitioner seeks to unscramble eggs that were cracked, cooked, and eaten 16 and two years ago, with no explanation as to why he did not bring suit before breakfast hit the pan. Had Petitioner timely sought and obtained an injunction against issuance of the
bonds....



the State could have made different arrangements to fund its obligations, and bondholders would not now be needlessly placed in peril. "

Asks court to throw it out. Hearing set for August 15. #muniland



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2h2 hours ago
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Replying to @Caitlindevitt
If plaintiffs prevail, kiss the muni bond market goodbye.
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From 2017:

https://digitalcommons.law.seattleu....ontext=faculty
Quote:
Recognizing Taxpayers as Stakeholders in
Municipal Bankruptcies
Diane Lourdes Dick
Spoiler:
INTRODUCTION
Recent large municipal bankruptcy cases have called into question the
rights of debtor-cities to impair their capital markets creditors, on the one
hand, and beneficiaries of their unfunded public pension promises, on the
other. As I show in a companion work,' federal bankruptcy law generally
allows debtors to impair each of these obligations. However, heightened
judicial scrutiny may apply to plans that are crammed down on public pension benefit recipients.2 Moreover, debtors and their stakeholders may still
agree for a variety of reasons to pursue restructuring plans that preserve
public pensions and impair the claims of capital markets creditors.'
But for all the focus on these two dominant creditor classes,' an important stakeholder-the debtor-city's taxpaying residents-has been largely overlooked in the public discourse. By "taxpaying resident," I mean
persons who reside in the debtor-city and are subject to taxes (such as sales
and property taxes) that are assessed and levied by the debtor-city to support services and infrastructure. This key stakeholder is likely to play a
central role in the case, and is not only substantially impacted by the bankruptcy filing but also capable of substantially impacting any proposed restructuring plan. This is because, in an emerging prototype of municipal
bankruptcy restructuring, debtor-cities slash services in the years and
months leading up to the bankruptcy filing, and also rely in large part on tax
increases to support their plans to exit bankruptcy with a stronger fiscal
foundation.' This Article considers whether and to what extent a debtorcity's taxpaying residents are considered parties to the bankruptcy case, and
whether they should have formal representation and a seat at the bankruptcy
negotiation table. I join a small chorus of scholars and practitioners who
argue that taxpaying residents should be granted standing and formal representation in the proceedings. To this body of work, I contribute an examination of whether and to what extent taxpaying residents are "stakeholders"
of municipal debtor-cities under prevailing stakeholder analysis methodology.
This Article proceeds as follows. Part I introduces a detailed case
study of a recent large municipal bankruptcy, that of the City of Stockton,
California, paying particular attention to the ways in which taxpaying residents attempted unsuccessfully to interject in the proceeding and obtain an
official taxpayers committee. Part II introduces recent scholarly and practice-oriented literature exploring the role of taxpaying residents in Chapter
9 bankruptcy, and considers how these interested persons may be classified
under the Bankruptcy Code. This Part also contemplates the prevailing
wisdom and methods of stakeholder analysis to determine whether the interests of taxpayers are adequately represented in prevailing Chapter 9 law.
and practice. Part III concludes.

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Old 07-29-2019, 03:12 PM
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https://fixedincome.fidelity.com/ftg...3d9a0000_110.1

Quote:
New GFOA working group to address timely disclosure

Spoiler:
For the first time, the Government Finance Officers Association is putting together a working group to address overall issues with timely disclosure in the municipal market after increased scrutiny from the Securities and Exchange Commission and other muni market groups.

The working group of about 10 to 15 industry professionals will be announced next week and Emily Brock, director of GFOA’s federal liaison center, said that the group would have a variety of muni market participants from bond lawyers to municipal advisors.

The announcement came after GFOA met with SEC Chair Jay Clayton and other commissioners in June to follow up on Clayton's call for the SEC's Office of Municipal Securities to work with the Municipal Securities Rulemaking Board to improve transparency and increase timeliness of issuer financial information. Brock said the SEC then encouraged GFOA to work with the MSRB and other industry groups to reach the market’s goals of timely disclosure.

Hence the GFOA working group is now being formed, and may produce a white paper or other publication to try to communicate best practices.


“We’ve got to bring the band back together to really craft industry wide best practices in these disclosure matters,” Brock said. “This is the perfect opportunity really to get together and put pen to paper,” Brock later said.

GFOA would like to be able to use the working group to allow issuers to make their case, Brock said. Some participants have said the disclosures for audited financial statements take too long.

At GFOA’s annual conference in May in Los Angeles, issuers reacted negatively to a National Federation of Municipal Analysts letter which was sent to the SEC.

In the letter, NFMA said lapses in issuer financial disclosures in the secondary market are unacceptable and inconsistent with more timely and robust disclosures investors are accustomed to in equity and corporate bond markets.

“I don’t think that there’s a lack of sympathy out in the market,” Brock said. “I just think there’s a lack of understanding of how many hands have to be on that (audited financial statement).”

A mutual objective could be improving MSRB’s EMMA site through filing information and categorizing the time, input and expiration of information. It wouldn’t necessarily mean a ticker, Brock said, but an easier way for issuers to represent data and thinking of ways to ensure stakeholders know what the data is and its status.

The working group is a good idea, in that it allows for the issuer groups to take on the role of leading the conversation,said Lisa Washburn managing director at Municipal Market Analytics.

“There are tens of thousands of issuers in the 50 states that each have different reporting regimes so really understanding the current rules, what would need to get done, and how they might go about addressing and improving timeliness does really need to come from the issuer community,” Washburn said. “So that’s a positive development.”

Washburn noted that governments prepare various reports for internal management that are given to city councils and other officials, which could be provided to investors. That would then provide good information on how a community is managing during the fiscal year, Washburn said.

“If there are things that the issuer community can provide during the disclosure period gap and is comfortable providing, that could be very helpful,” Washburn said. “It’s not all about the audit timeliness, it’s about having information about what’s going on at the credit level.”

The working group needs to discuss the definition of timeliness and what it means to local governments, said Sandy MacLennan, a partner at Squire Patton Boggs and National Association of Bond Lawyers past president. With the SEC and other secondary market stakeholders asking for more timely disclosure, it needs to be addressed, MacLennan said.

“If a local government produces an audit report as fast as it can, should somebody say it’s not timely?” MacLennan said.

The SEC’s Fixed Income Market Structure Advisory Committee is set to discuss the content and timeliness of municipal issuer disclosures at its meeting Monday.


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Old 08-08-2019, 05:58 PM
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VERMONT

https://vtdigger.org/2019/07/30/sena...ng-downgrades/
Quote:
Senate leaders blast rating agencies after bond rating downgrades

Spoiler:
eeks after a major credit agency dropped Vermont’s bond rating, leaders of the Vermont Senate on Monday criticized how fiscal analysts judge the financial strength of small rural states.
On July 10, Fitch Ratings announced it had downgraded Vermont’s sterling AAA bond rating to its second highest level — AA+ — citing the state’s demographic challenges and labor force, which has been “flat to declining” over the last decade.

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This rating change could make it more expensive for the state to borrow funds, and comes after Moody’s Investors Service, another top agency, dropped Vermont’s bond rating last October— also citing the state’s aging population and high pension debt.

At a meeting of the Joint Fiscal Committee on Monday, the leader of the Vermont Senate and its top budget writer blasted the agencies for applying narrow standards to all states when they calculate bond ratings.

“I feel like our governance is really at risk at this point with the way the rating agencies apply a single set of measures across all types of states who have different needs,” said Senate President Pro Tem Tim Ashe, D/P Chittenden.

“We’re getting hammered on demographics and we’re predominantly a rural state,” said Sen. Jane Kitchel, D-Caledonia, who chairs the Senate Appropriations Committee. “It just seems like it puts rural states at a disadvantage in how our financial house is rated.”

Ashe said that rating agencies don’t give Vermont enough recognition for the investments it has made, including its funding of federally-mandated efforts to clean up its waterways.

“I find the way the rating agencies judge state performance to be horrible in a lot of ways,” he said. “For instance, states that they would apply their measures to have huge poverty rates, ignore the environment, have terrible education systems.”

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“We in a sense are constrained and punished for proactively addressing what are effectively public problems.”

Ashe added that the fear of taking on more debt, which could lead to downgrades from agencies, may be preventing the state from making investments that could attract new residents and boost the economy.

He mentioned the Senate’s effort in March to invest in a new $50 million housing bond that could yield hundreds of affordable housing units. The initiative was opposed by many, including Vermont Treasurer Beth Pearce, who feared the debt needed to fund the project could lead to another rating drop.

“The very things that are prerequisites to succeeding and turning some of these corners in a more robust way are being taken out of our hands before we can even use them,” Ashe said.

In a statement, Eric Kim, Fitch’s lead analyst for Vermont, said the agency “rates to its criteria which is applicable to all state and local governments in the US in the same way.”

“Economic resource base analysis, including demographic trends, are an important part of our rating process and provide the foundation for our assessments of the key rating drivers,” he wrote.

In its most recent report on Vermont, Moody’s said it was keeping the state’s rating at an Aa1, and also highlighted the state’s struggling demographics.

The report states that for the last decade Vermont has lagged the entire nation and northeast region in job creation, which is “largely a consequence of the state’s slowly growing and aging population.”

But David Jacobson, a spokesperson for Moody’s, stressed that the rating agency considers many other factors like personal income growth, and debt when issuing its ratings.

David Coates, a retired managing partner at KPMG-Vermont, who used to represent Vermont in meetings with rating agencies, says agencies have some bias against small states, though he understands why fiscal analysts would look at Vermont and see risk.

“There is some prejudice out there with a small state like ours, particularly when we have a population that’s not growing,” Coates said. “But saying that, I think we were lucky to keep the AAA as long as we did.”

With its massive teacher pension liabilities, and a slow rate of personal income growth that has fallen behind other small states around the country, he sees why the state has faced downgrades.

“As much as I love the state of Vermont… I just don’t see that bright a future.”

But he thinks rating agencies tend to view small states as particularly sensitive to small changes and shifts in the economy. And like Ashe suggested, he said they don’t pay attention to all statewide policy changes.

“There are some good things that we do that we don’t get credit for,” he said.


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Old 08-14-2019, 05:33 PM
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https://fixedincome.fidelity.com/ftg...7e750000_110.1

Quote:
Moody's wraps up ratings review triggered by Puerto Rico ruling

Spoiler:
Chicago’s recent defeasance of its remaining senior-lien water bonds resolved a review Moody’s Investors Service launched in May that included eight utility and special district credits nationwide as a result of an appellate court ruling on Puerto Rico special revenue bonds that has shaken the market.

Moody’s issued a report this week confirming the Baa2 rating on $1.2 billion of Chicago’s second-lien water revenue bonds that it rates.


“The city does not have any senior lien water revenue debt outstanding following a recent defeasance. This action concludes a review for possible downgrade undertaken on May 13, 2019. The outlook is stable,” Moody’s said.

Although the senior lien remains open, city officials have publicly indicated there are no plans to issue debt under it, Moody’s said.

Confirmation of the Baa2 rating is driven primarily by the close government linkage between the city and its water enterprise system. Moody’s rates Chicago’s general obligation bonds Ba1.

“The connection to the GO is the primary factor constraining the rating to Baa2 despite otherwise strong attributes of the system, which include strong debt service coverage and steady investment in capital supported by recent rate increases, ample water supply and treatment capacity and role as a provider of essential services,” Moody’s said.

Moody’s has now resolved its assessment of seven water/sewer utilities and one special assessment district with a total of $13.8 billion of rated debt that were placed on review for downgrade May 13.

The decision was driven by the three-to-four-notch positive rating differential between the utility/special district ratings and those of the general obligation or issuer ratings of the parent governments.

“These large differentials potentially over-weight the standalone credit strength of the utility enterprise or special assessment district,” Moody’s said in the May announcement.

The review considered economic, governance, and financial interdependencies between the affected entities and their "parent" governments, and whether those interdependencies detracted from credit quality.

The concerns were spurred by the March 26 ruling by the 1st Circuit Court of Appeals that upheld the district court’s conclusion that the Commonwealth of Puerto Rico was not required to pay special revenue debt service the Puerto Rico Highway & Transportation Authority’s bonds during its Title III proceedings.

The 1st Circuit affirmed the lower court’s decision that held special revenues pledged to revenue bondholders are only exempt from the automatic stay that halts creditor payments if the municipality voluntarily pays the special revenues to bondholders.

While the ruling only impacts those states and the commonwealth that are within the 1st Circuit it does have broader implications as the decision marked the first time that an appellate-level court has addressed the issue of whether pledged special revenues must be paid to bondholders in a municipal bankruptcy or restructuring process, Moody’s said.

“The uncertainty regarding the interpretation of special revenue resulting from the federal appeals court ruling underscores the importance of the linkage between a local government's general credit quality and that of its enterprises,” Moody’s said.

Also under review were Cleveland water senior bonds; Dallas waterworks and sewer enterprise bonds; Granite City, Illinois, wastewater treatment plant bonds; Lynn Water and Sewer Commission, Massachusetts; Sheffield, Alabama, Electric Enterprise; and Center City District, Pennsylvania, which all enjoyed ratings three notches above the sponsoring government.

Monroe County Water Authority, New York, was also on review for its four-notch differential.

The Cleveland, Dallas, Granite City, and Center City ratings were downgraded. The Lynn, Sheffield and Monroe County bonds were affirmed.


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