All governments should be aware of recent electronic fraud and other sophisticated measures being used to access banking account and other payables information. These schemes include sending extremely realistic e-mails from fake or hacked e-mails disguised as known vendors, including banks. Governments should exercise caution in their handling of e-mails announcing changes to a vendor’s ACH or other account information, or from vendors requesting the government’s account information. GFOA is cautioning governments to be aware and put safeguards in place to prevent fraud.

At GFOA’s annual conference last month in Denver, the Addressing Fraud in Electronic Payments session focused on this topic. Speakers provided their own tales of how their governments’ accounts had been or were nearly breached by sophisticated fraud attempts. Slides from the presentation, which are available on the GFOA website, provide valuable information about establishing policies and procedures to prevent and react to this type of fraud, as well as details about how it is executed.

Some key elements to help governments avoid being the victim of fraud include the following recommendations:

• Do not make any changes to vendor information, particularly payment addresses and/or bank account information, without carefully reviewing the information provided and corroborating the change through other sources.
• Do not use e-mail to confirm changes to vendor payment information—if the government or vendor has been recently hacked, you will likely be contacting the fraudster rather than the vendor. Verify changes by phone or regular mail, using information from existing vendor records.
• Revise the government’s forms to require that vendors provide both the old and new bank routing and account numbers or billing addresses when requesting a banking change or a payment mailing change.
• Remove vendor change forms from the government’s website to help avoid this kind of scam. Instead, ask vendors to contact staff directly for these forms.
• Communicate with staff and outside departments about the importance of prioritizing outstanding balance inquiries from vendors and resolving them quickly. Payment questions need to be addressed as quickly as possible because they may uncover vendor or payment fraud. Again, insist that staff use telephones, faxes, or the postal service for correspondence rather than e-mail to address issues with vendors.

If you are aware of fraudulent account routing and numbers, notify your bank and law enforcement. They may already be involved in a related investigation and might be able to help.

Download the slides from the GFOA conference.

NEW YORK, June 12, 2017 /PRNewswire/ — CUSIP Global Services (CGS) today announced the release of its CUSIP Issuance Trends Report for May 2017. The report, which tracks the issuance of new security identifiers as an early indicator of debt and capital markets activity, found a surge in the pre-trade market for corporate and municipal bonds in May. This increased demand for new CUSIP IDs for corporate and municipal bonds is suggestive of a possible uptick in new security issuance volume over the coming weeks.

CUSIP identifier requests for U.S. and Canadian corporate debt and equity offerings totaled 2,289 in May, a 12% increase from April 2017 totals. So far this year, demand for new CUSIPs for both corporate debt and equity offerings are up 34% over the same period in 2016, reflecting the strong pace of request volume observed during February, March, and May of this year.

Municipal bond requests also increased in May. A total of 1,413 muni identifier requests were made during the month, an increase of 32% over April. This made May the most active month so far in 2017 for new requests for municipal bond CUSIPs. Despite this growth, municipal bond request volume was down 25% through the end of May 2017 on a year-over-year basis, reflecting some volatility in municipal bond issuance volumes over the course of this year.

“A combination of macroeconomic and technical variables have driven a fair amount of volatility in month-to-month CUSIP request volume so far this year,” said Gerard Faulkner, Director of Operations for CUSIP Global Services. “Overall uncertainty about where the markets and interest rates are going, and preparations for pending regulatory reforms such as the Fiduciary Rule have all conspired to create a choppy trend in pre-trade activity.”

International debt and equity CUSIP International Numbers (CINS) volume was mixed in May. International equity CINS increased 16% and international debt CINS decreased 1% during the month. On a year-over-year basis, international equity requests were down 9% and international debt requests were up 74%, reflecting continued volatility in international markets.

“In the big picture, we’re seeing very healthy levels of CUSIP request volume, indicative of robust new issuance activity,” said Richard Peterson, Senior Director, S&P Global Market Intelligence. “But the path we’ve been taking to get there has been bumpy with monthly surges in activity followed by slow-downs over the course of the year.”

To view a copy of the full CUSIP Issuance Trends report, please click here.

A few years ago, I wrote a blog post entitled “The P3 Wars” in which I provided a brief explanation of how a P3 (i.e., a public-private partnership) works, and the general arguments for and against the use of P3s. More recently, President Trump proposed a $1 trillion U.S. infrastructure plan that likely includes the use of P3s. Although no details of his plan have been released, Elaine Chao, his Secretary of Transportation, recently told the Senate Environment and Public Works Committee that of the $1 trillion dollar infrastructure investment, approximately $200 billion would consist of public funding, which leaves $800 billion of private financing.

In the early 2000s, then Governor of Texas, Rick Perry, who is now President Trump’s Secretary of Energy, was a big proponent of P3s. He promoted toll roads built and operated by private persons as a way to fund the construction and operation of Texas highways, because he found P3s to be preferable to raising fuel taxes for the same purpose. However, sometime in the mid-2000s, a populist movement began and continues in Texas that voraciously opposes toll roads operated by P3s. That movement was instrumental in getting the Texas legislature to pass a legislative moratorium in 2007 on most P3 funded highway projects. A few toll road projects were permitted to go forward, however, even after the legislative moratorium. One such toll road project involved a highway that would bypass the congested Austin metropolitan area. However, the private entity involved with the P3 declared bankruptcy last year, adding fuel to the populist movement’s fire. (Advocates for P3s counter that the failure only supports the argument that toll roads should be used for major thoroughfares).

Continue reading.

By Cynthia Mog on June 8, 2017

The Public Finance Tax Blog

Squire Patton Boggs

WASHINGTON — President Trump will lay out a vision this coming week for sharply curtailing the federal government’s funding of the nation’s infrastructure and calling upon states, cities and corporations to shoulder most of the cost of rebuilding roads, bridges, railways and waterways.

He will also endorse a plan to privatize and modernize the nation’s air-traffic control system. That plan, which is to be introduced on Monday at the White House and the subject of a major speech in the Midwest two days later, will be Mr. Trump’s first concrete explanation of how he intends to fulfill a campaign promise to lead $1 trillion in United States infrastructure projects. The goal is to create millions of jobs while doing much-needed reconstruction and updating. But the actual details of the initiative are unsettled, and a more intricate blueprint is still weeks or even months from completion.

What the president will offer instead over the coming days, his advisers said, are the contours of a plan. The federal government would make only a fractional down payment on rebuilding the nation’s aging infrastructure. Mr. Trump would rely on a combination of private industry, state and city tax money, and borrowed cash to finance the rest. It would be a stark departure from ambitious infrastructure programs of the past, in which the government played a major role and devoted substantial resources to paying the cost of large-scale projects.

“We like the template of not using taxpayer dollars to give taxpayers wins,” said Gary Cohn, director of the National Economic Council and an architect of the infrastructure plan, in an interview Friday in his West Wing office.

His language evoked the corridors of Wall Street, where he previously worked. “We want to be in the partnership business,” Mr. Cohn said. “We want to be in the facilitation business, and we’re willing to provide capital wherever necessary to help certain infrastructure along.”

As a model for the approach, Mr. Trump plans on Monday to send a proposal to Congress for overhauling the nation’s air-traffic control system. He would spin it off into a private, nonprofit corporation that would use digital satellite-based tracking systems, rather than land-based radar, to guide flights in the United States. There would be no cost to the government, Mr. Cohn said, because a newly formed corporation would finance the entire enterprise, using loans to handle the initial costs of equipment and other needs.

On Wednesday, Mr. Cohn said, the president will travel to the banks of the Ohio River to deliver a speech about overhauling the nation’s infrastructure, including the inland waterways that are in dire need of attention.

The philosophy undergirding the speech, administration officials said, is that melding public and private forces to rebuild the nation’s physical backbone will vastly expand the resources available to pay for doing it. The concept — a discussion of which helped cement Mr. Cohn’s hiring by Mr. Trump late last year — has driven infrastructure policy in the United States for many years. But Mr. Trump is proposing a far smaller federal investment than many Republicans and Democrats have long thought is necessary.

Mr. Trump is “trying to figure out, How do I get the most infrastructure improvements for the American citizens in the quickest fashion I can with the best return on investment for the U.S. taxpayers,” said Mr. Cohn, a former Goldman Sachs executive. “It’s sort of a businessman’s model.”

The White House has said Mr. Cohn will recuse himself from matters pertaining to Goldman, but it is unclear how that decision will affect any future plans by the company to bid for government partnerships in infrastructure. The White House noted on Saturday that the proposed air-traffic control corporation would be governed by independent directors with a fiduciary duty to the new entity.

On Thursday, Mr. Trump will hold listening sessions at the White House with a group of mayors and governors. On Friday, he plans to cap off what members of the administration are calling “infrastructure week” with a visit to the Transportation Department, where he will discuss drastically reducing the time it takes to obtain federal permits for projects.

The Trump administration clearly hopes the infrastructure rollout will provide a sorely needed policy victory. Its first attempt to overhaul the Affordable Care Act was so unpopular, even among Republicans, that House Speaker Paul Ryan called off a planned vote and began a rewrite. Senate Majority Leader Mitch McConnell recently said he was uncertain whether he could find a majority to move a health care bill through his chamber.

The president’s principles for a “massive” tax cut, encapsulated in what appeared to be a hastily written one-page document issued in April, were widely ridiculed for a lack of specifics and their underlying economic-growth assumptions, which many economists and policy experts considered overly rosy. And Mr. Trump has been roundly chastised for his recent decision to withdraw from the Paris climate agreement, a multinational plan to limit global warming through curbs on emissions that Mr. Cohn and many prominent corporate executives supported.

Despite the public push to promote the infrastructure package, Mr. Cohn acknowledged that the White House did not have a detailed proposal ready to release. He said, for example, that no decision had been made on whether the infrastructure plan would ultimately be married to a tax measure. Republicans and Democrats tried such a step during the Obama administration, in a plan that would have used revenue from repatriating corporate profits parked overseas to finance projects to improve roads, bridges, waterways, broadband and other areas.

“It’s undetermined yet,” Mr. Cohn said. “It may come before. It may come during. It may come after.”

Mr. Trump said in an interview with CBS News in April that his infrastructure bill was “largely completed, and we’ll be filing over the next two or three weeks, maybe sooner.”

Mr. Cohn blamed the delay on lawmakers, saying the White House was reluctant to send its proposal to Congress until progress had been made on the health care bill, a budget bill, legislation to raise the debt ceiling and the as-yet-unformed tax bill.

“If we thought it was the time to release an infrastructure bill, we would release an infrastructure bill,” Mr. Cohn said. “We just can’t keep throwing stuff on Congress. We actually need them to get legislation done. And as they start getting legislation done, we’ll come back with infrastructure.”

When that happens, the package is likely to meet with substantial criticism from Democrats, who were heartened to hear Mr. Trump focus on infrastructure spending during his presidential campaign but crestfallen to see the budget he unveiled last month. The proposed spending plan devoted only one-fifth of the money that he had spoken of for building and improving infrastructure.

“When Trump talked during the campaign about $1 trillion for infrastructure, people were taking him at his word that it would be $1 trillion,” said Sarah Feinberg, a former senior official at the Transportation Department in the Obama administration. Mr. Trump’s budget proposal to spend $200 billion in the next 10 years falls far short of what is needed, she said.

“The idea that this really minimal amount of federal investment will spur that level of private investment is hopeful but not realistic,” Ms. Feinberg said. “The reality is, the state of infrastructure has become an existential threat to huge portions of the economy.”

For now, Mr. Trump is focused on popular ideas that have been discussed by members of both parties for years. At the Transportation Department on Friday, he will pitch what Mr. Cohn called his “10-to-two plan,” an effort to cut permitting requirements so the process takes only two years instead of a decade. The current sluggish pace has prompted frequent complaints from construction and financing companies, who say the excessive bureaucracy that surrounds major infrastructure projects can be a costly and sometimes insurmountable hurdle.

Mr. Trump’s air-traffic control privatization plan is based on a bill sponsored by Representative Bill Shuster, Republican of Pennsylvania and chairman of the Transportation and Infrastructure Committee. It has drawn criticism from Representative Peter DeFazio of Oregon, the ranking Democrat on the panel, who has said it would cater to large airlines at the expense of smaller operators.

Jonathan Root, a senior credit officer for the ratings agency Moody’s, said privatizing air-traffic control could be a welcome change. “The expectation is that a private organization will complete the modernization much quicker than if it remains with the F.A.A.,” he said.

Although many of the details of the privatized air-traffic control system are far into the future, administration officials said they did not anticipate higher airline-user fees or increases in ticket prices.

In a statement, Thom Metzger, a spokesman for the National Air Traffic Controllers Association, expressed cautious optimism about the air-traffic control reforms, which have been widely telegraphed in Mr. Trump’s public comments and at White House gatherings. “Natca considers the status quo to be unacceptable,” Mr. Metzger stated, adding that the group shares “the administration’s commitments to infrastructure modernization.” It supports the notion of privatizing air-traffic control, he said, but only in a nonprofit entity.

THE NEW YORK TIMES

By JULIE HIRSCHFELD DAVIS and KATE KELLY

JUNE 3, 2017

Kroll Bond Rating Agency (KBRA) issues a rating letter at no cost for all municipal bonds insured by a KBRA-Rated bond insurer.

Please see the links below for a sample KBRA rating letter as well an overview of our Public Finance/Financial Guaranty sector:

Sample Rating Letter
Public Finance/Financial Guaranty Overview

KBRA rates the following bond insurers:

Assured Guaranty Corp. (AGC)
(Rated AA, Stable Outlook)

Assured Guaranty Municipal Corp. (AGM)
(Rated AA+, Stable Outlook)

National Financial Guarantee Corporation (National)
(Rated AA+, Stable Outlook)

Municipal Assurance Corp. (MAC)
(Rated AA+, Stable Outlook)

S&P Global Ratings is requesting comments on proposed revisions to its methodology for rating limited property tax general operating (LTGO) debt. The criteria are being updated to provide general guidance and transparency on S&P Global Ratings’ view of limited property tax debt to the market.

Continue reading.

Jun. 8, 2017

S&P Global Ratings Services is requesting comments on proposed changes to its methodologies for assigning issue credit ratings on obligations which are linked to the creditworthiness of U.S. Public Finance obligors, such as non-ad valorem/general fund-backed bonds, lease-backed bonds, appropriation-backed obligations and moral obligation bonds.

Continue reading.

Jun. 8, 2017

S&P Global Ratings maintains long-term ratings on more than 1,600 U.S. obligors issuing a combination of water, wastewater, drainage, or irrigation system revenue bonds. This is in addition to the ratings on U.S. regional wholesale water and/or wastewater systems.

Continue reading.

Jun. 7, 2017

A roundup of money (and other) news governments can use.

GOVERNING.COM

BY LIZ FARMER | JUNE 9, 2017

While it seems far-fetched, the danger is real for small governments.

Last month saw an unprecedented global ransomware attack that infected tens of thousands of computers in nearly 100 countries, including the U.S., the U.K. and Russia. Hospitals in the U.K. were the hardest hit as more than a dozen were forced to turn away nonemergency patients and doctors had to rely once again on pen and paper.

The disruption has caused many to consider how vulnerable U.S. government services are to a similar attack. But some are raising the possibility of another vulnerability: That a cyberattack has the potential to lower a government’s credit rating, making borrowing to fix the problem even more expensive for taxpayers.

The possibility seems remote: No government yet has been downgraded because of a cyberattack. But S&P Global Ratings analyst Geoff Buswick says the risk is real, particularly for smaller governments with less financial flexibility. That’s because attacks can cost a lot, but can also cost taxpayer trust. That in turn, can hinder a government’s ability to raise taxes. “As a rating analyst, I look at the willingness and ability to repay debt,” says Buswick. “Without taxpayer support you don’t have that ability.”

The concerns come as ransomware attacks — malicious software that blocks computer system access until a ransom is paid — have been on the rise. According to the U.S. Department of Justice, an average of more than 4,000 ransomware attacks per day occurred in 2016, a 300 percent increase over the prior year.

This year alone, the St. Louis Public Library; Licking County, Ohio; the library server system for Hardin County Schools, Tenn.; Bingham County, Idaho; and the network of the Pennsylvania Senate Democratic Caucus were all victims of a ransomware attack.

The success of such attacks vary. In St. Louis, the library had backups for the encrypted files and refused to pay the ransom.

But more sophisticated attacks on smaller governments can bring more damage. In Bingham County, which is not rated, a ransomware attack in mid-February brought down the county’s website and disrupted the emergency dispatch center. The problems persisted for weeks as officials worked to rebuild the county’s computer infrastructure to avoid paying the $28,000 ransom. In the end, though, it agreed to pay a $3,500 ransom to the hackers in early March after officials determined that it would be cheaper than buying new servers.

But the ransom was just the tip of the financial damage. Bingham County’s IT Department told the East Idaho News that the cost of repairing the servers was nearing the $100,000 mark, and that it could take the remainder of the year to get back to normal. For a county with less than $1 million in reserves, the unplanned expense cuts into the government’s financial flexibility, a key credit rating measure.

Often, the monetary damage can be bigger. In spring 2016, the city-owned Lansing, Mich., Board of Water & Light paid a $25,000 ransom to unlock its internal communications systems. The utility, which is rated, reported six months later that responding to the attack cost the city $2.4 million, all but $500,000 of which was covered by insurance.

Buswick notes that the Lansing utility was large enough to absorb the damage but says others might not be in that position. Utilities have monthly income but school districts, for example, only get their revenue twice a year. “[The utility] had to use some of the reserves they were not on using,” he says. “In another situation, credit could be an issue.”

GOVERNING.COM

BY LIZ FARMER | JUNE 7, 2017

A small rural county in southeast Nebraska might have to declare bankruptcy, not because of mismanagement or high labor costs but because of an unexpected legal judgment that the county government cannot pay.

Gage County on the Nebraska-Kansas border could be the next local government in the nation to file for bankruptcy protection after a federal jury awarded $28.1 million in damages plus attorneys’ fees last July to six people wrongly convicted of a brutal rape and murder.

Leaders from the farming community of about 22,000 people said they can’t afford that amount. The county’s insurance carriers have declined to cover the verdict.

“No county could prepare for that,” Myron Dorn, chairman of the county Board of Supervisors, said in an interview.

Increasing taxes to cover the judgment would be difficult, because Nebraska’s property tax cap limits the county from raising taxes by more than about $3.7 million. Residents could theoretically vote to exceed the state-imposed limit, but that is unlikely.

The county has appealed the verdict and is awaiting a decision; in the meantime, officials have hired bankruptcy attorneys to explore their options in case they lose the appeal.

While municipal bankruptcies are generally rare—only 54 counties, cities, towns, and villages nationwide have filed for bankruptcy since 1980—it’s not unusual for lawsuits to contribute to Chapter 9 filings. Of the 18 general purpose local government bankruptcies filed since 2006, legal judgments have been an important factor in five, or nearly 30 percent, according to research by The Pew Charitable Trusts. [General purpose local governments include entities such as counties, cities, towns, and villages and exclude special purpose districts such as school districts or and fire districts, which account for a much larger proportion of municipal bankruptcies. Nebraska historically has led the nation in special district bankruptcy filings.]

The legal judgments underscore the importance of local governments maintaining a healthy reserve fund balance to absorb unforeseen expenses. They also reinforce the need for states to be aware of the fiscal health of their local governments, so officials can prepare for situations when the state may need to step in to help. Washington state, for example, asks local governments about “litigation costs or pending legal judgments that risk depleting available fund reserves,” to try to anticipate and to plan for potential fiscal shocks.

Elsewhere around the country, Hillview, Kentucky, filed for Chapter 9 in August, 2015, after losing a lawsuit filed by a local truck driving school over a property dispute and being ordered to pay $15 million. The bankruptcy was dismissed in May, 2016 after city leaders agreed to raise taxes and sell bonds as part of a settlement with Truck America.

Other municipal bankruptcies that were prompted at least in part by lawsuits include:

• Mammoth Lakes, California, filed for bankruptcy in June, 2012, after a property development dispute resulted in a $43 million legal judgment. Mammoth Lakes later settled with the land acquisition company out of court.
• Boise County, Idaho, was ordered to pay $5.4 million in damages and attorneys’ fees to a developer for violating the federal Fair Housing Act. The county filed for bankruptcy in March 2011, but failed to prove in court that it was insolvent and the bankruptcy was dismissed. The county spent $2.25 million from its cash reserves and used bond financing to pay the rest. In addition, the Idaho Legislature passed a law to enable the county to levy additional property taxes to repay the bond.
• Washington Park, Illinois, filed for bankruptcy in 2009 after accumulating debts totaling over $1 million. The village struggled with numerous problems, including public employees stealing money and numerous lawsuits. A federal judge dismissed the bankruptcy, which followed another bankruptcy filing in 2004.
• Westfall Township, Pennsylvania, filed for bankruptcy in April, 2009, after a federal court decided in favor of a developer who had argued that township supervisors illegally halted development of a 1,500-unit residential project.

GOVERNING.COM | JUNE 9, 2017

By Stephen C. Fehr, Adrienne Lu, and Matthew Cook

• Very supportive supply/demand technicals trumped by valuations
• Ratios are 2+ standard deviations rich, close to 5-year lows

While many on Wall Street expect a heady summer for state and local debt, Barclays analysts are making a different call.

Despite forecasts for negative net issuance amid steady demand, the municipal market is unlikely to see a strong performance over the summer, according to Barclays municipal analyst team led by Mikhail Foux. Valuation is a better indicator of where the securities’ performance is headed, they wrote in a June 2 note to investors.

Municipal bonds current yields relative to U.S. Treasuries mean “there is very little value in the front-end but, with 30-year ratios already in mid-90s, the long end is hardly attractive.” Barclays added that, “as it stands, muni ratios are 2+ standard deviations rich compared with their three-month average, and are close to five-year lows.”

“Given that, currently, muni ratios are moving close to multi-year lows, we do not foresee strong performance from the asset class over the coming months, despite supportive technicals,” the strategists wrote in the note.

The view differs from other strategists who expect municipal bonds to continue to strengthen as demand outpaces supply and cash-rich investors have more money to deploy. The Barclays analysts wrote they expect net issuance to be a negative $25 to $35 billion this summer, near the levels other analysts estimate, but that a similar amount of negative net issuance in 2014 did not translate into lower ratios that year. They also noted that negative net issuance is not uncommon for the summer season.

“We are unlikely to see a major selloff any time soon, but, in our view, ratios might end up higher by the end of August.”

Bloomberg

by Rebecca Spalding

June 6, 2017, 9:51 AM PDT

Taylor Riggs, a contributor to Bloomberg Briefs, talks with Editor Joe Mysak about this week’s municipal market news.

Watch video.

Bloomberg

June 8, 2017

On May 23, President Trump released his Fiscal Year (FY) 2018 Budget Request, laying out a $4.1 trillion spending proposal for fiscal year 2018 and the following decade. The budget expands upon the administration’s initial “skinny budget” request for FY 2018 released earlier this year. NACo has released a comprehensive analysis of the president’s FY 2018 Budget Request and its potential impact on programs important to America’s counties.

The budget proposes significant spending cuts, which combined with optimistic economic growth assumptions, attempt to balance the budget over the next decade. Specifically, it outlines discretionary spending levels at $1.151 trillion and mandatory spending levels at $2.943 trillion. This represents a $1.7 trillion cut in mandatory programs over 10 years and a 10 percent cut to domestic programs in 2018.

Counties are concerned with several of the president’s proposed spending cuts, which include the elimination and reduction of programs that aid counties and their residents. The proposed budget includes significant changes to the Medicaid program, converting the program to a block grant or per capita cap. Other significant proposed reductions compared to enacted FY 2017 levels include the U.S. Environmental Protection Agency (30 percent) and the U.S. Departments of State (32 percent), Agriculture (21 percent), Labor (20 percent), Commerce (15 percent), Health and Human Services (16 percent), Transportation (17 percent) and Housing and Urban Development (12 percent).

In response to the president’s budget, NACo Executive Director Matthew Chase expressed his concerns with the president’s budget in a statement released May 23: “We are greatly concerned that this proposed budget essentially abdicates the federal role in the federal-state-local intergovernmental partnership that is essential to addressing our nation’s most pressing challenges. This budget, if enacted, would deal devastating blows to some of the most vulnerable people in our communities.”

For the full NACo analysis of the President’s FY 2018 Budget Request, please click here.

NATIONAL ASSOCIATION OF COUNTIES

By DEBORAH COX

Jun. 6, 2017

Focus on infrastructure could help Mr. Trump find common ground with members of Congress

President Donald Trump will launch a new campaign this week aimed at fulfilling his pledge for $1 trillion of infrastructure investment, hoping to capitalize on lawmakers’ support for rebuilding the nation’s transportation systems at a time when his tax and health legislation are in flux.

Mr. Trump will begin with a White House event Monday announcing a push to privatize air-traffic control across the U.S., in what backers say could be a catalyst for improving speed and fuel efficiency across the aviation industry.

From there, the president will campaign for reviving infrastructure along the Ohio River, then meet with mayors and governors in the White House, followed by a speech at the Transportation Department on Friday.

The White House still hasn’t said how it plans to pay for the federal government’s share of the projects, and officials said a more detailed proposal will come at an unspecified later date. But Mr. Trump’s top economic adviser said the administration aims to encourage states and cities to bear much of the burden.

“We want to talk to them and make sure we’re partnering with them to make sure that they can use their tax dollars as efficiently,” White House National Economic Council Director Gary Cohn told reporters Friday. “We can be a good partner with them in helping them to enhance their infrastructure projects.”

Shifting the discussion to infrastructure could mean the best chance for Mr. Trump to find common ground with members of Congress who object to other elements of his agenda, given the broad agreement that the nation’s roads, bridges, rails and water facilities are in disrepair. It would, however, mean finding a way to live up to campaign pledges that many believe are irreconcilable—investing $1 trillion in infrastructure, but doing so with funds raised almost entirely from the private sector.

The infrastructure push is “encouraging,” said Scott Rechler, a real-estate developer and former official at the Port Authority of New York and New Jersey who consulted with Mr. Trump’s transition team. “They should have started with this, since it’s one area with a level of bipartisan support.”

But Mr. Rechler, a Democrat whose own real-estate company has financed infrastructure like sewers and utilities in public-private partnerships with local government, said the administration’s plans should recognize that private financing won’t be able to replace federal funding in fixing some critical areas—from railroads to crumbling dams—where investors can’t turn a profit.

“It’s not free,” Mr. Rechler said. “At some point or another someone’s going to have to pay for this.”

In remarks to reporters last week, presidential advisers made clear they will be attempting to pair the president’s pledge to renew critical infrastructure with a shift of responsibility for some of the costs from federally funded grant programs to state and municipal taxpayers.

Some city and state officials say that they are already strapped for funds and worry about having to shoulder large additional costs.

“Voters in L.A. have done their part by passing the boldest and largest transportation measure in our nation’s history,” Los Angeles Mayor Eric Garcetti said. “And I expect Congress to act across party lines, and finalize a budget that provides direct funding for infrastructure projects that will improve quality of life for millions of people.”

The administration has called for spending $200 billion on infrastructure projects over 10 years, saying that infusion of federal money could help trigger roughly $1 trillion worth of total funding thanks to a surge in private investment.

Still, after nearly six months in office, the administration hasn’t said how it will pay for the federal government’s share of that investment, and hasn’t put forward legislation that would show exactly how it plans to spur private investment.

Senior administration officials didn’t say if Mr. Trump would put forward his own proposals for raising the funds for an infrastructure package or defer to Congress, saying that is “something we are currently debating inside the White House.”

An infrastructure proposal fleshed out with actual details will be ready “when the president tells us it should be ready,” a senior administration official said.

The administration has been most specific about its desire to cut regulation and permitting that can delay the start of new infrastructure projects. Mr. Trump has seized on a flow chart provided by Mr. Cohn’s deputy, DJ Gribbin, that shows how the permitting process for a new highway can involve up to 16 federal agencies.

Mr. Cohn said Friday that the administration would like to shrink the permitting schedule for such projects from as much as 10 years to “two or less.”

“The cost of infrastructure goes up dramatically as time goes on in the approval process, capital is tied up, it has people waiting for permits, and the amount of paperwork and the amount of fees that you just encumbered while you’re going through the approval process is enormous,” Mr. Cohn said.

Those comments would find agreement among some Democrats as well, and echo some of the Obama administration’s efforts to “fast-track” selected major capital projects by speeding environmental approvals.

The Wall Street Journal

By Ted Mann and Michael C. Bender

Updated June 4, 2017 9:59 p.m. ET

Write to Ted Mann at ted.mann@wsj.com and Michael C. Bender at Mike.Bender@wsj.com

Effort reflects the difficulty of coming up with taxpayer dollars in era of constrained budgeting; administration has released few details

WASHINGTON — President Donald Trump’s proposed infusion of funding for infrastructure turns on a critical question: how the administration will get private investors to put up most of the money.

Mr. Trump launched on Monday what he said would be a week focused on U.S. infrastructure with an embrace of a long-debated proposal to privatize the nation’s air-traffic control system.

His advisers said the proposal is a model of how they want to approach an overhaul of national infrastructure maintenance, turning to user fees and private-sector management to fund and operate what has been a federal government service.

But there has so far been little detail on Mr. Trump’s lofty infrastructure promise. The GOP president has proposed spending $200 billion over 10 years on programs to incentivize greater use of financing from private investors. The administration said that funding will leverage a total expenditure of $1 trillion to fix and build roads, bridges, dams and broadband lines.

The effort to shift to private funding reflects the difficulty of coming up with taxpayer dollars in an era of constrained budgeting. The last big transportation policy bill to pass Congress, in late 2015, was cobbled together with funding from a Federal Reserve surplus account and other sources that some lawmakers said were unorthodox.

“I think you’ll see a huge increase in infrastructure fund balances once we put into place the two things we’re doing investors care about,” DJ Gribbin, the special assistant to the president for infrastructure policy, said in an interview.

The administration hopes to cut lead times to get projects from the planning stage to construction by reducing permitting requirements. That will lessen the political risk that has deterred some private investment, officials said.

Secondly, it plans to encourage cities and towns to raise fees—like roadway tolls or water-usage charges—that will provide the revenue streams for private-equity investors.

It isn’t clear, however, that private investors will swarm to some of the country’s most seriously decrepit infrastructure projects because not all of them will provide commercial returns.

“I’m a huge supporter of increasing private capital in infrastructure,” said Heidi Crebo-Rediker, an adjunct senior fellow at the Council on Foreign Relations who served in the administration of former President Barack Obama, a Democrat. “But it is not a silver bullet, and as a country we are not set up to take on a fully private investment in public infrastructure.”

The municipal bond market remains a more attractive source of funding to many state and local officials needing funding for major projects, Ms. Crebo-Rediker said, and many local governments lack expertise in how to structure public-private partnership deals.

Private-equity executives and bankers who specialize in infrastructure investing said that finding money for projects isn’t the problem. It is the dearth of attractive investments, they said.

Last year, investors world-wide committed a record of about $59 billion to private-infrastructure funds, pushing to more than $140 billion the amount of ready-to-invest cash in such funds, according to Preqin, a provider of investment-fund data. Much of that money is likely to be spent outside the U.S., where most private infrastructure investing happens in the energy sector

Fundraising has remained strong this year, with another $29 billion flowing into such funds during the first quarter, Preqin said. Blackstone Group LP disclosed last month that Saudi Arabia has agreed to invest $20 billion in an infrastructure fund that the New York firm hopes will reach $40 billion and have spending power of as much as $100 billion once debt is added.

The White House’s challenge will be to steer Wall Street’s mountain of infrastructure money to projects that have traditionally been bypassed, such as toll roads and bridges, because of political hurdles, low returns and project time lines that exceed the length of time these funds have investors’ cash locked up—usually 10 years or so. Speeding up permitting processes could make more projects palatable to private-equity investors, investors say, particularly as competition for deals that fit well within current funds, such as pipelines and power plants, pushes up asset prices.

Blackstone, for example, has spent more than six years securing permits to bury transmission lines that will carry electricity generated by dams in Quebec to New York City and Massachusetts. It could take years more before the power lines are completed, and the firm begins collecting on its investment. Blackstone executives say the massive fund they are raising, which would be more than twice the size of the current record, will have no timeline on returning cash to investors and targets lower returns.

Officials at several major transportation agencies have expressed concern about the administration’s infrastructure approach in recent days. One government official, referring to the administration’s desire to shift responsibility for providing direct funding from the federal to state and local governments, said Mr. Trump’s administration was trying to “starve the beast” and force states and cities to find ways to finance privately.

Others noted with alarm that while the administration said it would devote $200 billion more to infrastructure over the coming 10 years, the department is also cutting funding to existing programs that support major projects.

The administration’s infrastructure initiative will be “over and above” the amount of funding provided by Congress through conventional grant programs, said Reed Cordish, a White House adviser.

Ms. Crebo-Rediker praised the administration’s embrace of programs that provide loans, loan guarantees and lines of credit for projects with national significance, allowing states and cities that qualify to add leverage to building projects. The administration also called for expanding a similar loan program for water infrastructure, and it said it would lift the cap on a program that allows the Transportation Department to allow the issuance of tax-exempt bonds for private entities.

But she said it wasn’t clear how Mr. Trump’s plan will prepare cities and states to strike private-financing arrangements to take care of some of their most critical needs.

“The devil’s in the details and there have been no details,” she said.

The Wall Street Journal

By Ted Mann and Ryan Dezember

Updated June 6, 2017 7:03 p.m. ET

Write to Ted Mann at ted.mann@wsj.com and Ryan Dezember at ryan.dezember@wsj.com

Faster, better, cheaper.

As President Trump prepares to deliver a speech on Wednesday about infrastructure, his administration is promoting the benefits of having local governments work with private corporations to build, repair and manage the nation’s ailing roads, bridges and airports.

Public-private partnerships, as they are known, have many potential benefits. Companies can complete projects quicker and more cheaply than governments can, proponents say. Letting private industry take the lead can also limit the amount of debt that cities and states need to take on.

Yet in the United States, public-private partnerships represent a tiny fraction of infrastructure spending. On toll roads, for instance, where they have been used the most, they accounted for just 1 percent of all spending between 1989 and 2011, according to a report by the Congressional Budget Office.

And whatever the advantages of giving the private sector a stake in public works — rather than leaving the government in control — experts agree that while some public-private partnerships may result in near-term savings, there is little hard evidence that they perform better over time.

“There is a significant misunderstanding of the way public-private partnerships actually work,” said David Besanko, a professor at the Kellogg School of Management at Northwestern University. “Taxpayers or users are going to need to pay for private infrastructure just as they need to pay for public infrastructure. You’re going to need to get revenues from somewhere.”

Whether through fees like parking meters and tolls on a road, or through government payments to the contractors, such projects are ultimately supported by taxpayers.

On Monday, Mr. Trump proposed creating a nonprofit corporation to modernize the nation’s air traffic control system. More glimpses of the administration’s plans are scheduled in the coming days, part of what the White House is calling “infrastructure week.”

Variations of public-private partnerships — known as P3 deals on Wall Street — are more common in Canada and some European countries than in the United States.

There is a reason for that. America is one of the few nations that exempt the interest on local and state bonds from federal taxes. As a result, the nation’s municipal bond market is bigger and more developed than in most other countries, and that makes public financing of infrastructure much more attractive, lessening the need for private partnerships.

In the United States, “the P3 market is in its infancy,” said Scott Zuchorski, a senior director in Fitch Ratings’s global infrastructure group, adding that there have already been “some growing pains.”

In California, a public-private partnership was created to ease congestion on bumper-to-bumper State Route 91. The solution was a four-lane toll road installed in the middle of the highway, which was then leased to and operated by a private consortium formed by subsidiaries of Peter Kiewit Sons, Compagnie Financiere et Industrielle des Autoroutes, a French toll road company, and Granite Construction.

Initially the toll road, which opened in 1995, was a success: Drivers paid for a faster road, and it employed cutting-edge technology, allowing for automated collections and congestion pricing.

Over the long-term, serious drawbacks surfaced.

The 35-year lease agreement included a noncompete clause that barred the state from making any other road repairs and improvements — like adding a lane and improving public transit — that might lure motorists away from the toll road.

Orange County Transportation Authority spent a decade in court before having to buy the express lanes outright for $207 million in 2003 so that it could go ahead with a highway and public transit overhaul.

Mildred Warner, a professor at Cornell University, pointed out that private firms and local governments can have fundamentally different interests.

The government has broad concerns, like improving overall regional transportation, reducing traffic and curbing pollution.

The companies have a narrower concern — maximizing financial returns.

“Is there a reason for there to be public control,” she asked. “Is there a public good?”

Nationwide, Virginia has among the most extensive experience with public-private partnerships. Beginning two decades ago, it turned to firms including Fluor and Transurban, an Australian company, to build and operate high-occupancy tolls lanes along the Beltway to and from Washington, D.C.

The Beltway project has helped reduce congestion, and the state government avoided taking on more debt.

Consumers still pay tolls, however. And if the number of car-poolers is too high — thus depriving Fluor and Transurban of tolls — the state is required to reimburse the companies.

Arrangements like this in which local governments essentially guarantee their private partners substantial payments are not uncommon, and leases that extend beyond the life of the project can also divert extra revenue from the public to the private sector.

The state of Indiana had to pay the private operators of a troubled toll road — one of the first big public-private partnership deals in the country — nearly $450,000 because it waived tolls during a flood emergency in order to speed escaping residents.

“You can make money when there’s a flood,” Ms. Warner said, criticizing the payment, “but the government looks to save lives.”

In New York, the Australian investment bank Macquarie — one of the biggest global funders of infrastructure projects — is working to build and maintain a new Goethals Bridge to replace the span that connects Elizabeth, N.J., and Staten Island. One phase of the bridge could open in the coming weeks, according to a spokesman.

As part of the arrangement, the Port Authority of New York and Jersey has agreed to pay the Macquarie consortium about $56.5 million a year for about 40 years once the bridge opens, regardless of how much traffic it handles.

Macquarie is working on other projects around the country. In 2014, Kentucky tapped the company to oversee the installation and maintenance of 3,400 miles of high-speed fiber optic cable throughout the state.

Construction has been delayed by a year as the Macquarie group works to obtain the rights to install some of the fiber optics on existing utility poles and “uncertainty regarding the magnitude of costs,” according to Fitch. This led Fitch to issue a negative outlook on $300 million in bonds issued by a state entity to finance some of the upfront costs.

The delays on the project might well have occurred even if the government were in charge, and Macquarie said public-private partnerships helped local governments avoid taking on too much debt.

“PPPs have proven themselves to be an efficient and cost-effective project-delivery method, allowing state and local governments to access private-sector financing while effectively transferring risk,” said Geoff Segal, manager of government advisory and affairs for Macquarie Capital.

Aaron Renn, a senior fellow with the Manhattan Institute who has studied a number of public-private partnerships, said one problem with them is that the public officials negotiating these arrangements sometimes lack the financial sophistication and advice to fully understand the deals.

“The most important question,” he said, “is who bears the revenue risk if certain things happen?”

Though local governments can wind up on the hook for billions, sometimes it is private firms and their investors that get burned.

That is what happened with perhaps the nation’s best-known public-private partnership, a 2006 deal in Indiana to lease an aging toll road to an investment group led by Macquarie and Cintra, a Spanish infrastructure firm, for $3.8 billion, which the state used primarily for other road projects.

The 75-year lease provided a big upfront cash payment for the state in return for the consortium’s right to collect toll revenue. But the project to upgrade the antiquated 157-mile roadway ran into trouble as the consortium took on too much bank debt, and ridership on the highway dropped during the Great Recession as fewer people were driving to and from work.

Eventually the investment consortium had to file for bankruptcy in 2015.

Now, most of that $3.8 billion has been spent, and the new operator of the toll road is continuing to collect fees from drivers. In June, tolls more than doubled for many drivers after a state subsidy that was put in place when the lease deal was signed expired in May.

And just this week another road project in Indiana fell into disarray, with state officials announcing on Monday that Indiana was trying to take control of the job from a public-private partnership that led by a Spanish company.

Private money is beginning to line up to take advantage of new deals now that Mr. Trump appears to throwing his backing behind such arrangements.

Blackstone Group, the giant private equity firm, announced last month the establishment of a $40 billion fund to invest mainly in infrastructure projects, with Saudi Arabia’s main sovereign wealth fund kicking in $20 billion.

Stephen A. Schwarzman, Blackstone’s chairman and chief executive, is leading a White House business advisory group, which lists infrastructure work as one of its topics for discussion.

Even Lloyd Blankfein, the Goldman Sachs chief executive who has been critical of Mr. Trump on climate change, jumped into the debate Tuesday on Twitter with a message saying he just arrived in China and was impressed by the condition of the country’s airports, roads and cell service.

“US needs to invest in infrastructure to keep up!” he said.

THE NEW YORK TIMES

By MATTHEW GOLDSTEIN and PATRICIA COHEN

JUNE 6, 2017

President Trump’s infrastructure plan is turning out to be a mirage. He had talked about a $1 trillion, 10-year effort. But the White House now proposes allocating only $200 billion, which would come from cutting aid to states and localities and giving it to Wall Street investors as tax credits, which it hopes will attract $800 billion in investment for big projects that would turn a profit through tolls and user fees. As an opening act, for example, Mr. Trump is pushing privatization of the nation’s air traffic control system, which could jack up the price of air travel for passengers.

But most of the nation’s unmet infrastructure needs involve smaller projects to operate, maintain and upgrade — not only highways, but also water, sewer and other systems that are of no interest to private investors. In Ohio, where Mr. Trump went on Wednesday to deliver a campaign-style speech about his plan, more than 1,500 highway projects to be completed over four years have an average cost of only $9.2 million, according to research by the Center for American Progress. That’s far too little to attract huge investment funds that are the presumed recipients of the tax credits.

Since 1995, 14 of 36 privately financed highway projects across the nation have been completed, with mixed results, according to a 2015 Congressional Budget Office report. The C.B.O. found that private investments did not increase the amount spent or reduce costs — two supposed goals. It simply substituted for money that could otherwise have been raised through low-cost municipal bonds.

As to whether private financing resulted in more reliably completed and maintained projects, the C.B.O. found that it sometimes could be arranged more quickly than public financing, which allowed some projects to be completed sooner. But three of the projects went bankrupt and one required a public buyout of the private partners.

In recent years, investor risk in privately financed projects has been reduced through heavier public subsidies, federal tax breaks, federal loans or state and local grants. But the more public backing there is for any given deal, the greater the chance that taxpayers will ultimately bear excessive costs — including debt, cost overruns and litigation. In effect, when private partnerships with significant public backing go well, investors reap most of the reward; when they go badly, taxpayers take a hit.

A case in point is the South Bay Expressway in California, an $828 million private project whose financing included a $140 million federal loan. Completed in 2007, the project filed for bankruptcy protection in 2010. When the bankruptcy court imposed a new financing and ownership structure the following year, taxpayers essentially had to forfeit $73 million in loan principal and accrued interest, in all, a loss of 42 percent of the investment.

It’s bad enough that Mr. Trump is not tackling the nation’s critical infrastructure needs. It’s worse that he seems determined to use the limited funds he has scrounged to enrich private investors at taxpayers’ expense.

THE NEW YORK TIMES

By THE EDITORIAL BOARD

JUNE 9, 2017

The Trump administration and legislators on Capitol Hill have a tall order to fill when it comes to developing policies that can spur more investment in the nation’s infrastructure. To inspire informed dialogue on this topic, the Municipal Securities Rulemaking Board (MSRB), created by Congress in 1975 to oversee the $3.8 trillion municipal securities market, recently gathered bankers, developers and scholars for an infrastructure discussion.

Our goal was to look beyond the municipal market – which finances the lion’s share of the nation’s infrastructure – and better understand all it may take to fulfill the outsized need to maintain and build the nation’s roads, bridges, tunnels, schools and more over the next decade. If the municipal securities market serves as the perpetual backdrop and most essential aspect of public finance, how might state and local government finance be coordinated with and enhanced by federal incentives and private sector involvement?

Potential innovations in infrastructure finance and related policies must contend with a legislative process on Capitol Hill that advances on a fragmented and episodic basis, and which is affected by the challenges of rising federal debts and soft economic growth. Transportation funding and water infrastructure bills are core priorities for appropriations and infrastructure committees in Congress.

According to the Congressional Budget Office, federal, state, and local governments collectively spent $416 billion on transportation and water infrastructure in 2014 – a quarter of which came from federal spending. This significant level of spending has been a relatively stable percentage of the GDP over the past 30 years.

Yet congressional involvement in infrastructure policy reaches much further. For example,infrastructure stimulus proposals have been at the top of the agenda for President Obama’s, and now, President Trump’s, first terms. These proposals engage congressional tax writers in seeking to jumpstart infrastructure through new incentives. While the Trump administration favors federal tax credits and public private partnerships for stimulus, the tax component of Obama-era stimulus legislation established new types of subsidized municipal securities that have since expired, including tax-credit bonds and direct-pay, “Build America Bonds.” The return of these bonds, or the development of enhanced private activity bonds programs, is under discussion by the current administration.

A wide array of programs could be enacted by Congress or fine-tuned through regulatory relief in the name of infrastructure development – from P3s to infrastructure banks, QPIBs to QZABs, and WIFIA to TIFIA. Sometimes overlooked in this policy alphabet soup is the very foundation for successful infrastructure: efficient capital markets. Municipal securities, which are traditionally tax exempt, have been and remain the essential element for ensuring state and local governments can affordably access capital markets to maintain infrastructure, from roadways to alleyways, and from universities to elementary schools.

With 50,000 governmental and nonprofit issuers and counting, it is primarily the municipal securities market that assures community needs are identified, prioritized and financed at a reasonable cost. The municipal securities market must function well just to maintain current state and local government priorities, and must thrive to support policies aimed at bridging the nation’s infrastructure funding gap. While the market hums along to meet much of the nation’s infrastructure need – with an average $430 billion in municipal securities issued annually – experts are focused on removing policy barriers so that public and private finance can fit together more seamlessly and foster innovation.

The MSRB keeps top of mind its mission to promote a fair, efficient and transparent municipal securities market and those policies specifically targeted at its structure. As we seek to protect municipal securities investors and issuers, we are aware that new federal policies not directed at municipal securities or even infrastructure will nevertheless affect our market. Such policies may unleash or stymie the potential of capital markets as a whole – and may put the $3.8 trillion municipal securities market to work – or to rest. Democratic and Republican members of Congress have prioritized infrastructure investment, and the Trump administration is taking careful stock of infrastructure needs and the policies that could unlock the full potential of capital markets and the economy through the tax code and regulatory relief.

Within this debate, corporate or individual tax reform could change the relative value or tax treatment of municipal securities for investors and affect borrowing costs for issuers as priorities are aligned to support ideas for promoting U.S. competitiveness. Such legislative deal making can create surprise consequences, and the municipal securities market can adapt, having endured previous tax reforms, sequestration and economic recessions.

It is a resilient resource borne of the founding principles of a nation that reserves power, decision making authority and access to capital for state and local government. Yet hazards for the market should be avoided or overcome, and indirect consequences of tax proposals, carefully considered. An efficiently operating municipal securities market is the basis from which to advance essential priorities. As policymaking brings disparate ideas into focus, it must be remembered that the municipal securities market, operating quietly in the background, is the very foundation for financing the nation’s infrastructure.

THE HILL

BY LYNNETTE KELLY, OPINION CONTRIBUTOR – 06/09/17 02:30 PM EDT

Lynnette Kelly is executive director of the Municipal Securities Rulemaking Board.

Social Finance Announces Awardees to Develop Nation’s First Outcomes Rate Cards, Driving Government Performance through a Focus on Outcomes

Riverside County, CA and Yale Child Study Center with the State of Connecticut will employ pioneering tool to deliver results for at-risk children

May 31, 2017 – Boston, MA – Social Finance today announced the first round of awardees for the Outcomes Rate Card Development Competition, launching two new partnerships to advance outcomes-based contracting and financing in communities across the country. With support through funding awarded last year from the Corporation for National and Community Service’s Social Innovation Fund, Social Finance will partner with the Riverside County Executive Office and the Yale Child Study Center with Connecticut’s Office of Early Childhood to develop the nation’s first outcomes rate cards.

Outcomes rate cards scale solutions to society’s most pressing challenges by allowing government to identify priority outcomes for vulnerable citizens, and enabling service providers to achieve those outcomes through diverse interventions. An outcomes rate card standardizes the Pay for Success approach, by establishing a menu of outcomes a government seeks to “purchase” for a given issue and target population and the amount it is willing to pay each time a given outcome is achieved. With one outcomes rate card, governments can launch multiple projects, directing resources towards outcomes rather than outputs.

“Today’s announcement represents the growing enthusiasm of state and local governments to tackle persistent social challenges through outcomes-based approaches,” said Tracy Palandjian, co-founder and CEO of Social Finance. “Outcomes rate cards will allow us to scale Pay for Success, delivering even greater impact for children and their families in California and Connecticut.”

The Yale Child Study Center and Connecticut’s Office of Early Childhood, a state agency, will build on the state’s history of collaboration and experience with Pay for Success to design an outcomes rate card addressing early childhood outcomes. The partners will work with Social Finance to analyze data from the state’s Early Childhood Information System and identify the issues of greatest need facing the state’s young children and their families. Together, they will develop an outcomes rate card to support outcomes-based projects addressing the identified area of need.

“Connecticut has been a national leader in Pay for Success thanks in large part to the state’s collaboration with Social Finance and the Yale Child Study Center,” said David Wilkinson, Commissioner of the Office of Early Childhood. “We are excited to be selected in this competition to work together again as we seek to make the promise and potential of PFS achieve broader reach more efficiently. Government and service providers share a mission of generating positive outcomes, so it makes sense to align payment with the outcomes we want to see.”

“This award allows us to apply the rigorous research at the Yale Child Study Center on effective interventions for children and their families in our relationships with government and policy partners,” said Dr. Linda Mayes, Professor and Director of the Yale Child Study Center, co-Principal Investigator

Riverside County Executive Office will develop an outcomes rate card to improve services for Children of Incarcerated Parents (CIP). Incarceration in county jails and state prisons is a growing challenge in Riverside County, imposing a substantial social and economic burden on the community. Children of Incarcerated Parents face a range of challenging circumstances that put them at a higher risk for adverse health outcomes, low academic performance, and diminished economic opportunity. An outcomes rate card will help Riverside County expand the range of services needed to adequately support CIP, driving resources toward high-quality service providers and meeting the diverse needs of impacted children to help set them up for long-term success.

“The Riverside County Executive Office is honored to be selected as a service recipient. We will use the Outcomes Rate Card to develop a proactive model to reduce the incarceration rate by intervening early in the lives of children who experience risk factors that make them more susceptible to future incarceration,” said Brian Nestande, Deputy County Executive Officer, Riverside County.

Outcomes rate cards are one approach to developing Pay for Success projects, which combine nonprofit expertise, private funding, and independent evaluation to transform how government leaders respond to chronic social problems. Over the past six years, over 70 Pay for Success projects addressing chronic social issues have launched in 18 countries worldwide.

The Outcomes Rate Card Development Competition is supported by the Social Innovation Fund (SIF), a program of the Corporation for National and Community Service (CNCS). Social Finance was awarded funding as part of SIF’s Round 2 Pay for Success Grants Competition, which seeks to build the pipeline of Pay for Success projects for local governments.

“The Social Innovation Fund is an innovative program that seeks to invest in truly compelling solutions and expand programs that work,” said Lois Nembhard, acting director of the Social Innovation Fund. “We are pleased to support the development of the first outcomes rate cards in the United States and believe these projects will represent cross-sector collaboration at its best—laying the groundwork for more governments and nonprofits to follow the lead of the two service recipients announced today.”

***

About Social Finance

Social Finance US is a 501(c)(3) nonprofit organization dedicated to mobilizing capital to drive social progress. We believe that everyone deserves the opportunity to thrive, and that social impact financing can play a catalytic role in creating these opportunities. As a Pay for Success intermediary, Social Finance has built upon the work of our sister organization Social Finance UK, who pioneered the first social impact bond in the world in 2010.

About the Social Innovation Fund

The Social Innovation Fund (SIF) is a program of the Corporation for National and Community Service, a federal agency that engages millions of Americans in service through its AmeriCorps, Senior Corps and Volunteer Generation Fund programs, and leads the nation’s volunteer and service efforts. SIF positions the federal government to be a catalyst for impact—using public and private resources to find and grow community-based nonprofits with evidence of results. The Social Innovation Fund focuses on overcoming challenges confronting low-income Americans in three areas of priority need: economic opportunity, healthy futures, and youth development. To learn more, visit www.nationalservice.gov/sif

Contact: Alex Zaroulis, Director of Communications, Social Finance
617.549.0358
azaroulis@socialfinance.org

(Reuters) – A lean issuance calendar in the municipal bond market is propping up debt prices for U.S. cities and states and will likely keep a floor under some of the market’s wobbly sectors, even hospitals, according to data and analysts.

The scarcity of new deals also provides an opportunity for less credit worthy municipal issuers to come to market when cash levels are high and demand is strong.

Credit traditionally seen as more risky by investors, such as BBB-rated hospitals that rely heavily on government-funded Medicaid and Medicare, are seeing “enthusiastic demand” from the market, said Alan Schankel, municipal strategist at Philadelphia-based Janney Montgomery Scott.

But sweeping changes to the country’s healthcare law currently under consideration by Congress has woven uncertainty into hospitals’ future revenue streams. Such a tumultuous environment should give caution to investors to beware of debt tied to healthcare, in particular city and safety net hospitals.

“It certainly flashes a yellow light for me, a caution light,” said Schankel. But when it comes to new bond issues coming to market, “there is nothing around, so investors are chasing this stuff.”

Demand for bond deals will likely surge even more this summer, as billions of dollars worth of municipal bonds exit the market.

“The supply is way down. You have far fewer bonds in the market,” said Greg Saulnier, municipal research analyst at Thomson Reuters’ MMD. “With so much money and cash pouring back into the market, you have guys flush with cash with no where to put it.”

Some $130 billion to $140 billion in bond redemptions will outweigh the $100 billion of new debt expected to be issued in June, July, and August. The extra cash will likely set records, municipal analysts say, driving demand and bond prices up because of a dearth of deals in which investors can participate.

The “wave of cash” will create a “steady if not strong performance for the marketplace going into the end of summer,” said Jim Colby, portfolio manager for VanEck’s municipal bond investments. “You can see why this is an interesting time.”

HEALTHY DEMAND

Demand for hospital credits comes at a time of huge uncertainty and potential upheaval for the healthcare sector. U.S. President Donald Trump and the Republican-led Congress have vowed to repeal and replace the Affordable Care Act, the nation’s healthcare law commonly referred to as Obamacare.

A Republican-proposed healthcare bill approved by the House and now under consideration by the Senate would likely reduce federal Medicaid payments to states, a large revenue source for hospitals.

“We have seen incremental rating pressure recently, even among some of our largest and strongest organizations,” said Martin Arrick, managing director at S&P Global Ratings. “This pressure could grow, and threaten our stable outlook on the sector, depending on administrative and legislative actions under the new administration,” Arrick said.

Tax-exempt 10-year BBB-healthcare bonds on Friday saw a 2.97 percent yield and a 111 basis point spread over the benchmark MMD AAA yield curve. That spread has remained the same since the end of last year, even as the sector’s yield has declined from 3.42 percent on Dec. 30th.

Recent examples of the lower rated healthcare sector bonds hitting some high notes include two California hospitals from the BBB-rated category – Children’s Hospital Los Angeles sold $275 million and Eisenhower Medical Center in Southern California’s Coachella Valley sold $233 million. Both deals, done in May, saw yields reduced after preliminary pricing by 5 to 15 basis points, evidence of stronger-than-expected investor demand.

Cleveland’s MetroHealth sold $946 million of revenue bonds in May, even after the system received a three-notch downgrade from all three rating agencies.

The bonds saw strong after-market activity, topping the list of most active issues.

One tranche of the 40-year maturity carrying a 5 percent coupon was initially priced at a slight discount of 99.48, and a 5.03 percent yield. Nearing the end of the day’s activity, however, block trade yields fell as low as 4.64 percent, lifting the price to 102.78, according to Schankel. MetroHealth reported that 122 banks, firms, and individuals competed for the bonds.

“I don’t know that it’s quite in the category of frothiness, but it’s getting close,” Schankel said.

Reuters

By Robin Respaut

June 05, 2017

(Reporting by Robin Respaut; Editing by Daniel Bases and Diane
Craft)

Australia has had success with ‘asset recycling.’ Maybe turning old into new could work here too.

The Trump administration’s proposed federal budget calls for spending $200 billion over 10 years to “incentivize” infrastructure investment by state and local governments. One key to the strategy is reportedly “asset recycling” — selling or leasing infrastructure assets to the private sector and using the proceeds to pay for upgrades, maintenance and new infrastructure. If the administration is indeed embracing this reinvestment mechanism, it deserves our serious consideration.

Asset recycling was developed by the Australian government in 2014. It may have hit the Trump administration’s radar screen because Australia’s 2016 budget demonstrated that $5 billion in federal funding incentives had stimulated more than $20 billion in infrastructure investments through asset recycling. It also attracted institutional investors by creating project pipelines, the lack of which has long impeded the development of a U.S. infrastructure market. Top Trump administration officials and advisers — including Vice President Mike Pence, Transportation Secretary Elaine Chao, National Economic Council Director Gary Cohn, and Steven Roth and Richard LeFrak, co-chairs of the President’s Infrastructure Advisory Committee — have been championing the concept.

Asset recycling also involves another key to the Trump administration’s trillion-dollar infrastructure strategy: the engagement of the private sector through public-private partnerships. P3s have received mixed reviews worldwide, and P3 activity in the United States has consistently trailed most countries. To move the debate on P3s forward in Australia, the government of Prime Minister Tony Abbott introduced the concept of asset recycling. Officials reasoned that tapping into a source of funding for needed infrastructure that would not cost taxpayers or add public debt might have the potential to overcome reservations about P3s.

To encourage Australian states and territories to mine their balance sheets for assets that could be divested, the Abbott government offered to contribute 15 percent of the value from the proceeds of divested assets to new infrastructure projects being financed with the proceeds from divested assets. The states and territories had a two-year window to identify the assets to be sold or leased and reach an agreement with the federal government.

Some jurisdictions jumped at the opportunity. New South Wales, for example, netted $3 billion from port leases to a consortium of Australian pension funds and a government-owned investment fund, then used the proceeds to improve roads and transit facilities. Tasmania sold an airport to fund transportation, agricultural water storage and irrigation projects.

Could what worked in Australia — essentially a garage sale of government-owned infrastructure — work in the United States? Maybe, but we’ve got some big challenges. In addition to the reluctance of local officials to give up control of infrastructure, current tax law provides powerful disincentives to the selling or leasing of assets. Assets that are sold or leased must not only repay associated tax-exempt debt, but state and local governments would also have to finance any new debt that is incurred on a more expensive, taxable basis.

Those challenges aren’t insurmountable, as Indiana has shown. In 2006, the state leased the Indiana Toll Road, netting $3.5 billion after repaying $300 million of tax-exempt debt. The state put the proceeds into its infrastructure fund, which has since financed other transportation assets without taking on any additional debt or imposing tax increases.

Estimates of the potential value to be realized in the U.S. through recycling of existing revenue-generating assets — including not only toll roads but also ports, airports, bridges, water systems and parking facilities — exceed $1 trillion. And these estimates do not include the value of providing a reliable source of funding for infrastructure projects requiring “availability payments,” the disbursements to concession-holders based on project or performance milestones.

As with other approaches to selling or leasing public assets to the private sector, any plan involving asset recycling will need much discussion to address risks. How do we guard against assets being sold on the cheap? How can we protect the public from potential misuse of market power by new private owners tempted to boost profits by increasing user charges? Other issues span the need to ensure that adequate regulatory frameworks govern divested assets to the task of assessing the impact of political pressure on market competitiveness. Not trivial issues.

Just as traditional public-private partnerships are not a silver-bullet solution to infrastructure financing, nor is asset recycling. Distinguishing assets most suited for recycling from those that are not will be tough. Resource-strapped governments will be hard-pressed to develop comprehensive asset inventories and master lifecycle management practices. And public pensions could be put under additional pressure to buy assets that don’t fit into their investment strategies.

But it may be worth the work required. A federally driven asset-recycling program could help state and local governments access capital — without incurring debt or raising taxes — to build a new generation of infrastructure assets. More importantly, it would signal that the U.S. infrastructure market is open for business.

GOVERNING.COM

BY JILL EICHER | JUNE 1, 2017

A roundup of money (and other) news governments can use.

GOVERNING.COM

BY LIZ FARMER | JUNE 2, 2017

Bloomberg Markets with Carol Massar and Cory Johnson.

GUEST: Hardy Manges Head of Municipal Dealer Sales MarketAxess Discussing the outlook for muni bond investing. Oliver Renick, Bloomberg News Stocks Reporter, also participates in the discussion.

Running time 08:00

Play Episode

Bloomberg

May 30, 2017 — 12:33 PM PDT

producer: Paul Brennan +1-212-617-8292 or pbrennan25@bloomberg.net

• Puerto Rico bankruptcy rule changes surprised traders
• Distressed funds say they’ll demand discounts in the future

Puerto Rico’s bankruptcy has left distressed municipal-debt traders like Hector Negroni wondering if the old rules still apply — not just in San Juan, but across the U.S.

The island’s effort to shred protections written into its constitution to determine which creditors get paid first has made Negroni reconsider the high-yield, high-risk corner of the $3.8 trillion muni-bond market. “They’re attempting to suspend the constitution,” said Negroni, a principal at New York-based hedge fund Fundamental Credit Opportunities and a member of the general-obligation ad hoc group pushing for full payback.

It’s true that no state has defaulted since Arkansas in 1933 — Puerto Rico is a U.S. territory — and that so far the island’s actions have had no evident effect on the broader muni bond market. But the reverberations could, eventually, reach highly indebted states like Illinois, New Jersey and Connecticut. Puerto Rico’s decision to renege on its constitutional commitment, the argument goes, may trigger a quicker deterioration in investor confidence in the next borrower that gets itself into real trouble.

As part of Puerto Rico’s bankruptcy, made possible by an act of the U.S. Congress last year, a judge will now decide how investors will split repayments of $74 billion in bond debt, and Negroni and others will likely have to take less money than they were promised.

“People are going to start pricing in an increased probability of laws changing” by demanding discounts when they buy distressed debt, Negroni said.

Raise Taxes

Distressed muni-debt traders usually buy when the credit rating of a bond is downgraded to junk status. That’s when institutions, such as mutual funds, are forced to sell or otherwise long-term retail investors get spooked.

“Next time around, you bet that they’re going to be asking for lower prices when mutual funds want to unload something like Illinois,” said Matt Fabian, a partner with Municipal Market Analytics Inc. in Concord, Massachusetts.

When faced with a swelling budget shortfall or a looming default, states are expected to do anything from raising taxes, cutting services or selling off assets to pay creditors. They don’t have access to bankruptcy protection. Neither did Puerto Rico until last year, when Congress voted to help the commonwealth restructure its unsustainable debt. Puerto Rico has said it can only cover about $8 billion of $33.4 billion in bond payments due through 2026.

Doubly Protected

The law change came as a shock to some general-obligation bondholders, such as Negroni, who believed they were doubly protected. Not only would there be no bankruptcy, but the commonwealth’s constitution said that repaying bondholders was a priority, even ahead of providing citizens with essential services. (That approach may not have thrilled those outside observers worried about worsening living conditions on the island, but it was the law.)

Although there’s been no decision yet on how bondholders will divvy up the money, hedge funds holding $1.4 billion of the general-obligation bonds, including Aurelius Capital Management and Monarch Alternative Capital, have already sued to receive overdue principal and interest payments.

Puerto Rico’s bankruptcy is the biggest in muni land. About half the states prohibit towns and cities from filing. Michigan isn’t one of them. In Detroit, which was the second-largest muni bankruptcy, bondholders didn’t do as well as they could have. Pensioners, despite not having first-paid status, were one of the least-impaired creditors, walking away with 82 cents on the dollar. General-obligation bondholders got 73 cents, and some water-and-sewer bondholders received as little as 1 cent on the dollar.

Bailout Packages

“You should know on the front end that laws can change, and that includes bailout packages as well,” said Jon Schotz, co-managing partner at Saybrook Fund Advisors, a $250 million private equity firm that invests in distressed and defaulted municipal securities, including Prepa, Puerto Rico’s public power utility.

Puerto Rico probably won’t be the last U.S. entity to change the rules to cut down on its debt, said Kjerstin Hatch, managing principal of Lapis Advisers, which has about $380 million in assets under management but no Puerto Rico.

“How the country will deal with municipal default is likely in its infancy,” Hatch said. “Ideas are forming, from a legislative and judicial standpoint, as to how we’ll handle large insolvent municipal entities.”

The flouting of constitutional rules may cause distressed muni-bond investors to insist on discounts, but it won’t scare them away from the market, Fabian said.

“The ending of this movie might disappoint them, but they’d buy the ticket to watch it again.”

Bloomberg Markets

by Kate Smith and Amanda Albright

May 30, 2017, 3:00 AM PDT

Amanda Albright, a reporter for Bloomberg Briefs, talks with Joe Mysak about this week’s municipal market news.

Watch the video.

Bloomberg

June 1, 2017

Fitch Ratings-New York-31 May 2017: Under Fitch Ratings’ updated U.S. public finance tax-supported rating criteria, released today, pension liabilities will be discounted at a fixed 6% investment-return assumption, with the upward liability adjustment determined by newly-reported sensitivity data. The accompanying report discusses the criteria changes related to pension analysis, and the rationale behind them in more detail.

The investment-return assumption had previously been set at 7%.

Pension liabilities and the cost of supporting them remain a source of uncertainty for governments given the generally irrevocable nature of vested benefits, the variable nature of liabilities, and the rising burden of contributions relative to resources.

“U.S. growth has been slower and more incremental over the current economic expansion than over longer time horizons. There is little evidence to suggest the economy will accelerate to previous levels of growth in the near term. Fitch believes that pensions will be hard-pressed to achieve their long-term growth expectations in the current economic context,” said Douglas Offerman, Senior Director.

“The 6% return assumption, and increased total pension liability, better reflect the magnitude of the burden posed by pensions.”

In another change announced in the new criteria, Fitch will compare its existing metric for the carrying cost of long-term liabilities, which relies on the reported actuarially determined contribution for pensions, to a new, supplemental metric that combines a hypothetical annual pension cost using a level repayment of the Fitch-adjusted net pension liability in a manner similar to bonded debt and an estimate of the cost of newly-accrued benefits.

The supplemental metric highlights outliers where expenditure flexibility can be expected to decrease substantially and unavoidably over time as a result of pensions.

The criteria adjustments will have only limited impact on current ratings because existing through-the-cycle assessments already capture Fitch’s expectation for rising pension burdens.

The criteria report released today updates and replaces the tax-supported rating criteria dated April 18, 2016. The only material changes to those criteria relate to the analysis of defined benefit pension liabilities. Other revisions to the report are designed to improve clarity but are not substantive changes to the rating approach for U.S. state and local government credits.

For more information, a special report titled “Revised Pension Risk Measurements” is available on the Fitch Ratings web site at www.fitchratings.com or by clicking on the link.

Contact:

Douglas Offerman
Senior Director
+1-212-908-0889
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Laura Porter
Managing Director
+1-212-908-0575

Amy Laskey
Managing Director
+1-212-908-0568

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com.

Additional information is available on www.fitchratings.com

Demand for munis is rising while supply is set to shrink dramatically starting in June.

There are two big reasons why the muni market is likely to see a flood of new cash this summer, which should lift prices.

First, supply of new munis issued is expected to fall while munis mature at record levels. Peter Block of Ramirez & Co. wrote May 30:

There is an acute supply-demand imbalance in the Muni market in June, which should help the Muni market outperform over the next few months. We estimate that in June alone, about $86 bil. will be available for reinvestment, including June 1 redemptions of $32 bil. and coupon of $54 bil. against the current 30 day visible supply of only $11 bil. New York (-$5.81 bil.), New Jersey (-$2.41 bil.), and California (-$2.37 bil.) will experience the greatest deficits, followed by Florida (-$1.75 bil.), and Georgia (-$1.24 bil.). We reaffirm our long-term new issue gross supply forecast for 2017 at $368 bil., for a decline of about $60 bil., or -14% YoY, which incorporates $204 bil. of new money bonds and $164 bil. of refundings.

Also, investors who fled munis, wary of the “Trump effect,” are now coming back, writes Jim Colby, muni portfolio manager for municipal bond exchange-traded funds at VanEck in a Tuesday blog post. That means more demand.

He reports that as of May 23, the 37 municipal bond ETFs had, year-to-date, had collected $1.6 billion in net new assets. They now have $26.0 billion in assets, compared to $21 billion a year ago.

As individual munis become harder to find, Colby believes ETFs make more sense. He writes:

On the one hand, for those for whom reinvesting (perhaps in individual bonds) in a potentially tighter muni market may pose unwanted challenges, a muni ETF can provide efficient and effective asset class exposure. They also offer the added advantages of both professional stewardship and, equally as important, diversification.

The biggest muni ETF is the iShares S&P National AMT-Free Municipal Bond Fund (MUB), which is approaching $111, after a nice run-up since mid-March. VanEck has a suite of muni ETFs that allow investors to target specific maturity ranges.

Barron’s

By Amey Stone

May 31, 2017 3:33 p.m. ET

A new rule will require brokerage firms to disclose the markup or markdown on retail customers’ trade confirmations for most corporate- and agency-bond trades.

For investors buying individual bonds, it’s time to play “the price is right.” Regulators are implementing new rules designed to help small investors get better prices on their bond trades.

Unlike stocks, whose prices are easily tracked on an exchange, bonds generally trade in an over-the-counter market where many small investors simply accept the price that their broker pins on a bond. But that price typically includes a “markup” from the prevailing market price (if you’re buying the bond) and a “markdown” if you’re selling it. These ups and downs are largely profits for broker-dealers—and they’re usually not disclosed.

The new rules will change that. Late last year, the Financial Industry Regulatory Authority finalized a rule requiring brokerage firms to disclose the markup or markdown on retail customers’ trade confirmations for most corporate- and agency-bond trades. The Municipal Securities Rulemaking Board also announced a similar rule for municipal-bond trades.

“Hallelujah, it’s about time” that markups were disclosed, says Marilyn Cohen, chief executive officer of Envision Capital Management, in El Segundo, Calif. Just as competition has driven down mutual-fund fees and brokerage commissions, “there should be a price war in markups too,” she says, and the disclosure rules could make that happen.

Although the rules don’t take effect until May of next year, they put a spotlight on the importance of trading costs for bond investors—and recent research shows just how high those costs can be. A 2015 study from the University of Southern California Marshall School of Business found that individual investors pay an average of 0.772% in transaction costs when trading corporate bonds—or $115.80 on a $15,000 bond trade. Meanwhile, investors buying a stock through an online broker might pay a commission of $4.95 plus a penny or two per share in “bid-ask spread”—the difference between buying and selling prices.

Currently, many small investors don’t even realize they’re paying a markup, much less focus on its size. Investors buying the same bond on the same day and in the same amounts often pay very different prices.

But there are ways to minimize your bond trading costs. Online tools can help you research recent trades in the bond you’re considering (or trades in bonds with similar characteristics) and raise your odds of paying a reasonable price. Armed with recent trade information, you may be able to haggle with your broker for a better deal. And when you have a better sense of how much bond trading is costing you, you can weigh the costs and benefits against alternatives such as bond mutual funds and exchange-traded funds.

To see recent trades, go to www.finra.org/marketdata for corporate bonds or www.emma.msrb.org for municipal bonds, and enter the CUSIP numbers of bonds that interest you. By looking at trades between dealers, you can get a sense of the prevailing market price. To figure out how much you should be paying, look for recent customer purchases of similar size to yours.

“If you’re buying small, weeny positions [say 10 or 15 bonds at a time], you’ll probably pay at least half a point,” or a markup of 0.5%, for an investment-grade bond, Cohen says. If you’re buying 50 to 100 bonds at a time, the markup may be closer to 0.25%, she says. Investors should expect to pay higher markups for lower-quality, “junk” bonds and bonds that are thinly traded.

But small investors can incur hefty trading costs even in higher-quality, less-obscure bonds. Research firm Municipal Market Analytics offers this example: Looking at a California general-obligation bond maturing in 2037, there were two inter-dealer trades on the morning of March 17 at nearly the same price: $112.73 and $112.67. Three minutes later, a customer bought $50,000 worth of the bonds at $115.10—2.2% more. Less than an hour after that, a large investor buying $6.9 million worth of the bonds got something much closer to the inter-dealer price: $112.99.

Such price discrepancies can make the muni market “very difficult for an individual investor,” says Thomas Doe, president of Municipal Market Analytics. The market actually resembles a “flea market,” he says, “because you have this eclectic product, very inconsistent supply and demand, and you’re just trying to match the product with a buyer.”

Prepare to Negotiate on Price

As in a flea market, you may have to haggle to get a good deal. Investors “don’t have to be price-takers,” says Lynnette Kelly, the Municipal Securities Rulemaking Board’s executive director. Prices can be negotiable. If you’re offered a bond at a price well above recent trade levels, you can say, ” ‘Why would I pay that? No one has paid that today on this transaction,’ ” says John Bagley, MSRB’s chief market structure officer. Then use comparable customer trades to name a price you think is fair.

In many cases, there may not be any recent trades in the specific bond that interests you. But recent trades in comparable bonds can give you a rough idea of how much you should pay for the bond you want. Use the advanced search on the Finra market data site or the price discovery tool on MSRB’s EMMA site to find bonds with similar credit quality, maturity and other characteristics.

Muni-bond investors may be able to get the best price by buying newly issued bonds during the “retail order period,” when orders are accepted only from small investors. That way, “on 10 or 15 bonds you’ll get the same price as Pimco buying 14 million bonds,” Cohen says.

Another simple way to limit your bond transaction costs: Trade them as little as possible. Hold individual bonds to maturity.

But some advisers question whether small investors buying individual bonds can ever get a fair shake. “I think it’s a sucker’s market,” says Frank Armstrong, chief executive officer of Investor Solutions, an advisory firm in Miami.

When clients come to him with individual bonds, Armstrong says, he generally sells them off and replaces them with bond mutual funds or exchange-traded funds. Some bond funds charge annual fees of just 0.04%, while it can cost 4% or 5% to do a “round trip,” meaning buying and selling reasonably liquid individual bonds, Armstrong says. “That just eats into your total return. In an environment where there’s hardly any income in fixed income, why would you want to give that up?”

KIPLINGER’S

By ELEANOR LAISE, Senior Editor

From Kiplinger’s Retirement Report, June 2017

• Cities at most risk from extreme weather still get top ratings
• Storms, floods could diminish tax revenue and raise costs

Few parts of the U.S. are as exposed to the threats from climate change as Ocean County, New Jersey. It was here in Seaside Heights that Hurricane Sandy flooded an oceanfront amusement park, leaving an inundated roller coaster as an iconic image of rising sea levels. Scientists say more floods and stronger hurricanes are likely as the planet warms.

Yet last summer, when Ocean County wanted to sell $31 million in bonds maturing over 20 years, neither of its two rating companies, Moody’s Investors Service or S&P Global Ratings, asked any questions about the expected effect of climate change on its finances.

“It didn’t come up, which says to me they’re not concerned about it,” says John Bartlett, the Ocean County representative who negotiated with the rating companies. Both gave the bonds a perfect triple-A rating.

The same rating companies that were caught flat-footed by the downturn in the mortgage market during the global financial crisis that ended in 2009 may be underestimating the threat of climate change to coastal communities. If repeated storms and floods are likely to send property values — and tax revenue — sinking while spending on sea walls, storm drains or flood-resistant buildings goes up, investors say bond buyers should be warned.

“They are supposed to identify risk to investors,” said Eric Glass, a fixed-income portfolio manager at Alliance Bernstein, a New York investment management firm that handles $500 billion in assets. “This is a material risk.”

Breckinridge Capital Advisors, a Boston-based firm specializing in fixed-income investments, is already accounting for those risks internally: Last year, it downgraded a borrower in Florida due to climate risk, citing the need for additional capital spending because of future flooding.

Rob Fernandez, its director of environmental, social and governance research, said rating companies should do the same. “Either incorporate these factors, or, if you say that you are, tell us how you’re doing it,” he said.

S&P and Moody’s say they’re working on how to incorporate the risk to bonds from severe or unpredictable weather. Moody’s released a report about climate impacts on corporate bond ratings last November and is preparing a similar report on municipal bonds now.

Fitch Ratings Ltd. is more skeptical.

“Some of these disasters, it’s going to sound callous and terrible, but they’re not credit-negative,” Amy Laskey, managing director for the local government group at Fitch, said in an interview. “They rebuild, and the new facilities are of higher quality and higher value than the old ones.”

For more than a century, rating companies have published information helping investors gauge the likelihood that companies and governments will be able to pay back the money they borrow. Investors use those ratings to decide which bonds to buy and gauge the risk of their portfolio. For most of that time, the determinants of creditworthiness were fairly constant, including revenue, debt levels and financial management. And municipal defaults are rare: Moody’s reports fewer than 100 defaults by municipal borrowers it rated between 1970 and 2014.

Climate change introduces a new risk, especially for coastal cities, as storms and floods increase in frequency and intensity, threatening to destroy property and push out residents. That, in turn, can reduce economic activity and tax revenue. Rising seas exacerbate those threats and pose new ones, as expensive property along the water becomes more costly to protect — and, in some cases, may get swallowed up by the ocean and disappear from the property-tax rolls entirely.

Just as a shrinking auto industry slowly crippled Detroit, leading to an exodus of residents and, eventually, its bankruptcy in 2013, other cities could face the accumulating risks of storms or floods — and then suddenly encounter a crisis.

“One of the first questions that we’re going to ask when confronted with an issuer along the coast of Texas, or on the coast of Florida, is: How are you going about addressing, mitigating the impacts of climate change?” Glass, Alliance Bernstein, said. And if local officials don’t have a good answer to that question, he added, “We will not invest, period.”

When asked by Bloomberg, none of the big three bond raters could cite an example of climate risk affecting the rating of a city’s bonds.

Kurt Forsgren, a managing director at S&P, said its municipal ratings remain “largely driven by financial performance.” He said the company was looking for ways to account for climate change in ratings, including through a city’s ability to access insurance.

Henry Shilling, Moody’s senior vice president for environment, social and governance risks, said the company is planning to issue a report this summer that explains how it will incorporate climate change into its municipal ratings. “It’s a bit of a journey,” he said.

Last September, when Hilton Head Island in South Carolina issued bonds that mature over 20 years, Moody’s gave the debt a triple-A rating. In January 2016, all three major bond companies gave triple-A ratings to long-term bonds issued by the city of Virginia Beach, which the U.S. Navy has said faces severe threats from climate change.

 

The threat isn’t limited to smaller cities. The World Bank called Boston one of the 10 cities globally that are most financially exposed to flooding. But in March, when Boston issued $150 million in bonds maturing over 20 years, Moody’s and S&P each gave those bonds top ratings.

Of course, predictions are hard, especially about the future. While scientists are generally united about the science of climate change, its pace remains uncertain. And what all of that will mean for communities and their likelihood of paying back bonds is not a simple calculation. Ocean County continued to pay back its current debt load after Sandy, and will still have a lot of oceanfront property if its current coast is swamped. The oceanfront just won’t be in the same place.

The storms or floods “might be so severe that it’s going to wipe out the taxation ability,” said Bob Buhr, a former vice president at Moody’s who retired last year as a director at Societe Generale SA. “I think this is a real risk.”

In May 2016, 117 investors with $19 trillion in assets signed a statement calling for credit ratings to include “systematic and transparent consideration” of environmental and other factors. Signatories also included rating companies from China, the U.S. and elsewhere, including Moody’s and S&P.

Not Experts

Laskey, of Fitch, was skeptical that rating companies could or should account for climate risk in municipal ratings.

“We’re not emergency-preparedness experts,” she said in a phone interview. “Unless we see reason to think, ‘Oh, they’re not paying attention,’ we assume that they’re competent, and they’re doing what they need to do in terms of preparedness.”

That view is at odds with the picture painted by engineers, safety advocates and insurers. Timothy Reinhold, senior vice president for research at the Insurance Institute for Business & Home Safety, a group funded by insurers, said local officials aren’t doing enough to prepare for the threats of climate change.

“While most coastal communities and cities have weather-related disaster response plans, many older, existing structures within these communities are not as durable, or as resilient as they could and should be,” Reinhold wrote in an email.

Politically Fraught

The types of actions that cities could take to reduce their risk — including tougher building codes, fewer building permits near the coast and buying out the most vulnerable properties — are politically fraught. And the benefits of those policies are typically years away, long after today’s current leaders will have retired.

The weakness of other incentives leaves the risk of a credit downgrade as one of the most effective prompts available to spur cities to deal with the threat, according to Craig Fugate, director of the Federal Emergency Management Agency under President Barack Obama.

“They need cheap money to finance government,” Fugate said in a phone interview. If climate considerations meant higher interest rates, “not only will you have their attention. You’ll actually see changes.”

Fugate also said rating companies were wrong to assume that cities are well prepared for climate change, or that their revenue will necessarily recover after a natural disaster.

As an example, he cited the case of Homestead, a city south of Miami that bore the worst damage from Hurricane Andrew in 1992. The city’s largest employer, Homestead Air Force Base, was destroyed in the storm; rather than rebuild it, the federal government decided to include the facility in its base closures.

Fugate said climate change increases the risk that something similar could happen to other places along the coast — and they won’t ever be able to bounce back as Homestead eventually did.

“If that tax base does not come back,” he warned, “they cannot service their debt.” Asked about rating companies’ insistence that such risks are remote, Fugate scoffed. “Weren’t these the same people telling us that the subprime mortgage crisis would never happen?”

Bloomberg

by Christopher Flavelle

May 25, 2017, 1:00 AM PDT

U.S. public finance government borrowers are a varied group, but those with the strongest credit profiles have a lot in common when it comes to management practices.

Continue reading.

May 22, 2017

White House Pushes to Leverage Private Sector for Infrastructure Change

As part of its budget rollout this morning, the White House identified public-private partnerships…

Continue reading.

May 23, 2017

S&P Global Ratings announced the launch of its Green Evaluation service, a comprehensive approach to measuring sustainability at the asset level. Green Evaluations, which are separate from traditional credit ratings, can be used to assess the green impact of a variety of securities and are independent of credit characteristics.

Continue reading.

Apr. 26, 2017

Investment of some $90 trillion is needed in the next 15 years to achieve global sustainable development and climate objectives, according to estimates put forward by the Group of Twenty’s Green Finance Synthesis Report. Over $800 billion needs to be invested every year to 2020 in renewable energy, energy efficiency, and low-emission vehicles alone, according to OECD estimates.

Continue reading.

Apr. 26, 2017

The green bond market reached an estimated $42 billion of new issuance in 2015 and in excess of $80 billion in 2016. As anticipated, given the magnitude of China’s environmental issues, its government has constructed a top-down push to solve the country’s environmental issues.

Continue reading.

Apr. 26, 2017

There’s a wide range of dependence across and within the states. Here’s a state-by-state look at how welfare, education and roads could be impacted by the next budget that Trump signs.

As Congress debates the budget, states are eagerly waiting to hear how it will affect them.

Updated data from the Census Bureau’s 2015 Annual Survey of State Government Finances published last week indicates that federal aid made up nearly a third of all states’ general fund revenues in fiscal year 2015. The single largest line items in states’ budgets include federal funding for transportation, Medicaid and other social assistance programs.

The survey, which provides a detailed portrait of how states generate and spend money, suggests states’ reliance on federal money varies greatly. Even larger discrepancies exist across individual areas of state government.

We’ve compiled data below showing how much of each state’s budget is tied to federal aid across select major spending areas.

Continue reading.

GOVERNING.COM

BY MIKE MACIAG | MAY 22, 2017

A roundup of money (and other) news governments can use.

GOVERNING.COM

BY LIZ FARMER | MAY 26, 2017

The decline of malls in America can mean lost jobs and lower tax revenues for states and municipalities — but not always.

There are threats everywhere to state and local revenues. To that list add this one: The golden age of malls in America seems to be well and truly over. Several of the country’s 1,000 enclosed malls and a chunk of the nation’s 47,000 shopping centers have either shut down or are emptying out.

Overall investment in retail property assets declined nearly 20 percent last year. Vacancy rates in community shopping centers increased in 30 of 77 U.S. metro areas last year. Rents, which usually increase roughly at the rate of inflation in healthy markets, decreased.

These trends may accelerate. In recent months, department stores such as Sears and Macy’s — bulwarks of shopping malls — announced plans to close hundreds of stores nationwide. It will surprise few that this change in the fortunes of shopping malls comes in the wake of the accelerating growth of online shopping. Amazon is expected to surpass Macy’s as America’s top clothing seller this year, according to Cowen Group Inc., a financial services firm.

The fiscal implications of mall closings for states and localities are significant. Not only are jobs, corporate income tax revenues, and sales and use tax revenues foregone, but so are property taxes. “If a mall closes or goes into decline, you’re going to see declining property values in the area,” says Arthur Nelson, a professor of urban planning and real estate development at the University of Arizona.

The Fort Steuben Mall in Steubenville, Ohio, is an example of what it looks like when a mall starts to fail. A former steel town on the edge of the Ohio River, the community is facing a double whammy of store closures: On one end of its mall is an empty space that used to house a Sears; on the opposite is a Macy’s, which is set to close this spring. The mall went into foreclosure in February 2016 and was sold to the bank that held the mortgage — for roughly two-thirds of its previously estimated value.

But the depopulating of malls doesn’t need to be a negative. One city leader says he sees a significant upside: “It can help hasten the eventual redevelopment of the entire mall site. It’s potentially a big positive for the city’s tax revenues as it makes much closer the day where redevelopment proceeds [start pouring in].”

I have watched this play out in my own city of Alexandria, Va., where the Landmark Mall has both a Sears and a Macy’s as tenants. Seventeen years ago, the mall as a whole and the Sears store that anchored it generated $1.25 million in real estate taxes. Today, they bring in only about $500,000 in real estate taxes. Moreover, to aggravate the fiscal dilemma, the reduction in revenues from sales tax, dining tax and other business taxes has also been dramatic. And now Macy’s has announced it is closing its Landmark store. As Alexandria Vice Mayor Justin Wilson told me, “There is no clearer demonstration of the city’s financial challenges than the predicament that currently faces Landmark Mall.”

But Alexandria is seeing and seizing an opportunity. It has rezoned the site and has encouraged the mall’s owner, the Howard Hughes Corp., to move ahead with its plan to transform the enclosed portion of the mall and the Macy’s parcel into an open-air urban village that has stores, restaurants, housing and entertainment venues.

Wilson notes that the passing of the glory days of malls ought not to be a dirge for times gone by, but rather an opportunity to latch onto a nationwide trend of returning to cities’ historic urban centers both to live and to start businesses.

GOVERNING.COM

BY FRANK SHAFROTH | MAY 2017

St. Louis International could become the largest airport in the country under private control.

St. Louis has a vexing problem with its airport: It’s too big.

Lambert International today handles only about half as much traffic as it did just over a decade ago. That’s left the facility with more than enough runway capacity and a lot of empty gates.

Why the precipitous drop in traffic? Airline consolidations. When American Airlines took over TWA, which was based in St. Louis, it stopped using Lambert as a Midwestern hub. The airport has somewhat pulled out of that dive, especially as Southwest Airlines has expanded its operations there. But the city is still faced with the challenge of running an airport that’s much larger than it needs to be.

Now, with the help of a think tank that promotes limited government, St. Louis is exploring whether a private operator might do a better job. Thanks to the Trump administration, which has promoted the value of public-private partnerships, the city can now see whether that plan is feasible.

“This approach to airport management increases productivity, revenue and operating efficiency for airports, creating greater access to capital for infrastructure needs,” U.S. Transportation Secretary Elaine Chao said last month, pointing to the success of a similar effort in San Juan, Puerto Rico. Chao announced that the Federal Aviation Administration approved St. Louis’ request to join a federal program that allows airports to be run by private operators. FAA approval is the first step in that process.

A Clinton-era law allows for airports to be privately managed but sets strict rules for how those deals are carried out. The complicated rules are one reason that not many cities have opted to go that route. St. Louis is the fourth — and largest — airport that currently has FAA permission to use a private operator. (Other airports, such as LaGuardia Airport in New York City, have leased individual terminals to private operators, but, unlike the potential St. Louis deal, all of the proceeds from those arrangements must remain in the airport.)

St. Louis is a long way from handing over the keys to its airport. Mayor Lyda Krewson, who assumed office a week before Chao’s announcement, made that clear. “I appreciate their consideration of our application and look forward to working with the FAA throughout the process, but,” she cautioned, “the key is in the details.”

Krewson’s predecessor, Francis Slay, brought the idea to the federal government, but the main driver behind the effort is Grow Missouri, Inc., a group funded by Rex Sinquefield, an anti-tax activist who is a major force in Missouri politics.

Travis Brown, an organizer with Grow Missouri’s Fly 314 Coalition, says there are many ways a private operator could attract new business, update the airport’s facilities and even generate money for the city.

He says a private operator could take a more strategic approach to running the airport. They could, for example, improve the facilities to attract new vendors, negotiate better flight schedules with airlines or lure more cargo business, Brown says. He points to airports in Memphis, Indianapolis and Louisville that have improved their fortunes by expanding cargo operations.

Brown is confident that private investors would be willing to take on a project like running the St. Louis airport. While the arrangement is seldom used in the United States, it is very common in Europe. Plus, Brown points out, Chicago came close to a similar deal for Midway International Airport in 2013. While that plan eventually sputtered out, it did show that airlines could be willing to go along with a privatization plan, which federal law requires for approval of the deal.

But Chicago’s experience also highlights how tricky it can be to execute a move to a private operator. Mayor Rahm Emanuel pulled the plug on the efforts to lease Midway after nine months of exploring a deal. The mayor said the companies bidding on the airport did not offer enough protections for taxpayers.

“I learned in the private sector that sometimes the best deals are the ones you don’t make,” Emanuel wrote in a Chicago Tribune op-ed. “My most important goal was to protect the interests of the city and its taxpayers in a way that had not been done on previous public-private partnerships.”

In other words, Emanuel wanted to avoid the storm of controversy that followed a 2008 deal authorized by his predecessor, Richard M. Daley, to lease the city’s parking meters for 75 years. The $1.2 billion deal led to skyrocketing parking costs, and the city’s inspector general concluded that the value of the contract was far less than what the private consortium paid for it.

But Daley had tried to lease out Midway, as well. Chicago’s city council approved the 99-year, $2.5 billion deal just eight days after it had been made public. But the arrangement fell apart in 2009 when capital markets froze during the Great Recession, and the private investors could not find enough money for the deal.

Emanuel said the city had learned a lot from those experiences. “While this partnership did not work out, the process was not a waste of time,” he wrote in the Tribune. He continued:

“There are five things we learned over the past six months that should guide any future public-private partnerships: first, a group of outside experts should be impaneled at the start of the process to monitor each step; second, there must be a minimum 30-day review by the City Council before the project is voted upon; third, there should be a clear set of standards so the public can judge a potential partnership when it is presented; fourth, the funds should be invested in infrastructure rather than used as a plug for short-term budget holes; fifth, a true public-private partnership requires that taxpayers maintain control of the asset and share in management decisions and financial profit.”

Those experiences will loom large for St. Louis as it explores its airport lease.

Brown, from Fly 314, says the process will help St. Louis, no matter the outcome. “The worst thing that can happen is that we don’t like the proposals we see, but we learn a lot about ourselves and what we should be doing,” he says. “We think we’re at least as good as Chicago.”

GOVERNING.COM

BY DANIEL C. VOCK | MAY 22, 2017

President Donald Trump is pushing for $1 trillion in U.S. infrastructure spending over a decade. What will it take to make that happen and where could the money go?

Trump’s proposed budget calls for setting aside $200 billion in federal funding with the aim of attracting an additional $800 billion or more of private, state and local investment in roads, bridges and other public works. An additional six pages released with the budget (noticeably longer than Trump’s one-page tax plan) include proposals that cover everything from allowing tolling on interstate highways to leasing power-transmission assets.

Parts of the infrastructure plan (along with much of the budget) were quickly slammed by Democrats out of concern that some proposals could rack up costs for constituents and because of quibbles over where the money will come from, among other things. Some Republicans have issues, too — but despite all that, there’s widespread recognition that revitalizing infrastructure should be a priority.

The belief that bipartisan support for an infrastructure package will eventually be reached has emboldened private investors — so much so, that newer players in the space like Blackstone Group LP and old hands such as Global Infrastructure Partners have raised or are raising billions of dollars, joining other investors that have long been scoping out the sector:

Building Bricks

Donald Trump’s pledge to facilitate $1 trillion in infrastructure spending has sparked a surge in private fundraising for projects targeting North American infrastructure.

They’re counting on the fact that the privatization schemes Trump is touting — which are commonplace in Australia, the U.K. and other nations — will play a key part in any new wave of U.S. investment, even if they haven’t to a large degree thus far.

The logic is pretty simple: such programs traditionally involve the sale of long-term leases that give purchasers the right to operate and maintain a project. Sellers of those concessions — often states or municipalities — can then use proceeds and any bonus government incentives to fund additional infrastructure improvements or supplement spending in areas such as health care, transport and education.

Despite the many benefits, these programs haven’t been easy sells in the U.S., owing in part to political wrangling at the federal, state and local levels and a general distrust of public assets like roads and airports being run as for-profit enterprises. That’s understandable — but there is still merit to the idea of privatizations, and places where they could work:

First on the Runway

 

Contenders include Chicago Midway International Airport, Philadelphia Gas Works Co. and Pennsylvania Turnpike — all of which have explored privatizations to the point of receiving bids. Then there’s St. Louis Lambert International Airport, which last month received preliminary approval to study a privatization plan that would make it the first mainland U.S. airport to be operated by private investors. And other public works that should be taken into serious consideration for privatization include already-tolled roads and federally owned electric utilities such as Bonneville Power Administration.

Beyond traditional infrastructure, Trump has floated the idea of spinning off the U.S. air-traffic system. Other deals that could one day transpire include the possible privatization of businesses such as Amtrak, the U.S. Postal Service (a move that would replicate happenings in Japan and the U.K.) and even state lottery operators (Illinois, Indiana and New Jersey have already paved the way, with mixed success).

Regardless of the specifics, U.S. privatizations will be a political minefield. Ensuring the $200 billion in federal funding incentives are delivered in a way that appeases critics will be key if there’s any hope of Trump achieving his lofty $1 trillion goal. But infrastructure does seem to be one place where both parties can come together, even if the rest of his budget is dead on arrival. Private money shouldn’t be seen as taboo.

1. To be sure, there have been some notable transactions, including the privatizations of the Indiana Toll Road and Chicago Skyway, but such deals have been few and far between.

2. Under President Bill Clinton, the Alaska Power Administration was privatized. Trump has his eye on other energy utilities, and mentioned Southwestern Power Administration, Western Area Power Administration and Bonneville Power Administration in his budget this week.

Bloomberg

By Gillian Tan

May 26, 2017 7:30 AM EDT

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net

• Tax cuts could trigger ‘yield maintenance provisions’ in loans
• Officials ‘ may not appreciate all the risks,’ analyst says

Some local governments have a hidden reason to root against President Donald Trump’s tax-cutting agenda: It could make their bank loans more costly, according to Municipal Market Analytics.

Municipalities have borrowed billions from banks to skirt the expenses associated with public bond offerings. But banks often include provisions enabling them to raise the interest rates if legal or regulatory changes diminish their returns. A cut in the corporate tax rate, for example, would likely result in a lower after-tax yield on a tax-exempt loan, potentially triggering “yield maintenance” provisions, wrote analysts at MMA, a Concord, Massachusetts-based independent research firm.

“Given the current administration’s focus on tax-reform and/or tax cuts, borrowers that have these yield maintenance provisions could see their debt service costs rise,” MMA wrote.

Direct lending by banks has proliferated in the $3.8 trillion municipal market because states, local governments and non-profits can borrow at rates comparable to those on bonds, without the fees or disclosure requirements associated with securities sales.

Because loans aren’t classified as securities, states and cities aren’t immediately required to disclose them, despite the risk they can pose to bondholders and taxpayers. For example, banks can demand accelerated principal and interest if a payment is skipped or a government’s cash falls below a specific target, which could push the borrower into a liquidity crisis if it can’t cover the bills.

MMA estimates that some $180 billion of such loans have been made. But given the lack of disclosure, it’s impossible to know how many borrowers might be subject to rate increases if federal taxes are cut, MMA wrote.

The Securities and Exchange Commission in March proposed requiring state and local governments provide information about significant bank loans within 10 days.

A borrower with a $20 million loan could pay an additional $50,000 in annual interest if the rate is increased 0.25 percentage point to compensate for the reduced after-tax return a lower corporate levy would bring, MMA said. By contrast, when municipalities issue fixed-rate debt the risk of future tax changes is shifted to bondholders. President Trump has proposed reducing corporate taxes to 15 percent from the current 35 percent.

Many municipalities that used derivatives such as interest-rate swaps in the mid-2000s to lower borrowing costs weren’t aware of the risks and had to pay billions of dollars to get out of the contracts when investors dumped certain types of municipal bonds en masse during the financial crisis.

“Banks that provided interest-rate swaps to municipalities found themselves in a firestorm of negative media stories detailing how they profited on the backs of municipal borrowers, costing taxpayers billions of dollars,” MMA wrote. As with interest-rate swaps, “many municipalities may not fully appreciate all the risks inherent in bank loans.”

Bloomberg Markets

by Martin Z Braun

May 24, 2017, 10:30 AM PDT

Taylor Riggs, a contributor to Bloomberg Briefs, talks with Editor Joe Mysak about this week’s municipal market news.

Watch video.

Bloomberg

May 25, 2017

• Slate of sales set for next 30 days hits two-month low
• ‘Enticing technical backdrop’ for the market, analyst says

The pipeline of bond sales from U.S. state and local governments has dropped to its lowest in more than two months, signaling a continuation of the borrowing slowdown that’s helped support a rally in the municipal market.

The volume of tax-exempt bonds that are scheduled to be sold over the next month has tumbled to about $8 billion, the least since late March, according to data compiled by Bloomberg. The decline comes as investors continue to pour money into municipal-bond mutual funds while yields, which move in the opposite direction as price, have slid to their lowest since soon after President Donald Trump’s November election.

While the number of planned sales typically drops ahead of the Memorial Day weekend, borrowing by municipalities this year has pulled back from last year’s record pace amid uncertainty about the direction of interest rates and Trump’s policies. By May 19, $141.5 billion has been issued this year, an 11 percent drop from the same period in 2016, according to data compiled by Bloomberg.

Some analysts have predicted that the tax-exempt market will shirk over the summer as bonds mature at a faster pace than they’re sold, leaving investors flush with cash to reinvest. Municipal securities have returned 3.5 percent this year, more than twice the 1.6 percent gain for Treasuries, according to Bloomberg Barclays indexes.

“The net negative supply figures are expected to expand into the summer months,” wrote Jeffrey Lipton, head of municipal research at Oppenheimer & Co., in a note to investors this week. “We believe that both retail and institutional demand will prove more robust against a more enticing technical backdrop.”

Bloomberg clients: We’ll be doing a TOPLive Q&A on Tuesday, May 30 at noon ET, moderated by Elizabeth Campbell, in which you can ask Joe Mysak questions about the latest with Illinois and its budget impasse. You can watch it here. If you want to ask a question, please send to TOPLive@bloomberg.net.

Bloomberg

by Rebecca Spalding

May 25, 2017, 9:03 AM PDT

• New Jersey, New York and California show net negative supply
• Muni sector forecast to show robust performance this summer

State and local debt hit its richest value compared with Treasuries in about a year, as demand for the securities remains robust against shrinking supply.

The index that tracks the benchmark 10-year municipal bond yield as a percentage of U.S. Treasuries sunk to 86.9 percent this week, the lowest since June 2016, according to Bloomberg data. At the beginning of the month, the gauge hovered near 95 percent.

The rally in municipal debt comes as analysts expect supply to continue to shrink in the summer months at the same time that cash-rich investors will have a hoard to invest. Citigroup Inc. analysts predicted that the market will shrink by $39.5 billion between June and August, while investors will receive $44 billion in interest payments.

“Because of the lack of supply relative to demand, and because of the relative height of nominal yields, its going to be hard for munis to project weakness over the summer,” said Matt Fabian, a partner with Municipal Market Analytics Inc., in a telephone interview. “Left to their own devices, munis will be prone to rally.”

Not all states are created equal. New York, California, and New Jersey show the most extreme net negative supply numbers as of May 25, with the Empire State posting negative $5.3 billion. All but seven of the 50 states posted negative net supply figures during the same time frame.

“We’re heading into a period of even more pronounced supply shortage. Unless governments dramatically increase their borrowing for infrastructure, we’re heading into a period with a shortage of bonds,” Fabian said.

Bloomberg Markets

by Rebecca Spalding

May 26, 2017, 10:11 AM PD

WASHINGTON — May 23, 2017 — This morning, the Trump Administration sent its full budget proposal to Congress. The proposal includes unprecedented cuts that would slash or eliminate crucial programs that invest in cities and create jobs, including the Community Development Block Grants (CDBG), TIGER grants for transportation projects and the HOME Investment Partnership Program. The National League of Cities (NLC) is concerned that small cities would fare the worst under the proposal, since they are less able to compensate for the cuts. Many states limit the amount of additional revenue cities may raise, leading to a real possibility of municipal bankruptcy for some small cities. In response, NLC President Matt Zone, councilmember, Cleveland, released the following statement:

“The administration’s budget proposal would be devastating to cities and towns. No community in America would be better off with this budget, and it could bankrupt smaller cities and towns. It does nothing to create jobs in our communities, and violates the president’s core campaign promise to lift up Americans in communities across the nation.

“The White House ignored more than 700 city officials who urged the administration to protect crucial programs, including Community Development Block Grants, TIGER grants and the HOME Investment Partnership Program. These vital programs allow communities to invest in public safety, economic development and infrastructure, and create private-sector jobs.

“The budget proposal would have a disproportionate impact on America’s small cities and towns, whose budgets are already stretched thin. In these communities, the programs being targeted are a lifeline for maintenance and investment. For those communities, this budget would spell disaster — and, in many cases, bankruptcy.

“As the leaders of America’s cities, we call on Congress to throw out this budget proposal and develop a new plan focused on building prosperity, expanding opportunity and investing in our future. Congress must reject this budget proposal or risk derailing local economies nationwide.”

The National League of Cities (NLC) is dedicated to helping city leaders build better communities. NLC is a resource and advocate for 19,000 cities, towns and villages, representing more than 218 million Americans. www.nlc.org

South Bend Mayor Pete Buttigieg testified on behalf of The US Conference of Mayors and Hattiesburg Mayor Johnny Dupree testified on behalf of the National League of Cities before the House Transportation and Infrastructure Subcommittee on Water Resources and the Environment, on the high costs of Clean Water Act (CWA) mandates and the need to create additional tools to assist communities achieve their goals in a cost-effective manner.

The May 18, 2017 hearing was entitled, Building a 21st Century Infrastructure for America: Improving Water Quality through Integrated Planning. Joining the Mayors were: Todd Portune, Commissioner, Hamilton County, Ohio; on behalf of the National Association of Counties; Craig Butler, Director, Ohio Environmental Protection Agency; on behalf of the Environmental Council of the States; William Spearman, Principal, WE3 Consultants on behalf of the American Public Works Association; and Lawrence Levine, Senior Attorney, Natural Resources Defense Council.

Both Mayors talked about the costs of combined and sanitary sewer consent decrees and stormwater regulations for their cities. Mayor Buttigieg said that South Bend’s consent decree will cost his city $861 million. “This is a significant burden for our residents,” Buttigieg said, “with one out of every five households having to pay 10% of their household income just toward their wastewater bill and one of every ten households will pay 14%. As a result, every South Bend household spending $1300 per year for the next 15 years for a total of $19,500.”

Both discussed how integrated planning and affordability legislation would help their cities achieve better results while making the costs more manageable.

The Conference of Mayors worked with Environmental Protection Agency (EPA) to create the concept of Integrated (or comprehensive) Planning to help cities solve their most pressing water and wastewater needs in a more cost-effective way. Joining the Conference of Mayors were the National League of Cities and National Association of Counties in negotiations with EPA. As a result of our efforts, EPA created memorandums on Green Infrastructure, Integrated Planning, and Financial Capability that they distributed to the EPA Regional Offices. However, the Regional Offices have not always been enthusiastic about allowing communities to implement any of these tools. That is why the three local government associations are seeking legislation that would codify Integrated Planning, define Financial Capability, and encourage the use of Green Infrastructure.

“While the Integrated Planning Framework and the Financial Capability Framework have been positive steps by EPA to address the high costs of meeting CWA regulatory requirements, there is more work to be done to ensure that these policy frameworks are useful tools for our communities across the country,” said DuPree.

Mayor Buttigieg outlined the Conference’s key priorities for the legislation including: Codifying EPA’s Integrated Planning and Permitting Policy; Achieving Long Term Control of Stormwater Through Permits; Renewing Congressional Support for Exercising Flexibility in Existing Clean Water Law; and Eliminating Civil Penalties for local governments who develop an integrated plan and make reasonable further progress into improving their water.

The members of the House are listening and the Mayors thanked them for introducing multiple bills that would address many of our priorities. Mayor Buttigieg expressed gratitude for all the introduced bills but did say that the Conference of Mayors preferred HR 465, the Water Quality Improvement Act of 2017, which was introduced by Representative Bob Gibbs (OH). HR 465 has several unique provisions that would better help communities by defining affordability, asking EPA to determine if their solutions are technically feasible, and allowing cities to solve their long-term wastewater and stormwater needs through permits, rather than through consent decrees.

The Senate has also taken the issue of Integrated Planning, Financial Capabilty, and Green Infrastructure with Lancaster Mayor Rick Gray testifying on April 4. Their bill, S.692 the Water Infrastructure Flexibilty Act, passed out of the Environment and Public Works Committee and is awaiting action by the entire Senate.

Please click here for a copy of Mayor Buttigieg’s testimony, click here to download S.692 and click here to download H.R. 465.

Washington, D.C. – U.S. Conference of Mayors (USCM) CEO and Executive Director Tom Cochran issued the following statement on the release of President Trump’s FY 2018 budget proposal, A New Foundation for American Greatness:

“Mayors across the country are deeply troubled by President Trump’s brazen attack on the very people he promised to protect. The unprecedented cuts to critical domestic programs would be nothing short of devastating to all our nation’s cities, piercing the very soul of America.

“President Trump’s proposed budget stands to drastically reduce or eliminate programs that benefit the most vulnerable of our citizens. Instead of assisting those struggling to make ends meet as he promised, the President plans to ax services designed to forge a path for working families into the middle class. In effect, President Trump pulls the rug out from under those who are already living on the edge.

“Specifically, the Community Development Block Grant (CDBG) would be eliminated, a program that OMB Director Mick Mulvaney characterized as one that does not work. Nothing could be further from truth. For the past 40 years, since its inception, this program has a proven track record of revitalizing neighborhoods and creating jobs.

In light of this, The U.S. Conference of Mayors released today bipartisan letters to Congressional leaders in both the House and Senate in strong support of the CDBG program. More than 350 mayors representing all 50 states, the District of Columbia and Puerto Rico, signed the CDBG letter and remain committed to fighting this destructive cut.

“While many of the nation’s cities and metropolitan areas are strong and continue to drive the national economy forward, many have not yet rebounded from the Great Recession. We cannot and will not turn a blind eye to these communities that are hurting from federal disinvestment.

“President Trump’s proposed cuts betray his campaign pledge to the American people to make the country stronger. If Congress allows these cuts to workforce training, education, housing, public safety, the arts, the EPA and other social services to prevail, the impact will be felt far and wide, severely affecting people living in cities large and small; suburban and rural.

“Further, the elimination and phase out of the National Endowment of the Arts, National Endowment of the Humanities and Institute of Museum and Library Services would destroy the cultural infrastructure of the nation.

“Throughout the campaign, President Trump vowed to make the country stronger and to keep all Americans safe. It’s ironic that the morning after the deadly terrorist attack in Manchester, his budget proposes significant cuts to key Homeland Security programs, a direct contradiction to what he repeatedly promised.

“Yesterday the Attorney General issued a memorandum defining sanctuary jurisdictions as those not in compliance with 8 U.S.C. §1373, a narrow definition. Today the Budget proposes a legislative change that would significantly broaden §1373, threatening many more jurisdictions with noncompliance for upholding the law and the Constitution.

“Since 1932, USCM has maintained that there should be a strong federal-city funding partnership to serve the millions that reside in our cities. In the name of devolution, this budget proposal, at the direction of Mulvaney, would turn billions of funds over to states, putting the future of the American people in the hands of governors and state legislators. Mayors are simply asking for the tax dollars that we send to Washington to be directly repatriated home so we can meet the needs of our local residents in a cost-effective manner.

“The nation’s mayors will be on the front line fighting against this draconian vision for America’s cities and metro areas. The U.S. Conference of Mayors stands ready to work with Congress to craft a budget that reflects the truthful needs of this country’s men, women, and children.”

The case for making infrastructure a priority and the issues that may affect our ability to fix it.

This week marks the 5th annual Infrastructure Week — a clear reminder that strong, resilient infrastructure is critical to our country’s economic growth and vitality; yet we continue to fall behind due to crumbling and outdated roads, bridges, rails, airports and seaports, water pipes and the power grid. This has not gone unnoticed.

A 2016 National Infrastructure Poll, conducted by the Association of Equipment Manufacturers, found that the majority of Americans recognize the declining state of our country’s infrastructure and that it should be addressed. The Trump Administration has identified infrastructure as one of the top priorities of the new President’s agenda. To underscore the urgency surrounding U.S. infrastructure, there is also growing bipartisan support: Democratic Senator Bill Nelson, ranking member of the Senate Commerce Committee, discussed infrastructure and the role it plays in our economy, telling Vice President Mike Pence in March 2017 that the “time might be right” for a Bipartisan Infrastructure Bill. With heightened recognition across the country, our leaders and citizens, why is infrastructure still in crisis?

At SIFMA, we distinguish between financing infrastructure — bringing capital from investors to build projects — and funding infrastructure, finding ways to pay the operating and maintenance costs in the long-term, service the debt and provide a return on capital. We believe the infrastructure problem lies in the ability to identify reliable funding sources and recommend:

• Preserving the tax exemption for municipal bonds;
• Expanding Public-Private Partnerships (P3s), including the use of Private Activity Bonds (PABs) without restrictions for publicly accessible projects, promoting private equity investment in public projects, and applying design-build strategies;
• Reviving direct-pay bonds.

These approaches can help. However, as part of Congress’ discussions on federal tax reform, there is concern the House of Representatives may consider options that could negatively affect the ability to fund our infrastructure, such as imposing a full or partial federal income tax on municipal bond interest or eliminating PABs, both of which have been proposed by policy-makers before.

In order to bring our infrastructure into the 21st century, we need to invest more without imposing burdens that can weigh down our economy.

I recently discussed this issue in-depth with The Bond Buyer.

For more information, listen to the podcast.

SIFMA

By Michael Decker

May 17, 2017

President Trump’s Fiscal Year 2018 Budget was released on Tuesday and the administration’s Infrastructure Initiative Fact Sheet was released on Wednesday. The plans call for $200 billion in outlays, over the next ten years, for infrastructure investment. The $200 billion is to be leveraged, alongside non-Federal funding, to pay for $1 trillion in total infrastructure spending. The proposal also calls for corporatization of the air traffic control system, reform of the Inland Waterways Trust Fund, and a reduction in Federal grants to Amtrak. The transportation plan specifies an expansion of the Transportation Infrastructure Finance and Innovation Act (TIFIA) program, as well as lifting the cap on Private Activity Bonds for highways and liberalizing the use of tolling on Interstates. The budget calls for an elimination of the Transportation Investment Generating Economic Recovery (TIGER) Grant Program, and reduced the Department of Transportation’s total budget by 13% from its 2017 level. The administration also called for the regulatory and permitting review to speed the construction of infrastructure projects. At a hearing of the Senate Finance Committee on May 25, on the 2018 budget and tax reform, Treasury Secretary Steven Mnuchin said in response to questioning, “Our preference is strongly to keep the interest deductibility of state and local bonds.”

U.S. Administration’s Fiscal Year 2018 Budget

Infrastructure Initiative Fact Sheet

The National Council for Public-Private Partnerships (NCPPP), the leading association in the field, is proud to announce its inaugural list of the Top 10 P3 Transportation Infrastructure Pioneers.

“Public-private partnerships are as much about the people driving the projects as they are about the projects themselves,” said Executive Director Todd Herberghs. “It takes tenacity, creativity and will to incorporate this alternative project delivery method into the traditional financing and procurement model.”

A select committee of NCPPP members identified 10 people who have embodied these characteristics while contributing meaningfully to the public or private sector sides of the field. These individuals have seen partnerships as another path forward to improving our national infrastructure network and have overseen the completion of some of the most significant transportation projects and the passage of some of the most groundbreaking P3 laws in the past three decades.

Continue reading.

NCPPP

May 17, 2017

While we think it’s too early to shout “all clear,” investors now have more information about policies likely to affect the municipal bond markets this year, and relative valuations are looking more attractive than they did a few months ago.

PIMCO’s 2017 Municipal Market Outlook called for greater caution this year due to uncertainty on a number of fronts: From a macro perspective, rising inflation, the potential for large fiscal expansion following the U.S. Republican election sweep, and fears of an imminent trade war painted a potentially volatile picture. Municipals underperformed other U.S. credit asset classes following the 2016 election as tax reform, near the top of the new administration’s agenda, loomed over the market.

But so far this year, flows into municipal bond funds have been positive (if only marginally), and recent trends point to further potential upticks as the policy outlook turns more favorable.

Continue reading.

BARRON’S

BY DAVID HAMMER AND MATTHEW SINNI

MAY 22, 2017

Trump’s infrastructure push cited by Saudis making huge commitment toward Blackstone’s $40 billion goal

Saudi Arabia joined the parade of investors into U.S. public works by pledging a record investment with Blackstone BX 6.73% Group LP.

The country’s Public Investment Fund agreed to commit $20 billion to Blackstone’s new infrastructure fund in the latest push around the world by large investors to buy up airports, pipelines and other public projects, particularly in the U.S.

Blackstone said Saturday the kingdom’s money would seed an investment fund that the New York private-equity giant hopes will reach $40 billion and have spending power of up to $100 billion once debt is added to the mix.

The commitment shows how Blackstone continues to distance itself from Wall Street rivals by raising ever larger sums from investors like sovereign-wealth funds, public pensions and rich families. With assets of $368.2 billion as of March 31, it manages nearly twice as much as its closest competitor, Apollo Global Management LLC, and each of Blackstone’s four platforms—real estate, private-equity, hedge funds and credit—are among the largest investing businesses of their kind.

Saudi Arabia’s planned $20 billion investment alone would be about 25% larger than the biggest infrastructure fund ever raised, a $15.8 billion pool Global Infrastructure Partners completed earlier this year, according to data from industry tracker Preqin. Global Infrastructure Partners, or GIP, is also based in New York and its chief executive, Adebayo Ogunlesi—like Blackstone Chief Executive Stephen Schwarzman —is one of the business leaders President Donald Trump has named to a presidential advisory group.

Last year, investors committed a record of about $56 billion to private infrastructure funds and fund managers collected another $29 billion during the first quarter of this year, according to Preqin. The data provider has said managers of more than 150 other private infrastructure funds are soliciting investors for another $100 billion or so.

Carlyle Group LP and BlackRock Inc. are among other big investment firms that moved recently to beef up their infrastructure investing businesses.

The Blackstone fund will have a broad mandate to find investments, according to a person familiar with the firm’s plans, with the ability to invest in things such as hospitals as well as assets that are more typically considered infrastructure, such as pipelines, roads and utilities. Also, unlike most of the private funds the New York firm manages, which lock up investors’ cash for 10 years or so, the infrastructure fund will have no expiration date. That structure gives the firm more time to find investments and reduces the pressure to sell them on a deadline.

Both features could help Blackstone circumvent two big issues infrastructure investors have encountered in the U.S.: limited investment opportunities outside the energy sector, and uncertainty over who will eventually buy some assets, such as roads and municipal utilities.

Saudi officials, who are seeking to diversify the kingdom’s economy by investing its oil wealth, on Saturday alluded to Mr. Trump’s campaign promises to steer $1 trillion into U.S. public works. The Public Investment Fund managing director, Yasir Al Rumayyan, said the pact reflects “our positive views around the ambitious infrastructure initiatives being undertaken in the United States as announced by President Trump.”

Yet the flood of cash into infrastructure funds can mostly be attributed to fairly reliable returns that sometimes beat the stock market and often outperform private-equity funds that make arguably riskier investments, such as corporate buyouts, according to Preqin. Still, there have been some prominent flops, including a rash of bankrupt toll roads.

Through late last year, the median annualized return after fees from infrastructure funds launched between 2004 and 2013 has ranged from 5.7% for those that began investing in 2007 to 14.4% for funds launched in 2004, according to Preqin.

Blackstone’s foray into infrastructure won’t be its first as it once struggled to raise a fund in the wake of the financial crisis. The executives who led the effort left the firm and in 2011 launched their own firm, Stonepeak Infrastructure Partners.

Saturday’s pact was announced in Riyadh during Mr. Trump’s visit to Saudi Arabia. The president has called boosting private investment in U.S. infrastructure a priority of his presidency.

The Wall Street Journal

By Ryan Dezember

Updated May 20, 2017 4:55 p.m. ET

Write to Ryan Dezember at ryan.dezember@wsj.com

On Tuesday, May 16, the Senate Environment and Public Works Committee held a hearing entitled “Leveraging Federal Funding: Innovative Solutions for Infrastructure.” The hearing focused on different funding mechanisms for infrastructure projects. Witnesses discussed the advantages and disadvantages of public-private partnerships (P3s) as compared to direct federal spending from the Highway Trust Fund and various Department of Transportation Grants.

SIFMA Hearing Summary

On Thursday, May 18, the Senate Environment and Public Works Committee held a hearing with Secretary of Transportation Elaine Chao. Senators asked Chao for information about the Trump administration’s infrastructure goals, and provided their thoughts on funding mechanisms for infrastructure projects. Chao said that the administration would release core principles for its infrastructure program in May, with a broader legislative package due in Q3 2017.

SIFMA Hearing Summary

On May 2, 2017, the United States Supreme Court held that a municipality has standing to sue for injuries under the Fair Housing Act (“FHA”) for discriminatory lending. However, the Court declined to decide whether the municipality’s injury was proximately caused by the alleged FHA violation.

The Proceedings in the Southern District Court of Florida and Eleventh Circuit

The City of Miami, Florida, (Miami) filed complaints in the Southern District of Florida (District Court) against two national banks (Banks) alleging violations of the FHA. Miami alleged that the Banks engaged in discriminatory lending by providing minorities with home loans containing less favorable terms than similarly situated nonminority borrowers. Miami also claimed that the Banks failed to extend fair refinancing and loan modification opportunities to minorities. Miami claimed that as result of these alleged FHA violations, minorities were unable to stay current on their mortgages, resulting in increased foreclosures in minority communities. As a result of these foreclosures, property values in the minority communities supposedly decreased, which affected the amount of property taxes Miami claimed that it could collect. Miami also alleged that the foreclosures resulted in blight within these communities, resulting in increased expenditures of municipal services, such as police and fire departments in those communities.

The District Court dismissed Miami’s complaints, finding that Miami’s injuries were purely economic and not discriminatory and therefore fell outside the zone of interests that the FHA was intended to protect. The District Court also held that Miami failed to show how its injuries were proximately caused by the Banks’ lending practices.

Miami appealed the District Court’s decision to the Eleventh Circuit which held that Miami’s injuries fell within the zone of interests contemplated by the FHA and that Miami adequately alleged its injuries were proximately caused by the Banks’ alleged lending practices. In finding that Miami sufficiently pled its alleged injuries were proximately caused by the Banks in order to survive a motion to dismiss, the Eleventh Circuit focused solely on whether Miami’s injuries were a foreseeable result of predatory lending.

The United States Supreme Court’s Majority Opinion

The Supreme Court was faced with two questions: (1) whether Miami had adequately alleged standing to bring an FHA claim and (2) whether Miami had adequately alleged that the alleged lending misconduct proximately caused Miami to lose property-tax revenue and spend more on municipal services.

The Supreme Court, in an opinion written by Justice Breyer, conducted its analysis in two parts. First: (1) in a 5-3 vote, the Court agreed with the Eleventh Circuit that Miami had standing to sue under the FHA. In an outcome joined by the entire Court, it decided that alleging “foreseeability alone” is not enough to meet the FHA’s proximate cause requirement. The Supreme Court declined to apply its proximate cause formulation to Miami’s allegations. Instead, the Court tasked the Eleventh Circuit with determining whether Miami’s alleged injuries were proximately caused by the Banks’ actions.

In reaching its conclusion, the Court determined that Miami’s injuries were within the zone of interests the FHA protects. The Supreme Court focused on the definition of “aggrieved person” as defined by the FHA. Under the FHA, an “aggrieved person” has standing to bring an action. The Supreme Court, citing its previous ruling on the definition of “aggrieved persons” under the prior version of the FHA, noted that “aggrieved person” is broadly defined to include any person who claims to have been injured by a discriminatory housing practice or believes that such injury will occur. Adopting the same broad definition of aggrieved persons under the amended FHA, the Court noted that Congress failed to limit the Court’s broad definition of “aggrieved persons” when it amended the FHA and, therefore, acquiesced to the Court’s definition of the term. The Court further compared Miami’s claims to those made by a municipality in Gladstone Realtors v. Village of Bellwood, 441 U.S. 91 (1979) . In Gladstone, the Court ruled that the village had standing to sue under the FHA based on alleged injuries due to reduced integration in the community, which resulted in lower tax revenues. The Court noted that Miami’s injuries, reduced property taxes and increases in expenditures for municipal services, were sufficient injuries contemplated by the broad definition of “aggrieved persons.”

In holding foreseeability alone is insufficient to show proximate cause, the Court cited the well-established common law principle that any injury must be proximately caused by the alleged conduct. The Court noted that although it may be foreseeable that a municipality might be injured by the Banks’ alleged practices, the FHA requires a direct relationship between the injury and the alleged violative conduct. Applying common law principles, the Court noted that the injury suffered by Miami must occur within the “first step” of the alleged act. The Court also noted that due to the nature of the housing market and its economic and social implications, nothing in the FHA suggests that Congress intended to allow a suit for injuries merely tangentially related to an alleged violation of the FHA and doing so would result in “massive and complex damages litigation.”

The Court, however, declined to dictate the boundaries of proximate cause under the FHA or to apply its ruling to the allegations of the complaints. Instead, the Court vacated the judgments below and remanded to the Eleventh Circuit for that court to apply the new proximate cause formulation.

The Concurrence and Dissent By Justice Thomas

In his Opinion, Justice Thomas stated that he would have held that (1) Miami’s injuries fell outside of the FHA’s zone of interests and, therefore, Miami lacked standing to bring suit; and (2) that Miami’s injuries were too remote to satisfy the FHA’ proximate cause requirement. However, Justice Thomas concurred with the majority’s decision that foreseeability alone is insufficient to show proximate cause.

In addressing Miami’s standing, Justice Thomas distinguished Gladstone and the other FHA cases upon which the majority opinion relied on the basis that those cases “at least arguably” involved discriminatory injuries falling within the zone of interests. Justice Thomas described the “quintessential ‘aggrieved person'” as “a prospective home buyer or lessee discriminated against during the home-buying or leasing process.” Justice Thomas noted that Supreme Court precedent extended “aggrieved persons” status to those who live in a segregated neighborhood, resulting from discriminatory housing practices, and that these cases illustrate the outer limits of protected interests under the FHA. He also noted that Miami’s interests are purely economic, unlike those claimed in Gladstone, which included both economic injury and changes to the “racial composition” of the community resulting from discriminatory practices. Justice Thomas stated that the FHA was not intended to redress purely economic injuries.

In addressing Miami’s lack of proximate cause, Justice Thomas wrote that the causal links between Miami’s injuries and the Banks’ alleged violations were “exceedingly attenuated,” observing that there was a lengthy and “attenuated chain of causation” between the Banks’ alleged actions and Miami’s injury. Pointedly, Justice Thomas predicted the “Court of Appeals will not need to look far to discern other independent events that might well have caused the [Miami’s] injuries.”

Practical Impact

The Supreme Court’s decision establishes a potentially expansive zone of interests for FHA claims brought by municipalities, thereby recognizing standing for plaintiffs situated similarly to Miami, assuming that they can allege the requisite proximate causation. This portion of the opinion may encourage municipalities to bring claims against mortgage lenders and servicers under the Act.

The Supreme Court’s holding that foreseeability alone is insufficient to allege proximate cause raises the bar for alleging proximate cause but does not fully clarify what is required in the FHA claim context. However, Justice Thomas’ delineation of the many causal links between the Banks’ alleged actions and Miami’s injuries shows why it will likely be difficult for Miami and other municipalities to allege proximate cause in attempting to recover lost property taxes and other purely economic damages.

Article by David N. Anthony, Amy Pritchard Williams, Andrew B. Buxbaum and David Long, Jr.

Last Updated: May 12 2017

Troutman Sanders LLP

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Green bonds are debt securities issued to raise capital specifically to support climate related or environmental projects.

Fitch Ratings provides credit ratings for green bonds based on the underlying credit risk in line with relevant sector criteria. For specific issues, this includes standard credit considerations used to assess credit risk including vulnerability to default and an expectation of relative recovery rates in the event of default. Fitch does not assess the environmental integrity – the “greenness” – of the bond or its stated use of proceeds.

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Legislation removing safe harbors for states to implement private-sector retirement programs was signed Wednesday by President Donald Trump, who signed a similar measure against cities and large political subdivisions on April 13.

Rep. Tim Walberg, R-Mich., chairman of the Education and the Workforce Subcommittee on Health, Employment, Labor, and Pensions, in a statement called the safe harbors “a misguided regulatory loophole that would discourage small businesses from providing retirement benefits and put the hard-earned savings of workers at risk.”

Mr. Walberg chaired a subcommittee hearing Thursday on regulatory barriers to retirement saving, including what he called the “flawed fiduciary rule” from the Department of Labor that becomes effective June 9. Allowing for more electronic disclosure in retirement accounts and easing federal restrictions on open multiple employer plans, would help improve access to retirement savings programs, Mr. Walberg and several witnesses said at the hearing.

PENSIONS & INVESTMENTS

BY HAZEL BRADFORD · MAY 18, 2017 2:36 PM · UPDATED 4:08 PM

In January 2017, Holland & Knight Transportation & Infrastructure lawyers and senior advisors prepared 20 posts for the 20 days leading to President Donald Trump’s inauguration regarding what to expect from the Trump Administration, the first session of the 115th Congress and how business planning could be impacted for those in the industry. In this alert, we have prepared updates, if relevant, on transportation-related developments in the Trump Administration’s first 100 days, including issues involving Maritime, Motor Carriers, Rail and Antitrust.

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Article by Linda Auerbach Allderdice, J. Michael Cavanaugh, Lawrence J. Hamilton II, David C. Kully, Michael T. Maroney, Andrew J. Steif, Eric Lee and Jameson B. Rice

Last Updated: May 9 2017

Holland & Knight

While Puerto Rico continues to dominate the muni market headlines, trading in Puerto Rico bonds has totaled less than 3% of muni trading volume so far this quarter (through May 15, according to MSRB data from Bloomberg).

With the bulk of attention focused elsewhere, muni yields have generally moved lower so far this year, lifting most of the muni indices into positive territory. Bond prices rise when yields fall.

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ETF.COM

PATRICK LUBY

May 18, 2017

Patrick Luby is the municipals strategist with CreditSights Wealth.

The company’s latest investment comes from Emerson Collective, 8VC, Govtech Fund and others.

Neighborly, a San Francisco startup that helps cities crowdsource their bond financing, more than quadrupled its investment backing in one fell swoop.

Before May 16, the company had raised about $5.7 million in seed and grant money. Then the company announced a $25 million Series A round led by Laurene Powell Jobs’ impact investing entity The Emerson Collective along with 8VC. Ron Bouganim’s Govtech Fund also participated in the round.

In a blog post, the company cited President Donald Trump’s push to cut massive swaths out of the federal budget as one reason cities might be looking to use Neighborly more.

“This comes at a time when the current administration is getting ready to roll out a number of spending cuts that will drastically reduce the amount of funding available to the nation’s communities,” the post reads.

While Trump faces a long-standing promise to spend $1 trillion on infrastructure, he has also proposed budget cuts to many federal programs that work with local government.

Neighborly has financed $25 million in debt for local government customers across the country since the beginning of the year. The company also pointed to increased borrowing rates and an increase in public works backlogs as reasons to expect a growing demand for its services.

“The current financial system is set up in a way that disadvantages and costs communities much more than needed,” the blog post reads. “Every basis point in the cost of issuance and borrowing means hundreds of millions of dollars per year that go to paying interest or banker bonuses.

Since the cost of borrowing is so high, municipalities often delay important projects or even forego them entirely. Consequently, our nation’s communities are unable to attend to some of the most underserved causes: Schools resort to cutting critical educational programs, communities do without recreation centers, utilities and energy infrastructure remain dilapidated.”

The company’s solution, as Neighborly pitches it, gives local government access to more capital, allows them to bypass antiquated technology and helps them avoid fees associated with traditional bonds.

This marks the second gov tech investment from the Emerson Collective of the week, with the organization also leading a $30 million Series C round for OpenGov. Neighborly’s previous backers have included Tumml, 500 Startups and the Knight Foundation.

GOVTECH

BY NEWS STAFF / MAY 16, 2017

When the city of Lawrence, Kan. wanted to borrow $650,000 to pay for a new fire truck for its local fire department, it didn’t use traditional banks and bonds to borrow money. Instead it turned to Silicon Valley upstart Neighborly, a two-year old marketplace that connects cities with investors to fund civic projects like schools, parks, and bridges.

Each year, U.S. cities borrow hundreds of billions of dollars to finance civic projects. This debt is typically in the form of municipal bonds, which investors buy for the monthly interest and relative security. Neighborly is a service for marketing these municipal bonds, an estimated $3.8 trillion market.

On Tuesday, Neighborly revealed exclusively to Fortune that it has raised $25 million in additional funding co-led by Palantir co-founder Joe Lonsdale’s firm, 8VC; and Emerson Collective, the philanthropic organization started by the wife of the late Apple CEO Steve Jobs, Laurene Powell Jobs. Existing investors including Ashton Kutcher’s Sound Ventures, Maven Ventures, Bee Partners, and Stanford University also participated in the funding round. This investment brings the company’s total funding to $35 million.

“We’re modernizing access to public finance,” Neighborly CEO Jase Wilson, said about his company’s business.

Traditionally, cities use brokers and underwriters to find traditional institutional investors to buy bonds like large banks and financial institutions, explained Wilson. His company, a registered broker itself, has put that search online.

It’s not just large banks that buy the bonds on Neighborly. It’s also people who live in the cities asking for funds. For example, with a Cambridge, Mass. project, residents who live in all five zip codes in the Massachusetts town bought bonds.

It’s worth noting that that for some projects, Neighborly can only round up a relatively small amount of capital. For example, in March the city of Cambridge, Mass. borrowed $58 million, of which $2 million came through Neighborly. The rest was raised from investors outside its service.

“There’s so many better ways that public finance can work using technology,” Lonsdale said, in an interview with Fortune. “The old processes are a lot more expensive, and only puts the money in the hands of people on Wall Street.”

Neighborly makes money by charging a 1% commission based on the deal size. That compares with the average 2% charged by other companies for most public finance projects, said Wilson. The other benefit, Wilson says, is that city residents can participate in funding their own neighborhood’s projects.

Neighborly declined to reveal its revenue.

Kutcher echoed Lonsdale’s belief about Neighborly’s opportunity in a statement to Fortune. “They are doing the right thing. They are returning the opportunity of bonds back to the people that stand to gain from them the most.” He continued that he “can see a world where this is not only the best way to get things done, but the only way.”

In addition to the Cambridge deal and the Kansas fire truck, Neighborly has helped find $5 million for new bike paths in Burlington, VT. Currently, Neighborly is helping finance an affordable housing project in the San Francisco Bay Area.

However, some financial tech startups that are trying to upend Wall Street have stumbled. Lending marketplace Lending Club was roiled by news last year that the former CEO violated internal lending rules and that it would lay off staff. Meanwhile, LendUp, a payday lending company, was forced to pay fines for allegedly deceptive and misleading practices, including charging incorrect fees and interest rates.

Wilson said that working with regulators and complying with all rules is extremely important to Neighborly. The company’s challenge is competition from brokers and underwriters that have handled public financing for decades and have a tight grip on the market.

Neighborly also has its fair share of critics, who don’t view the bond market as a place that needs or requires change. But Wilson remains optimistic.

“We see ourselves as being more neighborly with your city’s capital,” said Wilson.

Fortune

by Leena Rao

May 16, 2017

The municipal bond market is reaching a tipping point. E-trading is going to push it over.

When I started in this business back when dinosaurs roamed the earth, all you needed to trade bonds was a phone, the Blue List and a Monroe-Trader bond calculator. For those of you already lost, the Blue List was a booklet, printed on blue paper and stapled together, with the municipal bond offerings of Wall Street dealers and, roughly, at the offering price. To determine what you wanted to bid, you punched the various bond attributes like coupon, maturity, call and so forth into your Monroe-Trader. That was about as high tech as it got.

There were no ubiquitous Bloomberg terminals on every desk. You got on the phone and haggled out a price for a bond based on very limited information. No one knew what anyone else was bidding or asking—the phrase ‘price transparency’ hadn’t been invented. It was a truly an over-the-counter market.

Fast forward to today. Technology is radically changing the financial markets. Goldman Sachs is hiring more computer programmers than traders and BlackRock is replacing portfolio managers with computers. In the municipal bond market we’re seeing some similar changes. The transition is a bit slow—this is the muni market after all—but it is coming and it’s going to come a lot faster than some might realize.

Currently, there are seven electronic trading platforms currently dedicated to municipals: Tradeweb, MarketAxess, MuniAxis, Bloomberg, MuniBrokers, TheMuniCenter and ClarityBidRate. Some have been around since the inception, others are new entrants. I’ve either spoken with each firm in detail or used them in live trading. Having seen their interfaces and been taken step-by-step through their features, it’s really remarkable how these firms have, each in their own unique way, captured, digitized and electronified the municipal bond trading process. It’s akin to video poker in Las Vegas–if they just added an animated graphic of a trader to interact with, you’d swear you were dealing with a real person.

These are very powerful tools each with some very distinct benefits. If you’re a municipal bond market professional who hasn’t had a demonstration of these yet, you are strongly encouraged to absolutely do that.

The overall impact of these platforms is more important than their specific features and functions. Electronic trading platforms are bringing the municipal bond market to a ‘tipping point.’ This is having immediate consequences and longer-term effects.

Three Drivers

There are three drivers pushing this forward. The first is basic economics. Currently, the markets are in what seems to be a sustained low-rate environment. Combine that with the fact that asset management is a mature industry oversaturated with mutual funds, ETFs and SMAs (separately managed accounts). That means every basis point counts, either to cut costs or add to profitability or preferably both, from management’s point of view. E-trading offers efficiencies both in the trading process and in better price discovery in the trade itself.

Second is the trend toward index investing in the market. The MUB, which is a BlackRock-managed ETF that seeks to track the S&P National AMT-Free Municipal Bond Index, now has just a smidge over $8 billion in assets under management. In fact, if you totaled up all the muni ETFs that are managed to track an index, it’s more than $25 billion. Add to that mutual funds that either are explicitly or implicitly managed to an index, the number more than quadruples.

Indexing means more standardization in the market, more categorization and ease of automation. Every portfolio manager and muni trader knows that a bond in the index trades better, is more liquid and has tighter spreads. Index bonds are a clearly established category with fairly standardized characteristics. In other words, perfectly suited for an e-trading platform. Where better to get economies of scale for index bonds?

The third driver is regulatory guidance. I covered this in some detail in the companion piece to this article, Muni-Tech And E-Trading: Opportunities And Considerations For Investors. Each is a designated alternative trading system (ATS) under SEC Rule 600(b)(23). But that just meets the legal requirement. There are market rules bringing e-trading into the fore. For example, MSRB Rule G-18 and the SEC Rule 15c3-5 discuss best execution and management controls, respectively. There are others, such as the Volker Rule 619 and a host of SEC liquidity rules for mutual funds and other pooled investment managers. Between capital requirements, best execution, liquidity and trade transparency, suddenly electronic trading platforms, which can address all of those in one fashion or another, become a lot more attractive.

Those are the big three drivers—economics, indexing and regulations—pushing e-trading forward and also pushing the market closer to a tipping point. These are not meant to be the only factors. There are also market factors such as declining new issue supply and the dramatic increase in SMA asset growth.

Detractors and Skeptics

As with anything new, there are detractors and skeptics, as there always have been during periods of great change. People fear change. Some detractors of e-trading—and fight the tide all you want, but it’s here and it’s growing—detractors say the muni market defies standardization and automation because it is so variegated and compartmentalized. There are retail markets and institutional markets, bank qualified markets, AMT markets, specialty state markets, high yield markets, discrete sector markets, regional markets, specialty credit-name markets. Then there are the almost mind-numbing variables and attributes differentiating each bond—coupon, maturity, call provisions, sinking funds, security features are just a few.

All that is true—for now. What indexing and e-trading are going to do are organize and standardize the market. That’s a big forward looking statement. Even Nobel Prize winning Physicist Neils Bohr warned that “predictions are very difficult, particularly about the future.”

But as Shakespeare noted, “What’s past is prologue.” This automating-organizing-standardizing transformation is exactly what happened in other markets—and not just financial markets—that suddenly found technology disruptors changing how they transacted. The muni market will be no exception.

Others point out, with some legitimacy, that none of these platforms have been through a market meltdown like we saw in 2007 -2008. Can the platforms handle it? For those of us who lived through that period, I can tell you first hand, having people on the trading desks didn’t function very well either. Nothing does well in a free fall. There’s the old adage that it’s only when the tide goes out when you see who’s wearing a bathing suit and who isn’t. The first time the platforms get hit with a wave of selling, we’ll find out who is and who ain’t.

The Biggest Impediment

The advisor or Wall Street firm thinking about linking up an e-trading platform is caught in a conundrum. No one wants to be the one installing a platform that doesn’t become the market standard. It is a big spend when a firm commits to a trading platform. Putting a new system in place takes a lot of resources—the data feeds for uploading inventory, correct pricing, the trade information capture and storage—there is a lot of middle-office work that requires integrating and testing. Staff have to be trained, from front office trading desk staff to the middle office operations and tech staff. It’s great to be on the “cutting edge” so long as you don’t get cut.

On the other hand, while no one wants to be the first in the pool, no one wants to be last to the party either. If you don’t have it and your worthy competitor does, you better get it or risk falling behind. Call it technological peer pressure.

And Winner Is…

To mis-paraphrase Pogo, we have met the winner and it is us. E-trading means better access, liquidity and transparency for all market participants. There is more visibility to find bonds, better price discovery, and more bids on selling bonds. Where better to find offerings than on e-trading platforms where dozens—heck, hundreds—of dealers, institutions, advisors are all listing bonds? Where you can screen for bonds by specific attributes in only a few clicks?

Focusing on liquidity, if you sum up all the trading volume each platform claims, apparently more than 180% of all muni trades clear over e-trading platforms. That’s a bit of chest thumping bravado; the real number is closer to 20%. They can’t be faulted for a bit of braggadocio—no clear winner has emerged just yet and each wants to claim an early lead. However, the overall point is taken: e-trading improves liquidity.

Another prospective winner is the borrower. E-trading may up-end the entire underwriting process. If you’re a big borrower, a high grade borrower issuing into a standardized market with transparent components, do you really need investment bankers to the degree you do now? Research has shown, again and again, that the competitive bidding process for new issues is more efficient for borrowers. Now with an algorithmized (is that even a word?) and electronified market, a forward-looking borrower with even a modicum of tech-savvy can bypass the middleman and go straight to investors in an open-auction process. Those that can, will. They have already. Look at the initial work of Neighborly. That’s just one model. Others are coming.

Plus, the more e-trading gets adopted and integrated, the more borrowers in the market—and some municipalities are getting pretty sophisticated in tech—will be advised by their bankers and advisors to conform their structures to market standards set by e-trading and indexing. It is entirely possible the rating agencies will contribute to creating some conforming rules as well.

Last, but hardly least, is the data collection and artificial intelligence applications emerging from e-trading. Data is dollars and big data is big dollars. Yes, big data is everyone’s shiny new toy these days. However, as we’ve seen, big data and statistical analysis can find patterns and relationships that we mere humans with our intrinsic biases just can’t see or just don’t want to. Using that information to create algorithms to trade or set risk levels or any other number of things is where artificial intelligence comes to the muni market.

One market participant made the snarky comment that this may be the first time “intelligence” and “muni market” were used in the same sentence. He can crack wise all he wants, but it’s widely known that at least one top-bracket firm has been collecting retail trade data since the late 1990s. Now their muni retail trading process is fully algorithmic. Every trade in a certain band size gets bid or offered based on the data and the algorithm. No need for a retail desk. It’s all done through AI.

The Tipping Point

E-trading and indexing are going to be the drivers that tip the municipal bond market from the old over-the-counter model to what other markets already are and have been—an exchange-based model. No, the municipal bond market is not changing into the New York Municipal Bond Exchange, nor will it become fully automated with everything traded by AI driven bots. The muni market is and always will be a credit risk market. At some level, there will always be a need for a banker, a salesman, a research analyst, a trader and a portfolio manager. But as large parts of the market are going to become far more exchange driven, it’s just not likely to need as many of them.

Make no mistake, the tipping point is here: the traditional, over-the-counter market with liquidity by appointment-only simply cannot be maintained in the faster, tech driven investing world we are in.

Forbes

by Barnet Sherman, Contributor

May 16, 2017

————–

My thanks to Cathleen M. Rittereiser founder/Uncorrelated, LLC, Richard Brasser, CEO/RFactr and Meera Balakumar director/Sterling Analytics for their insights and tech-savvy guidance in the preparation of this article. They were invaluable.

Barnet Sherman is the Senior Managing Partner of The Tenbar Group, a financial services consulting firm advising on successful strategies to manage the credit risk in municipal bond portfolios.

Fitch Ratings-New York-19 May 2017: Fitch has concluded its review of all credits covered by the new U.S. tax-supported criteria, resulting in 74% affirmations, 18% upgrades, and 8% downgrades, according to a new Fitch Ratings report.

“The high level of affirmation was expected. The criteria revision was focused on communicating Fitch’s opinions more clearly, providing tools that facilitate a more forward-looking approach to ratings, and clearly expressing expectations for financial performance throughout the economic cycle,” said Laura Porter, Managing Director. “Fitch’s ratings continue to be based on the judgement of a team of experienced analysts rather than model-based outcomes.”

The most common reason for upgrades was the more focused consideration of the economic base and financial resilience in the revised criteria.

About half of the downgrades were to school districts, most commonly in California and Ohio. The revised criteria highlight the significance of the state school funding and policy framework to the financial prospects and position of school districts in the state.

None of the eight state ratings changed were the result of criteria alone.

Ninety-five percent of rating changes were one or two notches, less than a full rating category.

For more information, a special report titled “US Tax-Supported Criteria Implementation Results” is available on the Fitch Ratings web site at www.fitchratings.com or by clicking on the link.

Contact:

Laura Porter
Managing Director
+1-212-908-0575
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Amy Laskey
Managing Director
+1-212-908-0568

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com.

Additional information is available on www.fitchratings.com

“What–Me Worry?” are famous words from the fictitious Alfred E. Newman. It’s great to have a positive attitude in life. But there are times when investors need to observe and grasp the gravity of situations. That’s where we are with Puerto Rico.

Puerto Rico will soon become a legal catfight. It will be a lulu: General obligation bondholders versus sales tax revenue (Cofina) bondholders; AMBAC versus MBIA versus Assured Guaranty. This brawl won’t be a heavy weight fight. It will be a cage match because the hedge funds are vicious, wily beasts.

Even if you don’t invest in municipal bonds, as a taxpayer there are multiple lessons to be learned. First off, remember when we were taught that a state or territory cannot file for bankruptcy? Until it does. Puerto Rico, with help from Congress, filed for Title III, which is an in-court restructuring mechanism modeled after Chapter 9. No matter what you call it, it’s still bankruptcy.

I project this bankruptcy will become the template for all the cities, counties and a few states whose budgets, unfunded pension and health care liabilities are out of control. As a matter of fact, many of us in Bondland have a new word: Illi-Rico.

That’s right. Illinois, the state that is $14 billion in arrears paying its bills, two years without a budget, with under funded pensions like you wouldn’t believe. The Illinois Policy Institute estimates $203 billion total debt for state and local retirement benefits and oh—as the Institute points out, “the $203 billion includes only the unfunded liabilities of the state’s five retirement systems, which ignores bonds issued to tide over the pension funds and debt taken on to provide retired government workers with generous health insurance.” And this doesn’t include all the bonds outstanding that the poor taxpayers are responsible for.

Certainly Illinois, Alaska, Hawaii, New Jersey, Connecticut et al are not carbon copies of Puerto Rico. Yet their crushing debt and liabilities look eerily similar.

So all you conservative municipal bond investors dig into your municipal open-end, closed-end or exchange-traded funds. Study the composition of your portfolio. If it’s too laden with general obligation bonds from states and cities that will one day have to actually deal with their problems—get out. Investors had years to get out of Puerto Rico bonds. Bond fund managers did too—yet many of them held on. After all, it was your money, not theirs.

It’s true, the worst offenders must pay significantly higher interest on their new bonds but it hasn’t yet reached the frenetic levels that concern or scare investors. If they keep up their incompetent bad behavior it will. Then we’ll be staring another Puerto Rico in the face. As we learned from the recent bankruptcies like Detroit, bondholders lose to pensioners who vote. Puerto Rico will be a carbon copy.

So reassess your portfolio. Make certain the percent of good quality revenue municipal bonds far outweighs your general obligation holdings. The old rule of a GO issuer having the unlimited ability to tax its electorate no longer holds. We have learned issuers lose their ability and willingness to pay us bond investors. Just watch the Puerto Rico bond carnage to come.

Load up with airport revenue bonds from major hubs, the senior liens only. Names like Atlanta International Airport, Los Angeles, Dallas/Ft. Worth, JFK, San Francisco, Denver, Charlotte Douglas, McCarran International and Miami, to name a few. Stay away from the majority of small regionals. Invest in issues whose revenue stream is easily understood and underfunded pensions are not a consideration.

Keep it simple, keep it safe. Stay on top of the Puerto Rico news. It will matter.

Forbes

by Marilyn Cohen, Contributor

MAY 22, 2017 @ 01:23 PM

Marilyn Cohen is founder and CEO of Envision Capital Management, a Los Angeles fixed-income money manager.

Fitch Ratings-New York-16 May 2017: States will continue to increase transportation taxes and fees and seek alternative financing mechanisms to meet infrastructure challenges as federal investment remains uncertain, Fitch Ratings says. However, hurdles to realizing the full benefit of such measures include political risk, lower gas consumption, and resistance to creating and raising tolls.

Federal grants play an important role in building and maintaining highways and other transportation projects. However, federal policy inertia on transportation (and infrastructure in general) has been augmented by recent uncertainty about the current administration’s funding plans.

States are likely to increase their direct investments in transportation projects by leveraging recent revenue increases. Six states (CA, MT, IN, TN, SC, WY) have raised gas taxes and fees to fund transportation projects in 2017. Six others are considering bills that would increase gas taxes to raise transportation revenues (CO, WV, MN, OR, WI, ME). Most states are only catching up as gas tax revenues have grown more slowly than inflation for decades, according to the U.S. Census Bureau Annual Survey of State Government Tax Collections. Most recently, South Carolina’s House voted last week to override the governor’s veto of a bill that includes a gas tax hike and some fee increases. This is the first increase in gas taxes in the state in 26 years. The state’s inflation-adjusted gas tax revenues have risen by just 4.1% since 2000.

Higher gas taxes and fees could face risk from higher fuel efficiency. The Corporate Average Fuel Economy (CAFE) standards are set to raise the national fleetwide average mpg to 54.5 in 2025 from 35.5 in 2016. The current administration has called for a midterm review of the standards. However, regardless of how the regulations evolve technological advances will likely raise average MPG over the next several years.

Some states are also discussing adding tolls or raising existing tolls to meet capital demands. For example, last month Indiana approved funding to direct $1.2 billion to state roads by 2024 from higher gas taxes and fees. The bill also requires the state to apply to the federal government for a waiver to toll currently un-tolled interstates within. Fitch expects to see other states take similar approaches as tolling the interstates is a viable option.

Tolling and other user fees could be a viable and meaningful component of highway funding if they are carefully implemented. Tolls can be adjusted with inflation with minimal adverse economic or political implications, provided the system is well operated and maintained. For example, the “first-mover disadvantage” can be limited by implementation across the system as raising tolls on one highway near an untolled road can hurt toll revenues.

In addition, PPP-enabling legislation is rising and could be another financing alternative in certain situations. In 2016 three states (KY, TN and NH) enacted PPP legislation, according to the National Conference of State Legislatures. PPPs used in the right circumstances allow governments to effectively transfer many project risks to the private sector and provide certainty in forecast costs, though they aren’t a panacea for all funding shortfalls. In addition, issues of public perception, including a perceived loss of public control and a lack of understanding of potential long-term benefits, can make implementation of PPPs challenging.

Contact:

Scott Zuchorski
Senior Director, Global Infrastructure & Project Finance
+1 212 908-0659
Fitch Ratings, Inc.
33 Whitehall Street, New York, NY

Eric Kim
Director, U.S. Public Finance
+1 212 908-0241

Robert Rowan
Senior Analyst, Fitch Wire
+1 212 908-9159

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com; Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

A roundup of money (and other) news governments can use.

GOVERNING.COM

BY LIZ FARMER | MAY 19, 2017

“We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it.” From the very first night of his election win, President Trump was clear about his intention to usher in a new era in American infrastructure. Since assuming office, the president and his cabinet continue to use the figure of $1 trillion over ten years to demonstrate the scale of their vision.

By any measure, one trillion dollars is a lot of money. Given the well-documented maintenance and modernization backlogs in a range of infrastructure sectors, federal attention is welcome. Infrastructure spending has the added benefit of helping to support millions of good-paying jobs.

Continue reading.

The Brookings Institute

by Adie Tomer, Joseph Kane, and Robert Puentes

Friday, May 12, 2017

WASHINGTON – Preserving the tax exemption for municipal bonds, treating private activity bonds more like governmental bonds without restrictions for publicly accessible projects, and reviving direct pay bonds are some of the infrastructure funding recommendations that the Securities Industry and Financial Markets Association has made to administration officials and members of Congress.

The group also has recommended using tax credits as incentives for equity investors, promoting design-build strategies for public projects, and making infrastructure assets and liabilities more transparent in state and local government financial statements, Michael Decker, SIFMA managing director and co-head of the municipal securities division, said in a recent podcast with The Bond Buyer.

The recommendations were developed by a SIFMA task force led by Chris Hamel, head of U.S. municipal finance at RBC Capital Markets, and Suzanne Shank, CEO and chair of Siebert Cisneros Shank & Co.

“At the top of our list is preserving the tax exemption,” said Decker. “Tax exemption for municipal bonds is the single most important tool that public sector infrastructure developers have. Bonds have financed 75% of the infrastructure in this country and there is a real threat, a real risk that in the context of tax reform or through some other legislative vehicle on Capitol Hill Congress could curtail or eliminate the tax exemption. [That] would drive up the cost of infrastructure finance and we’d end up with less, not more, new project investment.”

A second recommendation is to expand the use of tax-exempt private activity bonds for public-private partnerships. Most P3s involve layers of capital, Decker said. One approach might be to have some equity as a base-level of investment, then some debt financing, and then perhaps some capital from the public sector partner. But under current tax law, tax-exempt PABs can only be used for certain specified categories of projects and are typically subject to volume cap limitations and private use restrictions. In addition, the interest from PABs is subject to the alternative minimum tax.

“Under our proposal, bonds issued for infrastructure, regardless of whether it is a purely public project or a P3, would be treated as governmental tax-exempt bonds without volume restrictions, no AMT, no private use restrictions, as long as the project being financed falls under the definition of publicly accessible infrastructure,” Decker said.

SIFMA wants to revive direct-pay bonds structured similarly to Build America Bonds, which were issued as taxable bonds in 2009 and 2010, where issuers receive subsidy payments from the Treasury Department in lieu of investors receiving tax-free interest. These bonds broaden the universe to corporate investors for munis.

The group suggested tax credits or some other type of incentives to attract equity investors in P3s. “If you look at the story of equity investment in other sectors like renewable energy or low-income housing, tax credit programs in those areas have been very successful in driving capital to those sectors and we think the same could be true for infrastructure,” Decker said.

SIFMA also wants to promote the use of a design-build approach for public projects, where one entity – a design-build team – works under a single contract with the project owner to provide design and construction services.

“That’s a successful procurement strategy in the public-private arena and we think that there are some efficiencies to be gained by using a design-build approach in the public sector development area,” Decker said.

SIFMA also would like some accounting issues addressed so that the full cost and value of developing infrastructure is shown on a state or local government’s annual financial statement to demonstrate the value of infrastructure to the community as well as any accumulated maintenance or expenses the government may be carrying.

“It would help identify, just from a transparency perspective, the true cost of the asset,” Decker said. “From a management perspective, it might help identify the assets or areas of investment at the state or local level that the government might not view as a priority where they might be interested in re-deploying capital that’s invested in one area into new infrastructure.”

It is somewhat ironic that infrastructure advocates are pushing for eased restrictions for the use of PABs in infrastructure or more restrictions for tax-exempt bonds. A few years ago and still today, critics decry the use of tax-exempt PABs to finance professional sports stadiums. Former House Ways and Means Committee chairman Rep. Dave Camp, R-Mich., proposed a tax plan that would have halted issuance of PABs. Former President Obama proposed capping the value of tax exemption for munis.

“Our message on this to policymakers is, ‘You’re digging a hole for yourselves. Why curtail or eliminate an existing successful tool that’s already resulted in trillions of dollars of infrastructure investment when you’re trying to promote infrastructure, not constrain it,’” Decker said.

“I think the current administration thinks infrastructure is, at least in part, part of a broader industrial or economic policy,” Decker said. ”You’re heard the president talk about reviving the manufacturing sector, returning American jobs to this country, getting companies to invest here rather than abroad. So if they’re trying to promote industrial development in a particular area, one way to do that is to ensure there’s infrastructure with sufficient capacity to support the economic development that will arise.”

Asked about critics who complain that the president only seems to be interested in big, shiny, costly P3 projects that may take years to develop, Decker said, “There are needs at so many levels.”

“We do need help with big transformational kind of cutting-edge infrastructure projects,” he said, pointing to proposals to further develop LaGuardia Airport as an example. “Then there’s street light repairs or replacing an on-ramp to a freeway, projects that are much smaller in scope that have a much more local impact,” he said, adding, “I would urge the administration to think about providing funding or enhancing funding for all levels of infrastructure development.”

Asked about projects that don’t have revenue streams, Decker said, “in terms of P3s there’s an emerging model that provides at least one approach to those kinds of projects and that is availability payments.”

“The way this works is, for a project that’s non-revenue generating, the state or local government would solicit bids from private sector developers under a standard kind of P3 arrangement – finance, build, own, operate, maintain – the full range of turnkey service that P3 infrastructure operators provide,” Decker said. “But rather than the developer being paid from revenues derived from the project, the developer is paid directly by the governmental partner-sponsor in the project through availability payments.”

The payments would depend on the project continuing to meet operational specifications that were decided at the time the P3 agreement was reached, he said.

“So that means the private developer is responsible for ensuring that the project is operating at capacity and that, in terms of maintenance and repairs, it’s in sound condition,” he continued. “The developer doesn’t get paid unless the project is performing to spec.”

“It’s an interesting approach,” Decker said. “It could potentially reduce the cost to the state or local government, but there are other elements in play too. For example … it allows that local government to lay off some risk of maintaining and operating the project at capacity. It also gives the local government leverage over the developer and avoids the risk that the government might defer operation and maintenance costs in a tight budget situation.”

Asked if he can crystal ball the timing for an infrastructure plan and the interplay between it and tax reform or even health care, Decker said: “They’re somewhat related in terms of process. Congress’ time is somewhat limited.

[Members] can only take on so many very large legislature issues in a given year because they’re so time consuming.”

“In the discussions we’ve had with key members of the administration, infrastructure continues to be at the top of their list,” he said. “I think the administration wants to be able to point to some legislative wins going into the 2018 congressional election. But I can’t tell you in terms of timing how all of this is going to play out.”

Asked about the prospects for infrastructure being wrapped into tax reform, Decker said, “It depends on what the infrastructure proposal looks like.”

He noted that virtually all of SIFMA’s recommendations deal with changes to the federal tax code and said, “I think it’s most efficient to deal with tax proposals in a single legislative vehicle, but that may not be how it ends up.”

The Bond Buyer

By Lynn Hume

Published May 15 2017, 6∶22pm EDT

Two years after the Securities and Exchange Board of India (SEBI) cleared a new set of rules for issuing municipal bonds, India may finally see some activity in this segment with a couple of cities now ready to hit the market. Don’t expect a booming municipal bond market yet, though, as the pick-up in municipal bonds is still linked to government support.

Both Pune and Ahmedabad are ready to go to market, Varsha Purandare, managing director and chief executive officer of SBI Capital Markets, told BloombergQuint, while adding that some regulatory clarifications are awaited. The cities have approached SEBI, asking the regulator to allow them to file their prospectus based on financials that have been audited by an external statutory auditor rather than wait for audited financials from the Comptroller and Auditor General (CAG).

While Pune and Ahmedabad are at an advanced stage of preparedness, a number of other municipal corporations are also hoping to raise money through bond issues as a way to fund their smart city projects.

In the past, most municipal corporations have depended on state or central government grants for infrastructure development. However, there is now a perceptible feeling that the government wants municipal corporations to have ownership of projects being undertaken. In particular, for smart city projects, municipal corporations have to bring in 40-50 percent of investment upfront.
Varsha Purandare, MD & CEO, SBI Capital Markets

To be able to meet this funding requirement, a number of municipal corporations will need to try and tap the markets, Purandare added.

The first step to this is to get rated. A total of 94 municipal corporations have been rated so far, Subodh Rai, senior director at rating agency Crisil, told BloombergQuint in a phone conversation. The rating profile, however, differs widely.

According to data provided by Crisil, of these 94 rated municipal corporations, only 10 are rated AA or above. About 14 are rated in the A category, while the rest are rated BBB or below.
The AA rated firms can access the market directly but the A and BBB rated firms may need some structured mechanism, said Rai. He added that A rated firms can look at securitising future cash flows or a structure where property taxes are put in an escrow account which is set aside for interest payments.

For municipal corporations rated BBB or below, accessing the market would be tougher and some sort of pooling mechanism or partial guarantee may be required, said Rai.

Subsidised Borrowing Cost

Given the rating profile of municipal corporations, the true market borrowing cost for most of them (in the BBB category) would be close to 10 percent, said Purandare of SBI Caps. However, borrowing at that interest rate may not be a viable way to fund infrastructure development, she added.

That’s where government support will need to come in.

While the government has rejected a demand for tax-free status for these bonds, the urban development ministry has set aside Rs 400 crore to provide interest subsidy for these bonds, the Economic Times reported on May 15.

Both Rai and Purandare said that such a subsidy would make it more viable to fund city infrastructure development through bonds. The difference between tax-free and taxed bonds is almost 2 percentage points, Rai pointed out, while adding that the interest subsidy may help in bridging that gap. The subsidy will help bring down the cost of funds to near 7 percent, which is affordable, said Purandare.

Is There Investor Appetite?

The story of municipal bonds in India has been one of numerous stops and starts. The earliest such bond dates back to 1998 when Ahmedabad raised Rs 100 crore. Others like Hyderabad, Nasik and Visakhapatnam have also tested the market with small issues.

Municipal corporations coming to the market now will also likely start with smaller issues in the 5-7 year tenure bucket, said Purandare, adding that once the market becomes more comfortable with the product, demand may pick up leading to a decline in interest rates. This would allow for larger-sized issues to come to market.

According to Rai, the key issue for investors remains the quality of financials reported by the municipal corporations. Delayed reporting of financials and lack of transparency may concern investors, he said. At present, municipal corporations do not report quarterly or half yearly financials. The issues that come to market in fiscal 2018 will be based on fiscal 2016 financials.

On the flip side, volatility in municipal finances is typically low and expected loss would be low for this category of issuers which may attract investors, said Rai.

BloombergQuint

BY Ira Dugal

May 18, 2017, 10:31 pm

Local government leaders discussed the current administration’s trend toward financing infrastructure projects through public-private partnerships and eliminating tax-exempt municipal bonds.

As Infrastructure Week, held May 15-19 in Washington, D.C., began to wind down, local government leaders remained hopeful that the pressure for a renewed interest in rebuilding America’s roads, bridges and the rest of the system would persist.

The initiative — a national week of education and advocacy that brought together American businesses, workers, elected leaders and everyday citizens around one message: It’s time to build — sponsored several events held in conjunction with local and state government groups that represent shared interests in the federal government. The National League of Cities (NLC) hosted a panel discussing infrastructure financing, successful projects and tools local governments need to maintain and develop infrastructure nationwide.

While the idea of investing resources in infrastructure garner widespread bipartisan support, recent revelations that the Trump administration and Congress’ tax reform may scrap the tax-exempt status of municipal bonds has been met with resistance.

“You can’t be for infrastructure, if not for tax-exempt municipal bonds,” said Oklahoma City Mayor Mick Cornett, who also serves as president of the U.S. Conference of Mayors.

Speaking passionately about the necessity of tax-exempt bonds, all members of the panel expressed their disapproval over the idea of cutting the provision. “The need has never been greater for infrastructure investment,” said Cleveland Council Member and NCL President Matt Zone.

In a joint statement released in late April by the National Governors Association, National Association of Counties, NLC, U.S. Conference of Mayors, International City/County Management Association, National Conference of State Legislatures and the Council of State Governments, the organizations urged Congress to preserve the tax-free municipal bonds.

“Tax-exempt municipal bonds were part of the original tax code in 1913 and have long served to meet critical needs in our communities,” reads the statement. “These essential components of the tax code support vital investments in infrastructure, public safety and education, encourage economic growth and provide states and local governments with the flexibility to deliver essential services to our residents.”

The panel also pushed back on the idea that private investment could help fill the void if local governments would have to spend part of the funding on taxes. The current administration has given several indications that rather than finance most projects through direct federal financing, municipalities are encouraged to utilize a public-private partnership model wherever possible.

While testifying in front of the Senate Environment and Public Works Committee, U.S. Secretary of Transportation Elaine Chao mentioned that the administration is hoping to release by the end of the month a set of principles for the oft-talked-about infrastructure package. The list is heavily anticipated by state and local leaders across the country.

“The proposal will likely include $200 billion in direct federal funds, which will be used to leverage $1 trillion in infrastructure investment over the next 10 years,” Chao told senators. She also acknowledged that “not every project … is a candidate for private investment.”

Zone still had concerns over the possible reliance on P3s. “Over last two decades, about 93 percent of projects that have been funded would not have been eligible for P3 partnership,” he said, adding that focusing on public-private partnerships as a uniform strategy “doesn’t really work.”

In order for P3s to work, Cornett explained, the conditions have to be just right. The best environment for successful partnerships takes are highly dense cities with extremely busy areas. Private partners are not interested in building rural roads, which are needed in Oklahoma, he explained.

There is also a danger that relying on private partners could leave behind traditionally underserved populations. As local leaders, Zone said, we have “an ethical and moral obligation to make sure that we look out for every citizen we represent.” All projects should be looked at with an “equity lens” to make sure the most vulnerable and marginalized populations are provided for.

Although there is a lot of focus on what’s happening at the federal level, it is important to keep in mind the role local and state governments play in not only financing transportation projects, but also operating expenses. More than 75 percent of all public roads and 50 percent of bridges are owned by local governments, which also operate 93.7 percent of all public transit agencies.

“Real action is happening outside of Washington in cities, states and metropolitan areas across the country,” said Eno Center for Transportation President and CEO Robert Puentes, who moderated the panel.

FUTURESTRUCTURE

BY RYAN MCCAULEY / MAY 19, 2017

David Kotok of Cumberland Advisors is finding high-quality, long-term munis with attractive yields.

David Kotok of Cumberland Advisors wrote an interesting essay Friday titled “Obstruction of Justice and Markets.” It’s mostly about market reaction to all the uncertainty in Washington.

But there is a nugget near the end where he lays out his investment strategy in this environment that is of particular interest to muni investors. He writes:

The 4%, high credit quality, tax-free bond is a gift to an investor in any higher tax bracket, whether at its present or future level.

It seems Kotok is talking about buying a muni with a 4% coupon — which would be about a 7% tax-equivalent yield for an investor in the highest tax bracket — a gift indeed.

Truth is, those bonds are hard to find and he isn’t saying which ones he has located. The yield for a 10-year A-rated Muni averages 2.5%, points out Thomas Byrne of Wealth Strategies & Management. Go out 30-years gets you to 3.5%, although he doesn’t recommend buying longer than 15-year bonds.

But there are higher coupon bonds out there. Byrne writes:

It makes sense to look for higher coupon bonds, relatively speaking, as they provide some cushion versus rising rates, particularly callable bonds.

Munis have risen as turmoil in Washington has led investors to seek safety in high quality bonds. The iShares S&P National AMT-Free Municipal Bond Fund (MUB) rose to $110 in May from trading between $108 and $109 for about the three months prior. Friday at 10:30 a.m., it was at $110.10.

Barron’s

By Amey Stone

May 19, 2017 10:57 a.m. ET

• Over the summer, supply of cash is projected to outpace sales
• ‘We are bullish on munis’ through summer: Citigroup analyst

Municipal bonds got a lift this week as turmoil surrounding President Donald Trump’s administration sparked a flight to safe assets. An even bigger boost will come this summer as investors will receive a flood of cash that will outstrip the sale of new securities, strategists said.

The state and local government debt market will shrink by $39.5 billion over June, July and August as bonds mature faster than they’re issued. At the same time, investors will receive $44 billion of interest payments, according to Citigroup Inc. — resulting in nearly $84 billion available to be reinvested.

“At least over the next three, four months, we are bullish on munis,” said Vikram Rai, head of municipal strategy for Citigroup.

Yields on benchmark 10-year municipal bonds tumbled this week to the lowest since November after reports that Trump disclosed highly-sensitive intelligence to the Russians and suggested then-FBI Director James Comey drop an investigation of former national security adviser Michael Flynn. The revelations caused stock prices to drop on Wednesday on speculation that Trump’s economic policies will be derailed.

While some investors speculated that the developments dampened the prospects that Trump’s tax cuts will advance in Congress, some bond strategists said that reaction is premature.

“People were too aggressive in their time-line of President Trump’s agenda,” said Mikhail Foux, head of municipal strategy at Barclays Plc.

Investors that want to put cash to work will find the most value on the long-end of the muni curve, where the difference between 10- and 30-year yields are close to 12-month highs, said Foux. By contrast, 5-year municipals are more expensive compared with Treasuries than they have been since the end of August 2016.

Investors have shifted heavily into shorter-maturity debt because of concerns about whether the tax break given to bondholders will be rolled back and the prospect of corporate tax cuts, which could cause banks and property and casualty insurers to stop buying long-duration debt, he said.

Those concerns may be overblown. Trump’s push to slash corporate and individual income-tax rates won’t have a dramatic impact on the market. Cutting the top-rate to 35 percent from 39.6 percent would be too small to sap demand, analysts said, while eliminating the Alternative Minimum Tax and state and local tax deduction could actually strengthen demand for tax-exempt securities.

Cutting corporate taxes to 15 percent would markedly crimp demand from insurance companies and banks, but it’s more likely the corporate tax cut will be in the 20 to 25 percent range, said Foux.

In the long run, though, changes to the tax code won’t be the main driver of municipal returns, said Lyle Fitterer, who oversees $40 billion as head of tax-exempt debt for Wells Capital Management. What’s more important is supply-demand trends, the absolute level of rates and the difference between short and long term yields — which is driven by forecasts about the trajectory of the economy.

“Right now, supply is down, foreign demand is up, U.S. demand is strong because rates have been rallying, so people are more comfortable in fixed income again, so you’ve seen the market outperform,” he said.

Bloomberg Markets

by Martin Z Braun

May 19, 2017, 2:00 AM PDT

Taylor Riggs, a contributor to Bloomberg Briefs, talks with Editor Joe Mysak about this week’s municipal market news.

Watch video.

Bloomberg

• Budget first step in Trump’s $1 trillion infrastructure plan
• Federal funds aim to spark state, local and private investment

President Donald Trump will propose spending $200 billion in federal funds over 10 years to spur investment in the nation’s infrastructure, a senior Office of Management and Budget official said.

The administration’s aim for the funds, which will be part of the budget proposal Trump plans to release on May 23, is to provide incentives for at least $800 billion of infrastructure investment by the private sector and state and local governments, said the official, who spoke on condition of anonymity because the plans were not yet public.

Administration officials are examining the use of federal grants and loans as well as other vehicles to spur the investment, much as the existing Transportation Infrastructure Finance and Innovation Act loan program leverages federal funding for state and local spending, the official said.

One option likely to be part of the plan is asset recycling, in which the federal government offers an incentive to encourage a state or municipality to lease a public asset to the private sector in return for an upfront payment that can be used for other projects that lack funding, according to the official.

Most U.S. infrastructure is owned and controlled by states, localities and private entities. Trump’s plan, the official said, will be designed to encourage them to secure their own funding and financing rather than relying on the federal government.

Trump promised throughout the campaign and since taking office to invest $1 trillion over 10 years to upgrade roads, bridges, airports and other assets. The $200 billion in the budget being released next week would be mostly spent between years two through six in the 10-year budget window, the official said, adding that it would be offset to avoid adding to the deficit. The official didn’t specify how.

The administration also has convened a task force of 16 federal agencies to identify rules, regulations and statues that could be changed to streamline the environmental review and permitting process to accelerate projects.

U.S. Transportation Secretary Elaine Chao has said the administration is providing principles for its infrastructure plan this month, with a complete legislative package expected by the third quarter.

Officials are using a broad definition of infrastructure that includes veterans’ hospitals, energy and broadband, Chao said during testimony on Wednesday at the Senate Environment and Public Works Committee. Administration officials also have said the plan will encourage public-private partnerships as a way to tap the estimated trillions of dollars in available private capital worldwide.

Democrats and even some Republicans have said such deals don’t work in rural areas that can’t support tolls or a revenue stream needed to secure private investment, and Chao said during her Senate testimony that the administration is committed to meeting both rural and urban infrastructure needs.

Chao has said Trump’s plan could involve consideration for “special projects” that are not candidates for private investment and need to be funded directly, though the plan probably won’t include a list of specific projects, she said.

Bloomberg

by Mark Niquette

May 18, 2017, 6:00 PM PDT

Washington, D.C. — While the nation’s metropolitan areas are economically strong with more than 300 metros experiencing job growth in 2016 and accounting for 95% of all the U.S. job gains last year, growth continues to remain uneven, with nearly one-third of metro cities (121) still not having recovered their lost jobs from the Great Recession, according to a report released today by the U.S. Conference of Mayors.

These metros are predominantly older Midwestern communities suffering from the loss of heavy manufacturing jobs and an aging population and infrastructure.

The report further forecasts that by the end of the decade (2020) nearly one in four U.S. metros (88) will have employment levels below their 2008 levels, representing a decade of lost jobs. For some metros, the loss of jobs has been even more prolonged, with 23 cities having fewer jobs today than in 1990. A large number of metros (140 or nearly 37%) for the same period experienced annual job growth of less than 1%.

Issued during Infrastructure Week in Washington, D.C., the mayors’ report also points to infrastructure spending as an economic tool that holds the promise of generating job growth across these metros. Such investment, if funneled directly to metro regions, can create jobs faster, relieve congestion, decrease costs to businesses and increase productivity—all of which further accelerates growth. The entire report and its key findings can be found here.

“Some of the oldest infrastructure is in the Rust Belt metros, which our data show have lagged the national recovery and expansion. And while infrastructure investment is not a cure-all, it can provide cities a “shot in the arm” to help jumpstart their local economies,” said U.S. Conference of Mayors President Oklahoma City Mayor Mick Cornett.

But increased infrastructure spending is also needed in high growth areas. The report’s findings project that over the next 30 years, the U.S. metro population will grow by 66.7 million people, almost all of the nation’s total population growth. By 2047, 72 metros will have population exceeding 1 million, compared to only 53 in 2016. In addition, five metros will have over 10 million people by 2047 – whereas only 2 currently meet that benchmark. And as the metro areas grow, so will traffic congestion.

U.S. metros are already the most congested areas in the country. In fact, from 2013 to 2014, 95 of the nation’s largest 100 metros saw increased traffic congestion, up from 61 from 2012 to 2013. The price tag associated with this congestion, which is the value of wasted time and fuel, is estimated at $160 billion in 2014 for U.S. urban areas, or $960 per commuter.

Mayors maintain that infrastructure investment in roads, rails, bridges and other forms of transportation will help relieve the bottlenecks impeding economic expansion, noting for example, the 4.8 billion hours of travel delay Americans experienced in 2014.

“Infrastructure dollars should also be directed where the potential returns are greatest. Clearly, population and economic projections indicate that growth in the United States in the coming years will largely be in cities and their metropolitan areas,” said Louisville, KY Mayor Greg Fischer, Chair of the Conference’s Council on Metro Economies which produced the report. “If we ignore these trends without preparing for future growth, we will face unnecessary challenges to human, environmental, and economic health.”

Mayors consistently tout the strength of U.S. Metros that contribute 91% of the production of goods and services that make up the nation’s total gross domestic product (GDP). In fact, since January 2009, 315 metros, 83% of all metros, gained jobs. And twelve of those metros, led by Provo at 29% and Austin at 27%, exceeded a 20% growth rate over the 2009-2016 period.

“We need the Administration and Congress to fulfill their pledge to put real dollars directly into the nation’s metro cities, which are the engines of our national economy and have the best track record in delivering infrastructure on time and on budget,” said U.S. Conference of Mayors CEO and Executive Director Tom Cochran. “As we look toward the release of the federal budget, mayors are hopeful, as the President promised, that an infusion of federal infrastructure dollars to our cities and metro areas is forthcoming. Anything less will be wholly insufficient to meet the infrastructure needs of the country.”

CHICAGO/SAN FRANCISCO — Wells Fargo & Co is paying a price in the U.S. municipal bond market for the bogus customer accounts scandal that hit the bank last year and led to bans by some cities and states, an analysis of Thomson Reuters data shows.

So far in 2017, Wells Fargo is in sixth place among senior underwriters of municipal bonds with 85 deals totaling nearly $8.13 billion, according to the data. During the same period in 2016, the bank ranked fourth with 134 issues totaling $12.74 billion.

In September, Wells Fargo agreed to pay a $190 million settlement over its staff opening as many as 2 million accounts without customers’ knowledge.

California, along with Massachusetts, Chicago, and Ohio, suspended Wells Fargo last fall from pricing their negotiated bond sales due to the scandal.

Municipal issuers typically sell their debt either by hiring underwriters to price their bonds or by setting a date and time for underwriters to bid on the debt, and then choose the lowest bid.

Wells Fargo’s ranking for negotiated deals slid to eighth place between Jan. 1 and May 17 from fourth place during the same period in 2016. The bank was the bookrunning underwriter on 45 deals totaling $5.2 billion so far this year, compared to 79 deals totaling $9.25 billion in 2016.

The bank’s ranking drop for winning competitively bid issues was not as steep, falling to fifth place with 40 deals totaling $2.92 billion so far this year from third place with 55 deals totaling $3.48 billion last year.

“Public Finance is an important business for Wells Fargo with many opportunities for growth,” Philip Smith, head of government and institutional banking at Wells Fargo, said in a statement to Reuters.

“We are continuing to invest in the business. Despite current political challenges affecting league tables, our strong relationships and diversified municipal business model have us growing (revenue) 15 percent year over year,” Smith said.

CALIFORNIA DEAL

California sanctioned Wells Fargo over the accounts scandal last year. In April, however, it beat out eight other banks to win a $635 million competitive deal in the state with a 2.811 percent interest rate, according to the California Treasurer’s Office.

“We had no choice,” said California State Treasurer spokesman Marc Lifsher. California law requires the state to award competitive sales of general obligation bonds to the bidder with the lowest interest cost, Lifsher said.

He added that the state plans to review the sanctions this fall, but as of Monday, the bank was “still in our dog house.”

“We’re continuing to pressure them to show us that they’ve cleaned up their act,” Lifsher said.

By REUTERS

MAY 19, 2017, 4:54 P.M. E.D.T.

(Reporting By Karen Pierog in Chicago and Robin Respaut in San Francisco; Editing by Daniel Bases and Tom Brown)

About the Report

A quarterly report containing brief commentary and statistics on the U.S. capital markets, including but not limited to: municipal debt, U.S. Treasury and agency debt, short-term funding and money market debt, mortgage-related, asset-backed and CDO debt; corporate bonds, equity and other, derivatives, and the primary loan market.

Summary

Total Issuance Increases in 3Q’16 Quarter-Over-Quarter and Year-over-Year

Long-term securities issuance totaled $1.90 trillion in 1Q’17, a 18.7 percent increase from $1.60 trillion in 4Q’16 and a 13.1 percent increase year-over-year (y-o-y) from $1.68 trillion. Issuance increased quarter-over-quarter (q-o-q) across all asset classes but municipal, mortgage-related and asset-backed securities; y-o-y, growth was positive in all asset classes except municipal debt.

Long-term public municipal issuance volume including private placements for 1Q’17 was $90.5 billion, down 13.7 percent from $104.9 billion in 4Q’16 and down 9.4 percent from 1Q’16.

The U.S. Treasury issued $654.1 billion in coupons, FRNs and TIPS in 1Q’17, up 44.8 percent from $451.6 billion in the prior quarter and 13.1 percent above $578.2 billion issued in 1Q’16.

Issuance of mortgage-related securities, including agency and non-agency passthroughs and collateralized mortgage obligations, totaled $406.5 billion in the first quarter, a 27.3 percent decline from 4Q’16 ($558.9 billion) but a 12.3 percent increase y-o-y ($361.9 billion).

Corporate bond issuance totaled $468.7 billion in 1Q’17, up 79.0 percent from $261.8 billion issued in 4Q’16 and up 17.9 percent from 1Q’16’s issuance of $397.4 billion. Of all 1Q’17 corporate bond issuance, investment grade issuance was $381.0 billion (81.3 per-cent of total) while high yield issuance was $87.7 billion (18.7 percent).

Long-term federal agency debt issuance was $151.2 billion in the first quarter, a 49.1 per-cent increase from $101.4 billion in 4Q’16 and a 2.5 percent increase from $147.4 billion issued in 1Q’16.

Asset-backed securities issuance totaled $75.8 billion in the first quarter, a decline of 3.5 percent q-o-q but an 37.5 percent increase y-o-y.

Equity underwriting increased by 23.4 percent to $57.7 billion in the first quarter from $46.8 billion in 4Q’16 and up 29.4 percent from $44.6 billion issued in 1Q’16. Of the total, “true” initial public accounted for $10.7 billion, up 144.8 percent from $4.4 billion in 4Q’16 and up tenfold from $1.2 billion in 1Q’16.

View the Report.

GFOA is participating in Infrastructure Week in Washington DC and will be continuing the focus during the Annual Conference.

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NEW YORK, NY, MAY 10, 2017 – CUSIP Global Services (CGS) today announced the release of its CUSIP Issuance Trends Report for April 2017. The report, which tracks the issuance of new security identifiers as an early indicator of debt and capital markets activity, found a slowdown in the pre-trade market for corporate and municipal bonds in April. This reduced demand for new CUSIP IDs for corporate and municipal bonds is suggestive of a possible slowdown in new security issuance volume over the coming weeks.

Read Report.

Taylor Riggs, a contributor to Bloomberg Briefs, talks with Editor Joe Mysak about this week’s municipal bond news.

Watch video.

Bloomberg

May 11, 2017

Many municipalities are forming public-private partnerships to bring high-speed Internet to long-neglected places. Their approaches, however, vary widely.

Andrew Dean remembers counting down to “Ting Day.” That was the day in December 2014 when Dean’s Maryland software business was getting hooked up to the kind of high-speed Internet that most Americans only dream about. Ting, the company that would replace Comcast as the office’s Internet service provider, offered a new fiber-optic connection that promised to be incredibly fast: a gigabit per second. That’s about 26 times faster than the average U.S. Internet connection. Gigabit fiber is so fast that users can download a full-length, high-definition movie file in two minutes and can watch five video streams at the same time. A user can upload a file to the cloud faster than she can save it to a thumb drive attached to her computer. For Dean and his co-workers, Ting Day couldn’t come soon enough.

At first blush, Dean’s software company might not seem like the kind of business that would attract such a coveted asset. Open Professional Group, where Dean is the president, employs 19 people and is located in Westminster, Md., a quaint town of about 18,000 people half an hour north of Baltimore. The area was largely rural and blue-collar when Dean grew up there, but these days it’s better known as a bedroom community for commuters to Baltimore or Washington, D.C. In other words, it doesn’t have the kinds of institutions, like a major university or a big corporate headquarters, that would require fiber-optic networks.

But the city of Westminster has struck a deal with Ting that, it hopes, will result in a citywide network of fiber-optic connections to every home and business. Under the terms of their public-private partnership, the city is laying all the fiber itself, which Ting is then paying to lease for customers, whom it is responsible for signing up and serving. The more fiber the city installs, the more customers Ting can reach. The more customers Ting signs up, the more the company pays the city. Eventually, other service providers will be allowed to compete with Ting on the network as well. “We may not be curing cancer,” Dean says, “but the technology provides us with a tool that allows us to do what we do faster, to do what we do better and to be able to do more of it. That means I get to hire more people and we get to grow.”

Right now, the Westminster project is perhaps the nation’s most closely watched public-private partnership trying to deliver high-speed Internet access. Many other local governments are also looking to public-private partnerships for broadband to spur development in places where the private company won’t provide it on their own. The approaches vary widely, and many are still in their early stages. But if they’re successful, these P3s could finally crack the code of how to bring next-generation Internet to people in rural communities and other long-neglected places on the wrong side of the digital divide.

Ever since browsing the Web has required more than a modem and a dial-up connection, vast swaths of the United States have struggled to get the state-of-the-art infrastructure they need to keep up with new technology. While utilities in many big cities offered higher speeds, small towns and rural areas were left behind. The phone and cable companies were reluctant to upgrade existing lines in those areas because they typically can’t turn a profit. The low-density development, low subscriber rates and long distances between customers mean higher upfront installation costs.

As a result, some cities decided to build out their own fiber-optic systems. More than 400 municipalities, mostly ones that already owned their own electric utilities, started offering broadband services. Lots of those efforts were successful, but the most prominent was Chattanooga, Tenn. It became the first city to offer a gigabit Internet connection in 2010, despite legal challenges from Comcast and AT&T. The lightning-fast service helped revive its fortunes, spurred the creation of an “innovation district” downtown and attracted companies like Amazon, OpenTable and Volkswagen to open or expand operations there. Meanwhile, the Obama administration tried to spur the building of “middle mile” networks in its 2009 stimulus package, with the hope that building high-speed networks that connect schools, government buildings and other major institutions would make it easier for private providers to extend those networks to homes and businesses.

But the real game-changer turned out to be Google. The tech giant made a big splash in 2010 when it announced it would provide one city with gigabit fiber service to homes and businesses. It was a bold goal, because it depended on installing a whole new layer of infrastructure on the city grid. For Internet access, most of America still depends on electric signals that travel down copper wires laid decades ago by telephone and cable companies. But Google wanted to build its Internet network with fiber-optic cables, which use laser flashes that race through thin glass wires to convey information at nearly the speed of light. The wires can carry virtually unlimited information, and they can be upgraded as technology improves. Enthusiasts say that makes fiber-optic networks “future proof.”

Google was by no means the first carrier to use fiber-optic networks, which already make up the backbone of the Internet and are used by many big institutions. For example, some Verizon home customers have fiber-to-the-home through the company’s Fios (fiber-optic service) product, but Verizon largely stopped expanding the areas where it offered Fios in 2010.

Still, the Google competition made it seem possible for almost anywhere in the country to make the jump to high speeds. Even better, customers would initially only have to pay $120 a month for Internet and TV service, about the same rates most customers pay for connections a fraction of the speed. Roughly 1,100 cities entered Google’s competition. Many took drastic steps to stand out from the crowd. Topeka, Kan., renamed itself “Google” for a month. The Duluth, Minn., mayor jumped into Lake Superior in February wearing only shorts and a T-shirt. University of Missouri fans waved Google signs during a nationally televised basketball game. In the end, Google chose Kansas City, Kan.

Google Fiber, which is now officially called Alphabet Access, has since expanded across the state line to Kansas City, Mo. It has also added another eight cities and plans to build networks in two more. But last year, the company put all other expansion plans on hold. It hired a new CEO and laid off hundreds of workers, leading some watchers to speculate that Google might be getting out of the fiber business altogether.

Still, nearly everyone agrees that the introduction of Google Fiber was a turning point. It made local officials all around the country think seriously about the benefits of installing super-fast Internet connections in their cities. Municipal leaders quickly realized that broadband could be the backbone for smart cities and connected vehicles, the foundation for advanced telemedicine, or the means for schoolchildren to explore the world far beyond their classrooms. In competing for Google, cities realized they wanted a fiber-optic network, regardless of whether Google provided it. “People got all excited about Google Fiber, which was very useful, because it opened people’s eyes to the country’s need for world-class, cheap data. But Google Fiber was never going to reach every city in America, because it’s not in their company’s interest to build basic infrastructure,” says Susan Crawford, a Harvard University law professor who specializes in Internet and communications law. “It is in the interest of every local government to ensure economic growth and social justice for its citizens. And the only way to do that is for the city or the local government to take matters into its own hands.”

While cities’ appetite for gig fiber grew, they were confronted with a conundrum. On the one hand, building and running a city-owned network is extremely difficult. Those cities that don’t already operate a utility, like a local power company, often don’t have employees with the technological expertise to run an Internet service, says Jim Baller, president of the Coalition for Local Internet Choice. City employees, Baller says, often are “not on a day-by-day basis versed in the industry changes in technology, finance and services that you provide in the communications world.” Another limitation: Thanks in part to intense efforts from telecom lobbyists and lawyers, at least 19 states have laws that restrict or prohibit cities from offering municipal broadband services.

On the other hand, as the experiences with cable and phone companies showed, cities had learned they couldn’t rely solely on the private sector to provide high-speed connections. And even if private companies brought gigabit speeds to every big city in the country, they’d never be a viable solution for getting faster Internet to the small towns and rural communities that need upgrades the most. That’s why so many cities have turned to public-private partnerships, using a mix of public resources and private know-how to achieve what neither sector could do on its own.

So far, the approaches vary markedly. “We are in such early stages of innovation that every project is developing its own model,” says Joanne Hovis, the president of CTC Technology and Energy, a consulting firm that has helped states and cities, including Westminster, develop public-private partnerships for broadband. “I think many of them will become models and be replicated by other communities. But there is not yet a standard way of doing this, as there is in, for example, P3s for toll roads, where there’s 20 years of experience and lots of data.”

At one end of the spectrum are the cities in Mississippi that lured fiber networks built by C Spire, a regional wireless carrier based in the state. C Spire started offering fiber to communities because it was inspired by the example of Google Fiber. It even initially modeled its selection process after Google’s by hosting a competition among cities. Like Google, it stressed the importance of streamlining the regulatory process in cities it chose, so it could build its networks with minimum hassle. “We found pretty quickly that was the easy part,” says Jared Baumann, a manager who led C Spire’s efforts to develop franchise agreements with cities and towns for the fiber networks. “It was far more important to have the city and volunteers within the cities really taking this to the next level.”

The mayor of Ridgeland, for example, organized a “Tour de Fiber,” with dozens of cyclists riding through neighborhoods to encourage residents to sign up for C Spire’s service. The mayor of Quitman, a town of fewer than 2,300 people, went door to door to encourage residents to get the fiber connection. In the town of Clinton, a group of two dozen residents “made it their goal in life” for several years to promote the new service, Baumann says. “In many ways, the mayors of our towns, and their staff members and their volunteers, were more of a sales force for us than our own sales force was. That was key,” he says. “Mayors were knocking on doors just like campaign season, saying this is only coming to town or your area if you sign up.”

Other states have used more traditional P3 approaches. Kentucky is installing 3,000 miles of fiber-optic lines through a public-private partnership. The new network will link every county in the state to faster Internet connections, although it will be up to local Internet providers to link end users to the new “middle mile” network. Macquarie, an Australian bank, will build and operate the network for 30 years. It will recoup its costs by selling access to universities and state government over the course of the deal, but Kentucky will own the network when the deal is over.

In Minnesota, local governments in two counties are using an old model to deliver new technology. Seventeen townships and 10 cities have formed a co-op to build fiber and wireless Internet connections over a 700-square-mile area, much as rural areas used co-ops to bring electricity to farms during the Great Depression. The co-op RS Fiber got its initial funding when the 10 cities issued bonds for half the cost of the first phase of its project. The co-op built wireless towers to cover farms in the area while it constructs a fiber network in the towns. With the money the co-op generates from providing service in town, it will then start building fiber to the farms. A local Internet provider runs the day-to-day services.

But it’s the public-private partnership between Ting and Westminster that experts are watching most closely these days.

The effort to bring higher-quality Internet access to the Maryland city started more than a decade ago, and the city considered all options, even the idea of installing and offering broadband on its own. Ultimately, it decided to partner with a private provider. Westminster had a few advantages that helped make it more attractive. For one, the city had enough cash on hand to fund a small pilot project. And Westminster found that businesses in town were very excited about getting the service. More than 90 percent of companies signed up when it became available to them. One of the things that distinguishes Westminster’s approach is that the city is building and keeping control over the physical fiber network. The strategy, says Councilman Robert Wack, who has worked extensively on the issue, is “perfect for municipalities. We are in the long time-horizon business,” he says. “We build water treatment plants that have a useful life of 40 years. We dump millions of dollars into pavement and nobody bats an eye because everybody understands how important good roads are for economic development. Why would building fiber be any different? We’re basically building a road for data.”

For Ting, selecting cities to work with comes down to both objective measures, like demographic data, and subjective judgments, like how easy a city is to work with. One thing that stood out about Westminster, says Monica Webb, the company’s director of government relations, was that the town was not just eager for service but also willing to do most of the hard work of financing and then installing the fiber all the way up to buildings.

But Webb cautions that there are not enough private companies like Ting to partner with all the cities that want high-speed Internet. After the Westminster deal went through, Ting received more than 2,000 requests from residents or public officials to come to other communities. Currently, Ting serves just five cities, with a few more in the works. “Sometimes, the best thing cities can do is to do it themselves,” she says. “There needs to be a plan B.”

Wack says communities like his don’t have a choice. They have to find a way to build better data connections. “This is the barebones, basic infrastructure of the 21st-century economy,” he says. “Communities that have this infrastructure will thrive, and those that don’t will wither and die. It’s just that stark.”

GOVERNING.COM

BY DANIEL C. VOCK | MAY 2017

Many predict severe, long-term consequences for the 2020 count and all the programs that rely on it.

Several events in recent months have hinted that the 2020 Census could be in serious trouble.

The latest funding proposals fall far short of what many contend is needed to prepare for the decennial count. In February, the Government Accountability Office added the program to its “high risk” list. And just last week, Director John Thompson surprised Census observers when he announced that he would resign at the end of next month.

Former agency officials and Census advocates are worried that inadequate preparation could potentially spell significant problems for the accuracy of the count. Given that congressional redistricting and funding for hundreds of federal programs all rely on the decennial Census, the reliability of the numbers carry far-reaching consequences.

Continue reading.

GOVERNING.COM

BY MIKE MACIAG | MAY 15, 2017

Last week’s ruling leaves open a key legal question that could make cities unlikely to file suit.

After losing billions in property tax revenue during the foreclosure crisis, local governments notched a win last week when the U.S. Supreme Court affirmed the city of Miami’s right to sue big banks under the Fair Housing Act.

But don’t expect a flood of lawsuits to follow any time soon. The ruling leaves open a key legal question about the burden of proof cities must present to show they were financially harmed.

In the 5-3 ruling, the court sided with Miami, agreeing that the 1968 act, which prohibits racial discrimination in the lease, sale and financing of property, applied to cities as well as people. But the ruling didn’t agree that Miami had provided enough direct evidence linking discriminatory lending practices by Wells Fargo and Bank of America to the financial harms incurred by the city. It also stopped short of saying what a city must do to prove economic harm and remanded the case back to the lower court to answer that question.

“So what it leaves open right now is, can cities who brought this kind of case establish the kind of proximate cause the court has flagged in this decision?” says Joe Rich, a fair housing expert for the Lawyers’ Committee for Civil Rights Under Law.

Proximate cause is essentially an event that sets in motion a sequence of events that result in a foreseeable effect, such as an injury, which would not otherwise have occurred. Last week’s ruling said Miami would have to prove the banks’ practices had a “direct” effect on its finances.

In its complaint, Miami had alleged that Wells Fargo and Bank of America intentionally targeted African-American and Latino neighborhoods for predatory practices by lending to them on worse terms than non-minority borrowers. The banks also failed to extend fair refinancing and loan modifications to those borrowers, the city said, which resulted in a high rate of defaults.

The conduct, according to Miami’s complaint, led to a disproportionate number of foreclosures and vacancies in majority-minority neighborhoods. By late 2013, when the suit was filed, Miami had the highest foreclosure rate among the 20 largest metro areas in the country. According to the complaint, loans in majority-minority neighborhoods were nearly six times as likely to result in foreclosure as loans in majority white neighborhoods.

The ensuing crisis not only cut the city’s property tax revenue, it strained Miamis’ limited resources by creating an increased demand for public safety services in those neighborhoods. An amicus brief filed by the Miami Fraternal Order of the Police (FOP) listed dozens of horrors that played out in these semi-abandoned neighborhoods. Foreclosed homes were used to hide dead bodies and to advertise child sex trafficking, for instance. In one heartbreaking case, a toddler drowned in the swimming pool of his neighbor’s vacant house. The FOP even alleged that untended pools in foreclosed homes became breeding grounds for swarms of mosquitos and “created the epicenter for America’s first Zika outbreak.”

It will be up to the federal appeals court in Atlanta to decide if Miami has shown proximate cause. But the ambiguity of the High Court’s ruling, plus the three-year statute of limitations on fair housing lawsuits, makes it unlikely that a slew of localities will use the decision as a license to start suing big banks. There are, however, a number of open cases in places like Los Angeles; Oakland, Calif.; and Providence, R.I., that benefit from the ruling.

Civil rights advocates say the decision is an important win in terms of enforcing the Fair Housing Act. Individuals have been successful at bringing cases against lenders following the foreclosure crisis. But governments have struggled: No case has gone to trial and there has just been one major settlement — a $175 million payment by Wells Fargo to several cities and borrowers across the country.

Ajmel Quereshi, senior counsel for the NAACP Legal Defense and Educational Fund, hopes the ruling will “act as a future deterrent to banks that are thinking about these practices in the future.”

GOVERNING.COM

BY LIZ FARMER | MAY 11, 2017

A roundup of money (and other) news governments can use.

GOVERNING.COM

BY LIZ FARMER | MAY 12, 2017

Continued slow revenue growth against a backdrop of rising expenditures in a range of less discretionary areas is exerting fiscal pressure across the U.S. state sector. According to S&P Global Ratings’ survey of state fiscal conditions, 43 states have projected operating deficits for either fiscal 2017 or 2018 in recent months.

Continue reading.

Philadelphia City Council Member Cindy Bass was already thinking about how to cut the city’s ties with Wells Fargo when bank CEO John Stumpf testified last September before the U.S. Senate. Questioning Stumpf about the bank’s fraudulent accounts scandal, Senator Elizabeth Warren said, “So you haven’t resigned, you haven’t returned a single nickel of your personal earnings, you haven’t fired a single senior executive. Instead, your definition of accountable is to push the blame to your low-level employees who don’t have the money for a fancy PR firm to defend themselves.”

Search the U.S. Department of Justice website for “Wells Fargo” and “settlement” and you’ll get a litany of results: a $25 billion settlement for foreclosure abuse (a record), $1.2 billion for improper mortgage lending practices, and $184.3 million in compensation for steering black and Latino borrowers into predatory subprime mortgages. The 2016 hearing was the moment when the wheels fell off the stagecoach.

Continue reading.

NEXT CITY

BY OSCAR PERRY ABELLO | MAY 10, 2017

• The $1 trillion that President Trump wants to invest in U.S. infrastructure by way of public-private partnerships may not be a slam-dunk for investors.
• Amid a patchwork of decaying U.S. roads, bridges, schools and water systems, an increasing share of municipal debt is being devoted to shoring up these structures.
• Yet experts warn that, for a variety of reasons, most infrastructure projects lack the revenue stream and return on equity needed to attract private investors.

For a variety of reasons, the mixed track record of rebuilding projects suggests that the $1 trillion that President Donald Trump wants to invest in U.S. infrastructure by way of public-private partnerships may not be a slam-dunk for investors.

As several PPPs have demonstrated recently — such as the Chicago Skyway’s $2.83 billion sale in 2015 and Westinghouse Electric’s high-profile bankruptcy declaration in March — infrastructure funding can swing from success story to cautionary tale.

Amid a patchwork of decaying U.S. roads, bridges, schools and water systems, an increasing share of municipal debt is being devoted to shoring up these structures. According to data from investment management firm PIMCO, about 58 percent of the outstanding tax-exempt municipal debt in the Barclays Muni IG Index is issued for infrastructure purposes.

Yet experts warn that, for a variety of reasons, most infrastructure projects lack the revenue stream and return on equity needed to attract private investors.

“We see a lot of need for infrastructure investment, but the areas where [it’s needed] are not necessarily aligned with what public-private partnerships may target, or with what the state and local governments might be willing to turn over to a private operator,” David Hammer, executive vice president and head of municipal bond portfolio management at PIMCO, told CNBC in a recent interview.

In view of past experiences, “it’s unlikely that you’d see state and local governments use public-private partnerships to address water and sewer needs,” for example, Hammer added.

That’s true even for cash-strapped cities like Detroit, whose water and sewer system is one of its more valuable assets — making officials reluctant to fully privatize the system, he added.

To be certain, there’s still a healthy appetite for public-private investment for massive projects such as New York’s $4 billion overhaul of a major terminal at LaGuardia Airport. Meanwhile, a more than $1 billion revamp of John F. Kennedy International’s Terminal 8 was considered a success for private investors.

However, Westinghouse’s cost overruns for its nuclear power plants show how hard it’s become for private entities to ensure an appropriate rate of return when the political or regulatory winds shift against them. Given the long timetable required to birth such projects, roadblocks can be hard to predict.

“These are often generational projects. The idea is that the requirements surrounding those projects, for the safety of all of us, will change as our knowledge base changes,” said Nick Venditti, a portfolio manager at Thornburg Investment Management.

With the exception of toll roads and some airports — where forecasting traffic patterns and revenue streams can be easier — Venditti doesn’t see the public-private partnership model in municipalities as sustainable over the long term, largely because of how hard it is to project an attractive revenue stream for most infrastructure projects.

George Friedlander, a veteran muni analyst with Court Street Group Research, said that while PPPs don’t have a strong track record as a viable financing method, technology may alter the landscape. “Technology drives the case for getting the whole package designed and having a private entity involved earlier in the game than has been the case historically,” he said.

‘Default rates relatively low’

Meanwhile, a potential wildcard could be the Federal Reserve, which is expected to raise borrowing costs through rate hikes, and tax reform that may dim the benefits of muni bonds, many of which are tax exempt.

PIMCO’s Hammer thinks the risks are fairly low given that the asset class historically outperforms other fixed-income asset classes when the Fed hikes rates. He also argued they’re less risky than corporate debt.

Lower-rated investment grade munis “actually default less frequently than [higher-rated] corporate bonds despite all the headlines of the last five years, with Puerto Rico, Detroit, [and] Jefferson County, Alabama, all going through bankruptcies,” Hammer said, citing data from Moody’s Investors Service.

“The cumulative bankruptcy percentage hasn’t gone up for the asset class, so we still see default rates as relatively low,” he added.

Friedlander noted that rating agencies have made it clear that more states have weakened in credit quality recently, due largely to public pension pressures and slower tax revenue growth. However, the number of actual defaults on rated municipal debt remains low, and he doesn’t expect that to change.

David Bogoslaw, special to CNBC.com

Saturday, 13 May 2017 | 9:00 AM ET

NEW YORK (Reuters) – The Los Angeles Unified School District, California’s largest school district, plans to sell nearly $1.1 billion of general obligation refunding bonds in the biggest U.S. municipal bond offering next week.

The debt, backed by county property taxes, will refund 2007 bonds that have July 1 call dates. Through lead underwriter Morgan Stanley, the district will hold a one-day retail order period on Monday, with institutional pricing on Tuesday, according to a presentation for prospective bondholders.

The second biggest school district in the United States, Los Angeles had 625,434 students enrolled in kindergarten through 12th grade in fiscal 2017 and $10 billion of general obligation bonds outstanding.

It is in the midst of a $25.6 billion to upgrade buildings and construct new schools.

Altogether, issuers plan to offer an estimated $9.4 billion of U.S. municipal bond and note sales next week as investors have maintained a steady interest in the muni market.

Investors have put money into muni funds for the last five weeks straight. Funds had $605 million of inflows for the week that ended May 10, the second-biggest week of inflows since January, according to Lipper, a Thomson Reuters unit.

Other issuers coming to market next week with big deals include the Dormitory Authority of New York, for New York University taxable bonds, and the District of Columbia.

Reuters

By Hilary Russ

May 12, 2017, at 5:41 p.m.

(Reporting by Hilary Russ; Editing by Leslie Adler)

An advance refunding is a complex transaction. There are several moving parts, and it is easy to lose track of where the value is. Two recent papers on this topic are Don’t Waste a Free Lunch: Managing the Advance Refunding Option in the Journal of Applied Corporate Finance, and Advance Refundings of Municipal Bonds, forthcoming in the Journal of Finance.

As some may recall, the authors of the latter paper made the stunning assertion in their 2013 draft (still posted on the SSRN website) that advance refunding always destroys value. In other words, this widely used transaction can never be optimal. If true, the practitioner community has been universally wasteful. In a Bond Buyer commentary (Advance Refunding: A Misguided View from the Ivory Tower, Sept. 10, 2013), I pointed out the faulty logic of this claim — the authors relied on general economic principles, without understanding the actual mechanics of the transaction.

Fast forward to 2017. After seeing that the paper was accepted by the Journal of Finance, I wondered how the authors handled the flaw of their central claim in 2013. It turns out they made a complete U-turn; the central claim has vanished. In fact, they inserted a counterexample showing that advance refunding can be optimal. Better late than never! However, without the (flawed) original claim, it is unclear that what remains is particularly new or insightful. The paper also displays a lack of familiarity with the muni market in its failure to recognize the dominance of 5% non-call 10 bonds, which are tailor-made for advance refunding. A discussion of what went wrong in 2013 would have been a service to the academic community.

In the “Free Lunch” article Lori Raineri and I examine the value of the advanced refunding option (ARO). To begin with, the ARO is free to issuers — for well-known reasons, investors actually prefer advance-refundable bonds. Quantifying its value is challenging, due to the imperfect correlation between the issuer’s funding cost and Treasury rates; the former determines the refunding rate, and the latter the escrow yield. At the historically low Treasury rates prevailing today, the value of the ARO of a new 20-year 5% NC-10 bond is roughly 1% of face amount. The figure below puts this in perspective – the value of the call option is roughly 5% of face value, with the total optionality being 6%. The option values increase with higher coupons, as expected. But let’s keep in mind that although higher coupons provide more option value (as a percent of par), they also reduce the size of the issue.

 

The key point of our paper is that an ARO should not be wasted by advance refunding near the call date. The “free lunch”‘ to consider here is the ARO of the replacement issue. Advance refunding is permitted only once in a funding’s lifecycle. Thus the replacement of an advance refunded issue is ineligible for advance refunding, but if an issue is called (current refunded), the ARO remains alive.

The efficiency of refunding is quantified by the percentage of the option value captured by transacting. The figure below shows the effect of including the ARO of the replacement issue. As the darker blue line indicates, it is considerably lower than when the ARO is ignored, signaling that advance refunding close to the call date wastes a free lunch. A preferable alternative is to construct a hedge which locks in savings, while retaining the ARO.

 

Issuers and their advisors can use these findings to make better advance refunding decisions. Specifically, recognize that you lose advance refunding option of the replacement issue when you pull the trigger close to the call date. And instead of obsessing over negative arbitrage, use refunding efficiency as your signal to transact.

The Bond Buyer

By Andrew Kalotay

May 09 2017, 10:27am EDT

Fitch bumped up its negative rating watch listings, but didn’t issue any positive rating watches in Q1.

While the first quarter was the 12th consecutive quarter where upgrades outpaced downgrades, it outpaced them by a smaller percentage than last quarter, according to a new report from Fitch Ratings.

In the fourth quarter of 2016, downgrades were just 25% of all rating actions. In the first quarter of this year, downgrades were 40% (37 of 151 ratings actions).

Jessalynn Moro of Fitch’s U.S. Public Finance group also notes that the downgrades were bigger in terms of dollar value this quarter — mostly due to the downgrade of Illinois.

While upgrades outpaced downgrades, we saw a higher par value on the downgrades this quarter due to the Illinois downgrade of nearly $30 billion. This one downgrade accounted for 68 percent of all downgrades this quarter.

Fitch downgraded Illinois from triple-B-plus to triple B in February. That’s the second lowest investment grade rating.

Fitch also notes in its report that there was a pretty big bump in “rating watch negative” listings — to 28 from 20. The average for the last four quarters is 21.75. No securities were listed as “rating watch positive.”

Positive rating outlooks (a longer-term measure than a ratings “watch”) decreased to 86 from 91 in 4Q16, and negative rating outlooks decreased to 109 from 118.

Barron’s

By Amey Stone

Updated May 8, 2017 12:07 p.m. ET

Policy stumbles can be bullish for munis

Municipal bonds are starting to draw investor interest as investors take in President Donald Trump’s early pro-growth-agenda stumbles, said David Hammer and Matthew Sinni, credit strategists at bond giant Pimco.

“While we think it’s too early to shout ‘all clear,’ investors now have more information about policies likely to affect the municipal bond markets this year, and relative valuations are looking more attractive than they did a few months ago,” they said in a note.

After Trump’s election, munis were pummeled by fears that his agenda of large fiscal stimulus measures, including tax cuts, could pare demand for municipal securities. The prospect of tax changes could dull the attraction of those securities, which depend on investors looking to benefit from the income-tax exemption munis offer.

However, a failure to repeal and replace Obamacare, along with a lack of specifics on Trump’s tax plans, have cast doubt on the president’s ability to easily implement his policies. Trump’s troubles, which comes despite Republican control of the Senate and House, has contributed to a bullish environment—at least for the moment—for muni bonds, the Pimco strategists said.

“Slower-than-expected policy progress and a Republican majority that lacks a unified vision for health care or tax reform make it more likely that an eventual fiscal boost won’t occur until 2018 (and may be smaller than initially expected),” they said.

“The upshot is a tax reform backdrop for municipals that, while not without risk, has modestly improved since the beginning of the year and (if realized) would not fundamentally alter the long-term valuation paradigm for tax-efficient investors,” they said.

Also, the relative value of munis versus Treasurys is also compelling, they said. The municipal/ Treasury yield ratio, a measure comparing Treasury TMUBMUSD10Y, -0.27% and municipal bond yields, is at 92%. Any number above the historical average of 80% is considered a sign municipal bonds are oversold and cheap compared with Treasurys.

Hammer and Sinni point out that high-yield municipals NHMAX, +0.00% for example, appear more attractive than high-yield corporate bonds HYG, +0.05% In 2017, the spread between high-yield municipal bonds and Treasurys surpassed that of high-yield credit, mainly because of a scramble for income against a backdrop of meager interest rates, with the 10-year Treasury benchmark offering a yield of 2.32%.

Funds focusing on municipal debt have notched a five-week streak of net inflows, according to data from EPFR Global.

Falling inflation expectations from lower energy prices also has helped spur appetite because lower consumer prices help to mitigate the corrosive effect of inflation on a bond’s fixed payments. Signs of slack in hiring, which suggest that wages are holding lower, can also contribute to weaker inflation expectations.

So-called break-even levels for Treasury inflation-protected securities, that is, the bond market’s estimation of expected inflation, have fallen. The five-year break-even rate, or average expectations over a five-year period, fell as low as 1.65% on April 18 from the two-year peak of 1.97% on Jan. 27, a week after Donald Trump had entered the White House, data from the Federal Reserve Bank of St. Louis shows.

To be sure, others argue different employment indicators could show an economy at full employment and that energy prices have only a fleeting impact on inflation. The jobless rate continues to stay at 4.5%, matching prefinancial crisis levels, and the Bureau of Labor Statistics reported wages had grown 0.8% in March.

MarketWatch

By Sunny Oh

May 3, 2017 5:35 p.m. ET

The Senate nixed an Obama-era regulation Wednesday that made it easier for states to create retirement plans for some workers.

Senators voted 50-49 on the House-passed resolution, rolling back a rule meant to encourage states to create retirement plans for private-sector workers who do not have access to an employer-based retirement plan.

GOP Sens. Bob Corker (Tenn.) and Todd Young (Ind.) voted against repealing the rule. Sen. Dick Durbin (D-Ill.), who had outpatient surgery this week, missed the vote, which allowed the Senate to avoid a tie and pass the measure.

The Obama-era rule, implemented in October 2016, would exempt the state-created plans from the Employee Retirement Income Security Act, or ERISA, a law that outlines rules for workplace savings.

Congress eliminated a similar regulation last month that targeted a state’s “political subdivisions” such as cities and counties.

Republicans argue the Labor Department rules are another example of executive overreach under the Obama administration and are overly burdensome for businesses.

“States … are already using this authority to impose new mandates on both large and small employers, including start-up businesses. Some of the mandates apply regardless of the size of the businesses,” said Sen. Orrin Hatch (R-Utah), the chairman of the Finance Committee.

Majority Leader Mitch McConnell (R-Ky.) added that the Obama rule would give “government-run retirement plans with a competitive advantage over private sector workplace plans, while providing fewer basic consumer protections to the workers who would be forced to contribute to them.”

But Democrats and outside groups urged their GOP counterparts to buck the resolution, warning that the state-started plans could help prevent a “retirement crisis” for low-income workers.

Senate Minority Leader Charles Schumer (D-N.Y.) and House Minority Leader Nancy Pelosi (D-Calif.) issued a joint statement asking President Trump to veto the resolution and keep the Obama-era rule in place.

“We strongly urge the President to veto the bill if it is passed by the Senate today, which would show he really did mean it when he said he understood the plight of the American worker. If President Trump vetoes this misguided bill, Democrats in Congress will stand by him and ensure the veto is sustained,” they said.

The AARP also sent a letter to senators this week urging them to keep the Obama-era rule, noting that tens of millions of Americans don’t have access to a workplace savings account.
“AARP urges the Senate to allow state flexibility to support more private retirement savings opportunities, and to vote no on H.J. Res. 66,” the group wrote.

Finance officials with roughly two dozen states also sent a letter earlier this week warning that without access to a savings account, workers could retire in poverty.

“States are pursuing a multitude of solutions to address this growing retirement savings crisis,” they wrote. “We insist that states be allowed to maintain their constitutional rights to implement such legislation.”

GOP lawmakers are using the Congressional Review Act to undo regulations implemented late in former President Barack Obama’s tenure by a simple majority.

THE HILL

BY JORDAIN CARNEY – 05/03/17 06:25 PM EDT

The U.S. Senate voted narrowly on Wednesday to repeal an exemption from strict federal protections that former President Barack Obama’s Labor Department had given to state-sponsored retirement savings plans for lower-income workers.

The exemption, championed by states such as California but opposed by the mutual fund industry, had freed the state-run plans from the strict compliance requirements of the Employee Retirement Income Security Act, or ERISA.

Private-sector workers whose employers do not offer 401(k) or other retirement benefits, and who often have low incomes, are automatically enrolled in plans being launched in some states, such as Illinois. States say the exemption would have let employers pass workers’ money into plans without footing ERISA compliance costs.

It stoked fights in Washington, however, over the reach of federal regulation, states’ rights and income inequality.

The Republican-led Senate passed the resolution repealing the exemption by a vote of 50-49. The House of Representatives, also controlled by Republicans, previously approved the measure, which President Donald Trump is expected to sign into law.

It was the 14th Obama-era rule killed by Congress under the once-obscure Congressional Review Act, which allows lawmakers to repeal newly minted regulations and forbids agencies from enacting similar rules in the future.

In mid-April, Trump signed a nearly identical resolution affecting city-run retirement plans, which are in the design stages. But the resolution for state-run plans was stuck in limbo for weeks, as Republicans struggled to gather votes and major lobby groups representing retirees and business interests turned up the heat on lawmakers.

Senator Dick Durbin, an Illinois Democrat, missed Wednesday’s vote because of minor heart surgery, helping the Senate avoid a tie.

Republican Senator Todd Young of Indiana broke party ranks to oppose the resolution, saying Americans were in a “real and ongoing crisis” to save enough money for retirement.

“While state-based retirement plans are not my first choice, if implemented carefully, they could help close the retirement savings gap,” he said in a statement to Reuters.

The California plan’s primary champion, Democratic state Senator Kevin de Leon, expressed outrage at the vote, saying taxpayers would ultimately foot the bills of people who retire without adequate savings.

“Wall Street investment firms fear their profits will take a hit … even though the investment industry has historically ignored middle- and lower-income workers at medium- and small-sized businesses,” he said in a statement.

The mutual fund, insurance and securities industries said the exemption would have denied some workers protections that are guaranteed for others.

“Denying ERISA protections to workers who are automatically enrolled would limit their legal remedies to fight against high fees or mismanagement of the plans,” said Paul Schott Stevens, president of the Investment Company Institute, a trade group representing funds holding $19.3 trillion in assets and that are often used to save for retirement.

Reuters

Wed May 3, 2017 | 8:24pm EDT

By Lisa Lambert and Sarah N. Lynch | WASHINGTON

(Reporting by Lisa Lambert and Sarah N. Lynch; Editing by Peter Cooney)

The Senate narrowly approved a resolution Wednesday to rescind federal safe harbors for states to set up private-sector retirement programs for small businesses.

The vote was 50 to 49, largely along party lines. It mirrors a resolution passed by the House on Feb. 15.

A similar resolution that rescinded safe harbors for cities and other large political subdivisions was passed by both chambers and signed on April 13 by President Donald Trump, who is expected to sign the state version shortly.

Senate Finance Committee Chairman Orrin Hatch, R-Utah, urged Senate colleagues on the floor to support the resolution against such programs, which he said would impose conflicting and burdensome mandates on private-sector businesses of all sizes and eliminate long-standing federal protections for retirement workers. “The regulation also encourages states to bar private workers’ access to their retirement accounts and it would let states invest private workers’ retirement assets, ignoring provisions in federal pension law that require prudent pension investment practices and that ban kickbacks and self-dealing,” Mr. Hatch said during floor debate.

Sen. Chris Murphy, D-Conn., whose state is implementing one such program, chastised his Senate colleagues for not letting states find innovative ways to increase retirement savings. “This is a crisis and if we’re not going to deal with it and the industry is not going to deal with it, let states deal with it,” he said.

Sen. Ron Wyden, D-Ore., whose state is launching a pilot phase of its OregonSaves program in July, said state initiatives “are commonsense steps to address a national crisis,” and criticized his colleagues for not offering alternatives.

“This legislation puts special interests before working people. It’s that simple,” Mr. Wyden said on the Senate floor.

Illinois Treasurer Michael Frerichs, whose state is working to have its auto-enrollment, payroll-deducted retirement savings account program ready for enrollment by the end of the year, said in an interview that the vote “just seems very hypocritical. It will take away a protection that we fought very hard for to protect Illinois employers, and it is anti-states’ rights.” With legislation already passed to create the program, “we intend to move forward,” Mr. Frerichs said.

California Treasurer John Chiang echoed that sentiment, saying in a statement that after consulting with legal and legislative experts, “while Congress has dealt Californians a setback, it is not enough to push us off our moral and legal high ground.”

Joshua Gotbaum, chairman of the Maryland Small Business Retirement Savings Program and Trust, said that the state “has been assured by its lawyers that this program is legal and is going to proceed to help provide retirement savings for one million Marylanders.”

PENSIONS & INVESTMENTS

BY HAZEL BRADFORD | MAY 3, 2017 6:23 PM | UPDATED 3:42 PM

— Contact Hazel Bradford at hbradford@pionline.com | @Bradford_PI

Washington, DC, May 3, 2017 – SIFMA today issued the following statement from Lisa Bleier, SIFMA managing director and associate general counsel on Senate passage of on H.J. Res. 66 to override the Department of Labor’s (DOL) regulation relating to savings arrangements established by states for non-governmental employees.

“We commend the Senate for passing the resolution to permanently protect private-sector retirement savers from losing access to important retirement savings options and safeguards. The DOL’s regulation could leave workers saving for retirement without important protections including survivors benefits, spousal benefits, children’s benefits and inter-state portability. Under this guidance, states could have created plans that restrict options and limit plan customizability while prohibiting an employer match, which is crucial to maximizing retirement savings.

“While we agree that more must be done to encourage Americans to save for retirement, exempting state plans from providing important protections for workers is not the solution. This resolution ensures that retirement savers have the same high-level protections and options available to workers under private plans. We urge the President to sign this resolution without delay.”

What do the City of Chicago and Jefferson County, Alabama, have in common with Riverside, California, and a school district north of San Diego? These local governments have lost millions of dollars by using creative municipal finance. And if citizens around the country aren’t vigilant and outspoken, their city, county or school district may become the next victim of an unnecessarily complex bond deal.

Perhaps the worst victim of municipal financial “innovation” was Jefferson County, Alabama, which filed for bankruptcy after its financing arrangements known as interest rate swaps blew up. With an interest rate swap, a borrower can issue variable rate bonds while still paying a fixed rate of interest — a transformation achieved through an arrangement with a bank. After suffering a series of rating downgrades, the City of Chicago paid $270 million to close out swaps and convert its variable rate debt to fixed.

Why bother with such complicated deals in the first place? Bankers who promoted interest rate swaps argued that municipal issuers would have lower interest costs overall by borrowing at variable rates. But fees banks collected for arranging the swaps offset these savings. Also, because bankers are more knowledgeable about swaps than politicians and government finance staffers, the terms and conditions of these deals often protected banks at the expense of borrowers.

Here’s another example of how innovative finance benefitted the financiers more than taxpayers. One product sold as a way of lowering interest costs was called the Auction Rate Security (ARS). This instrument allows cities to meet long-term financing needs in the money market. Every four weeks the bonds are rolled over to the money market participant willing to receive the lowest interest rate over the next four weeks. Since short-term interest rates are usually lower than long-term rates, the city saves money.

This seemed like a brilliant idea — until it stopped working. Money market funds don’t want credit risk because they have to be ready to redeem shareholder funds at any time. Thus, they invest only in AAA-rated securities. Most U.S. local governments aren’t rated AAA. The way they could get into the auction rate market was to buy a municipal bond insurance policy from a specialized, “monoline” insurer like Ambac or FGIC.

These insurers were rated AAA, but, by early 2008, investors realized that they were no longer safe because the companies had also insured toxic mortgage-backed securities. Demand for ARS dried up and many auctions had no bidders. But the banks that created ARS and ran the auctions had protected themselves: When auctions failed, they were entitled to receive a penalty rate from the city of as much as 20 percent. To avoid paying this usurious rate month after month, many cities refinanced their ARS with traditional municipal bonds — paying additional origination costs to financial intermediaries in the process. Riverside, a city east of Los Angeles, lost over $12 million when the ARS market collapsed.

Ultimately, Ambac and FGIC went bankrupt, despite their AAA ratings. Every municipal bond insurer failed or suffered large credit rating downgrades during the financial crisis. In retrospect, we can see that the whole municipal bond insurance industry arose from misaligned credit ratings. The cities had less credit risk than the insurers, yet they had lower ratings. Some observers — most notably Bill Ackman — realized that monoline insurers were overrated well before 2008, so this rating agency error cannot be dismissed as a case of 20/20 hindsight.

The municipal bond insurance industry started in the 1970s and peaked shortly before the financial crisis, when more than half of all new municipal bonds carried insurance. In 2007, government bond issuers paid more than $1.5 billion in bond insurance premiums — for an insurance product that often proved worthless.

By 2010, only a handful of new bonds were being insured, but then the industry began to recover. Two insurers have achieved AA ratings from S&P and AA+ ratings from Kroll, an industry upstart. In 2015, over 6 percent of new municipal bonds were once again being insured.

For a new Mercatus Research paper, Dr. Kenneth Kriz and I calculated “All-in Total Interest Costs” for general obligation bonds issued by California school districts rated AA and below (All-in TIC is the municipal bond market equivalent of Annual Percentage Rate, considering both upfront origination costs and periodic interest expenses). About half the sample was insured. After adjusting for ratings, deal size, market interest rates and other factors, we found that districts purchasing insurance did not achieve statistically significant cost savings. The insurance premiums paid by the school districts offset the benefits of lower interest rates, so buying insurance was not worthwhile.

Since there is no record of a California school district defaulting on general obligation bonds, I question whether there is any default risk that needs to be insured against. Debt service payments for the bonds are generated from a separate, dedicated property tax levy. If a district gets into financial trouble, it cannot use bond tax revenues to balance its books.

Dr. Kriz and I found one factor that greatly influenced APRs paid by these districts: whether they used Capital Appreciation Bonds (CABs). CABs are zero coupon instruments, meaning there are no annual interest payments, just a balloon payment at maturity. But because these bonds accrue interest on interest, they are more expensive over the long term.

School districts and other borrowers use CABs to lower financing expenses in the years after a bond deal launches, at the cost of much higher payments years in the future. This is not merely a way to kick the can down the road, but a way to maximize the size of bond issuances.

California state law limits the amount of debt service a school district can incur as a percentage of assessed property values. When districts and their financial advisors structure bond issues, they assume that property values will rise rapidly over the life of the deal. Thus, by backloading more debt service toward the end of the bond’s life, they can maximize the amount of money they borrow — violating the spirit but not the letter of debt service limits. In the process, they effectively mortgage the homes of future residents. Poway Unified School District, north of San Diego, is perhaps the worst victim of CABs: A few years ago, the district issued $179 million of bonds carrying lifetime debt service payments of $1.27 billion.

When it comes to municipal borrowing, the KISS (Keep It Simple Stupid) principle should normally apply. Plain vanilla structures made up of uninsured, fixed rate, current interest (as opposed to zero coupon) bonds have proven themselves across decades of municipal finance. They are readily understood, have relatively low upfront costs and generally do not produce nasty surprises. As citizens and taxpayers, we should be asking our city council members and school board trustees tough questions whenever they depart from this time-tested model. If they can’t provide convincing answers, it may be time to elect someone else.

The Fiscal Times

By Marc Joffe

May 1, 2017

May 5 The state of Hawaii is among the top deals scheduled to hit the U.S. municipal bond market next week, when an estimated $9.6 billion of new bonds and notes are expected to sell, according to preliminary Thomson Reuters data.

Hawaii, which recently received an improved outlook from Fitch Ratings, plans to sell $856 million of general obligation bonds to fund various public improvement projects for schools, community colleges, universities, libraries and parks.

Fitch in April revised its Hawaii rating outlook to positive from stable, citing improvements to the state’s long-term liabilities, strong financial flexibility as the state implements pension and other post-employment benefits reforms, and a resilient economy.

Other top deals scheduled to sell next week on the municipal market are $915 million of hospital revenue bonds from Ohio’s Cuyahoga County for the Metrohealth System, and $838 million of limited tax schoolhouse and refunding bonds from Texas’s Houston Independent School District.

Next week’s expected total sales of $9.58 billion compares to the weekly average of $6.7 billion thus far in 2017. Next week’s deals are made up of $7.9 billion from the negotiated calendar and $1.7 billion from the competitive calendar, according to preliminary Thomson Reuters data.

Reuters

By Robin Respaut

May 5, 2017 | 12:25pm EDT

(Reporting by Robin Respaut; Editing by James Dalgleish)

Municipal Market Analytics’ Matt Fabian expects the muni market’s default rate to roughly double thanks to Puerto Rico’s bankruptcy.

The muni market hasn’t posted much reaction to Puerto Rico’s mammoth bankruptcy filing this week. The iShares S&P National AMT-Free Municipal Bond Fund (MUB) stayed right around $109, roughly where it has been for the past three months.

But that doesn’t mean muni investors should be shrugging off the largest bankruptcy filing in U.S. history.

Municipal Market Analytics’ Matt Fabian puts it in pretty start terms in his Default Trends report Friday. Here’s his summary of his report:

Assuming all remaining Puerto Rico bonds end up in payment default, as now appears likely, the municipal market’s total for bonds in default will have roughly doubled to $74B, with Puerto Rico issuers accounting for 85% of that total. This would also roughly double the municipal market’s current default rate from 1.02% to 1.93% (versus 0.30% excluding Puerto Rico bonds). This is a dramatic reshaping of the industry’s overall risk profile and will doubtless drive at least somewhat more conservative investor behavior in the future, in particular as regards large distressed governments like IL, NJ, CT, KY, and Chicagoland credits.

Barron’s

By Amey Stone

May 5, 2017 4:49 p.m. ET

Key Points

• Owning an insured municipal bond can help ensure timely interest and principal payments in the rare instance that the issuer defaults.
• The “cost” of municipal bond insurance usually comes in the form of a lower yield.
  If you’re considering investing in insured munis, we believe the underlying rating—and not the insured rating—should fit your risk tolerance.

What’s the case for investing in insured municipal bonds? This isn’t a question many investors have had to ask in recent years.

The financial crisis in 2008 cut down most of the market’s insurers, so the chances of finding a newly issued insured muni have been pretty low in recent years. However, that may be changing now that the industry is showing signs of life again.

To be sure, the share of newly issued munis covered by insurance is still small—only around 6%, according to Bloomberg—but that’s up from just 3% in 2013. Before the crisis, nearly half of all newly issued munis were insured.

So although the market is still a far cry from its pre-crisis days, it is growing again. Here are six things to consider before investing:

Continue reading.

Schwab

By Cooper J. Howard

May 4, 2017

As interest rates rise, finding the right fixed-income strategy is crucial

The Federal Reserve is raising interest rates, and there are several questions that savers and bond investors would like answered.

For example, to be blunt: Is my savings account going to pay any worthwhile interest at some point?! (The answer: probably not soon. But there are alternatives.)

If this all sounds familiar, it should: Many bond-market strategists had expected bond yields would be a lot higher by this point in the economic recovery, perhaps even making a savings account desirable. But a climb in rates seems to be getting closer.

With inflation ticking higher, the Fed now anticipates lifting short-term rates more rapidly. Officials also are discussing winding down the Fed’s huge bond portfolio, accumulated during the recession to damp yields. Such a move would eliminate a major source of demand for government bonds, whose prices fall as yields rise.

And meanwhile, Washington lawmakers are talking about tax cuts and infrastructure spending that could stoke growth and lift inflation.

Amid such developments, “you need to be really careful about how you invest the fixed-income part of your portfolio,” says Terri Spath, chief investment officer at Sierra Investment Management in Santa Monica, Calif.

She and others say there are some smarter ways to play this: Avoid putting any cash that might be needed soon into bonds. Keep additional funds around to invest later, at potentially higher rates. Dial back on rate-sensitive holdings, and further limit risk by owning a range of U.S. and foreign bonds.

Here are six questions for savers and those who own bonds or are considering buying them:

1. What risks do rising rates pose for bonds now?

One threat is to short-maturity bond funds and exchange-traded funds, which some investors may think are immune to rate risk. These commonly have average maturities of around two years and aim to generate 1% to 2% in annualized yield.

After raising rates twice since last fall, Fed officials expect to boost rates another five or six times by the end of 2018, lifting the Federal Reserve’s rate target to around 2.25%-2.5% from about 1% now.

Bond yields move the opposite way as prices. Although short-term funds are less affected by yield changes than those that own longer maturities, many have a rate sensitivity of around two. If yields rose by one percentage point, that would result in a 2% decline in principal value—more than an investor would get back in interest paid by such a fund.

“If you are an investor who really can’t stomach any losses, you should be in a money-market fund” where principal value would remain steady, says Emory Zink, analyst at fund-trackers Morningstar Inc.

2. Where can investors get reasonable returns on cash?

Although short-term rates are rising, banks—not the market—decide what rate of interest they will pay on savings. The national average rate today is just 0.08%, and banks will raise rates slowly since doing so will boost their profitability.

Some money-market funds yield closer to 1%. Their yields will rise gradually, though lagging behind the Fed’s rate increases.

For the best combination of yield and safety, investors might consider putting money into a high-yielding, federally insured bank savings account, says Bankrate.com chief financial analyst Greg McBride. Such accounts are offered by virtual institutions that are courting depositors. Two such banks, Goldman Sachs Group Inc.’s GS Bank and the CIT Bank unit of CIT Group, are advertising rates above 1%.

3. Which bonds offer some protection against rising rates?

One way to diversify against U.S. rate risk is with bonds issued in other countries whose rate cycles aren’t in sync with that in the U.S. Raman Srivastava, managing director for global fixed income at Standish Mellon Asset Management Co., cites emerging-markets bonds as among “the more compelling opportunities” after investors fled such bonds several years ago. Yields can top 5%, offering a bigger offset to the impact of rising yields.

Moving lower on the U.S. credit ladder is another solution. High-yield bonds (or junk bonds) issued by companies with weaker credit ratings can yield more than 6%.

But be cautious about loading up on such securities to the exclusion of higher-quality bonds. While higher-yielding bonds are less vulnerable to rising yields, they are very sensitive to worries about defaults and can be volatile, notes Scott Kimball, portfolio manager of BMO TCH Core Plus Bond Fund (BATCX). In 2015, he says, some high-yield bonds issued by energy companies plunged in price during the oil-market swoon.

4. How can investors lock in better income as rates rise?

Traditionally investors did that by building a ladder of bonds having sequential maturities. As the nearest matured, the proceeds were reinvested in a new bond due to mature several years later, when the investor hoped to reinvest at an even higher yield.

Alternatively, an investor could build a ladder with defined-maturity bond ETFs, says David Berman, chief executive of Baltimore-based wealth manager Berman McAleer. Unlike conventional bond ETFs, which periodically buy new bonds to replace maturing ones, defined-maturity ETFs own bonds with closely bunched maturities. After all the bonds mature, the ETF repays principal and interest.

Mr. Berman uses Guggenheim BulletShares ETFs, which are available in either investment-grade or high-yield corporate versions. BlackRock’s iShares unit offers defined-maturity ETFs that own taxable corporate bonds or tax-exempt municipal bonds.

5. What are the alternatives to fixed-rate bond funds?

Floating-rate funds—sometimes called senior-loan or bank-loan funds—can be a good defensive play when rates are rising.

Such funds own loans made by banks to companies with lower credit ratings and yield 4% or more. The rates on the loans periodically adjust up or down, based on changes in a benchmark index such as the London interbank offered rate, or Libor, so a fund’s yield moves higher as rates rise.

One concern is that surging demand for such funds is enabling companies now to get much more lenient borrowing terms, says Frank Ossino, who oversees Virtus Senior Floating Rate Fund (PSFRX) at Newfleet Asset Management, in Hartford, Conn. Mr. Ossino cautions that another downturn eventually could spark defaults on lower-grade loans, denting a fund’s returns. Funds that yield more than peers may own a larger percentage of such loans, he says.

Among senior loan funds that Morningstar rates highly are Eaton Vance Floating-Rate (EVBLX), Lord Abbett Floating Rate (LFRAX) and Fidelity Floating Rate High Income (FFRHX).

6. Are mutual funds or ETFs better at this point in the cycle?

Active managers can reposition a portfolio to trim rate risk, moving to bonds that are less rate-sensitive. But ETFs may be a good choice because they charge much lower management fees—a benefit at times when bond returns are slim by historic standards.

Still, people who plan to buy an ETF need to understand what they are getting, says Josh Jalinski, an adviser in Toms River, N.J. ETFs that focus on certain narrower sectors, such as iShares 20+ Year Treasury Bond ETF (TLT), can be volatile, posing more risk of mistiming a purchase or sale, he says.

Some ETFs hedge against rising rates. They include WisdomTree Barclays Interest Rate Hedged U.S. Aggregate Bond Fund (AGZD), which yields about 2%, and Deutsche X-trackers Investment Grade Bond Interest Rate Hedged ETF (IGIH), which recently yielded about 3¼%.

Hedged funds outperform when rates rise, but may underperform when rates are falling, says Todd Rosenbluth, director of ETF and mutual-fund research at CFRA, a New York-based provider of investment research. “By hedging, you protect against something, but also you can miss something,” he says.

The Wall Street Journal

By Michael A. Pollock

May 7, 2017 10:15 p.m. ET

Mr. Pollock is a writer in Ridgewood, N.J. He can be reached at reports@wsj.com.

The payoff might be years away, and there are risks, but proponents see the trend on their side

Emboldened by President Donald Trump’s campaign promise of a $1 trillion infrastructure-spending package, investors have plowed more than $460 million into related U.S. mutual funds and exchange-traded funds so far this year, according to data from Morningstar Inc.

At the end of the first quarter, the amount sitting in such funds stood at $16.1 billion, up 12% from a year earlier, though the euphoria has eased as the market begins to digest just how much stands in the way of an infrastructure package—from shifting priorities in the White House to opposition in Congress.

Still, those who focus on infrastructure investing say things are looking up, even if it takes a few years for Washington to deliver a big spending package.

Blackstone buys in

The Fixing America’s Surface Transportation (FAST) Act, passed by Congress and signed into law by President Barack Obama at the end of 2015, sets up the next five years of spending for federal transportation projects. Meanwhile, voters approved some $200 billion of infrastructure-related ballot initiatives during November’s election, Mr. Welo says, adding that such projects are as close to a slam dunk as a government-backed project can get.

So while Washington negotiates its spending plans, investors can position themselves to take advantage of these FAST Act-funded efforts, as well as those at the state and local level, the pros say.

Indeed, last month private-equity firm Blackstone Group BX -0.64% LP announced that it was preparing to launch a unit that would invest in toll roads, bridges and other infrastructure projects.

The U.S. isn’t the only country getting ready to write fat checks. Sectors associated with infrastructure have seen valuations creep up globally as governments seek to expand airports, bridges and road in response to growing populations. Many infrastructure ETFs are constructed with this global view in mind, says Brandon Rakszawski, a New York-based product manager at Van Eck Global who oversees the firm’s hard-assets ETF product lines.

“Most infrastructure ETFs are global in nature, so investors need to realize that if they are choosing that option for their portfolios, they may only be getting 40% or so U.S.-specific names,” Mr. Rakszawski says. Taking a global approach can help diversify a portfolio, he says.

Beyond geography, the key to succeeding in this sector is knowing what it means to you, says Mr. Rakszawski.

“It is important for investors to decide what they see as infrastructure—is it energy, transportation, utilities, or some combination of those?” he asks. “Once they decide, they can start to target more specific exposures and products that are going to give them what they want.”

As investors weigh specific subsectors, they need to be mindful of risk.

If you invest in engineering and construction companies, for example, “you need to factor in a certain amount of commodities risk,” because many of the companies also are heavily tied to volatile oil-and-gas or mining-related capital spending, says Andrew J. Wittmann, a Milwaukee-based senior analyst at Robert W. Baird & Co, which manages $171 billion in assets.

Another red flag is turnover within mutual funds and ETFs.

Infrastructure projects are large and slow-moving. Once contracts are awarded for projects, it’s relatively easy to forecast what the next three to five years will look like. Tayfun Icten, a Chicago-based analyst with Morningstar, says a high level of turnover within a fund could signal a manager or strategy that isn’t operating with conviction.

“Investors in infrastructure mutual funds need to be clear about what types of opportunities they are getting access to,” Mr. Icten says.

Trillion watch

So, what of Mr. Trump’s trillion? Fidelity’s Mr. Welo expects to see a more-nuanced approach emerge from Congress. That could mean several billion dollars in project financing annually over the next 10 years, plus changes in tax policy, he says.

“The gas tax could be a key policy area to watch both at the state and federal level as policy makers start looking at ways to pay for these projects.”

Municipal-bond investors may also see a rise in new issuance, as the asset class has historically been the go-to place for project financing. State and local governments have been using low interest rates to refinance existing debt, but issuance isn’t keeping up with maintenance needs or expansion plans.

John Miller, co-head of fixed income and head of the municipal-bond investing team at Nuveen Asset Management in Chicago, says the muni market is showing signs of recovery and default risk is lower.

“Investors who have been skewed toward short duration and high quality can benefit from considering longer durations or slightly lower credit quality in this environment,” he says.

The Wall Street Journal

By Bailey McCann

May 7, 2017 10:09 p.m. ET

Ms. McCann is a writer in New York. She can be reached at reports@wsj.com.

Fitch Ratings-New York-04 May 2017: Water and sewer utilities throughout the country are faced with aging infrastructure and a rather large price tag to rectify it, which could pave the way for substantially more investment in the space, according to Fitch Ratings in a new report.

The California drought, the Flint, Michigan toxic water crisis and cases of elevated lead levels in drinking water across the nation have shed light on the effects of persistent underfunding of capex, delayed system upkeep and shortages of quality water. As such, the EPA estimates roughly $655 billion in capital over the next 20 years is needed for water and wastewater infrastructure. Answering this challenge is the Water Infrastructure Finance and Innovation Act (WIFIA). Modeled after the successful Transportation Infrastructure Finance and Innovation Act of 1998, WIFIA’s overarching goal is to precipitate steady investment in water infrastructure development.

“WIFIA-funded projects can potentially reduce the magnitude of increased costs to end users and temper the need to obtain rate increases related to capital,” said Director Stacey Mawson. “WIFIA can also spur partnerships between the public and private sectors, creating a forum for eliciting innovative proposals and problem solving.” As such, Fitch’s approach to rating WIFIA-funded projects will incorporate perspectives from both its Global Infrastructure and U.S. Public Finance Water and Sewer criteria.

More infrastructure spending brought on by WIFIA means loans will be available at more appealing terms than the financial market, which can help support an investment grade rating on a project that would otherwise be non-investment grade. WIFIA has the potential to fund larger projects for which State Revolving Fund (SRF) loans are hard to procure and smaller municipal utilities that may not have market access. That said, ‘WIFIA’s success will in part depend on timely vetting and executing transactions to leverage the public and private commitment to move projects forward,’ said Senior Director Yvette Dennis.

Fitch Ratings-New York-04 May 2017: Higher interest rates in the coming years should not exert much downward pressure for U.S. public finance and transportation infrastructure, according to Fitch Ratings in a new report.

Fitch’s Economics team expects interest rates to move higher over the next three to four years by approximately 150-300 basis points. This new scenario also calls for real potential U.S. GDP growth and inflation to remain at roughly 2% per year. The U.S. economy’s expected resilience to withstand higher rates represents a significant buffer against negative credit implications. According to Senior Director James Batterman, this outlook should by and large extend into public finance and transportation.

“A growing economy with stable employment implies that retail sales volumes as well as taxes on earned income should not be adversely affected,” said Batterman. “The same growth assumption implies that property values and property tax revenues also may not be greatly impacted.”

The same limited ripple effect should hold true for infrastructure. “Revenues and volumes for airports, seaports and toll roads tend to be a function of the general level of economic activity as well as factors specific to the issuer,” said Batterman.

Higher interest rates do increase the hurdle rate for new investments and the cost of financing. As such, Fitch sees this as more of an analytical consideration for issuers carrying higher leverage that need to take on new debt. Nevertheless, most issuers would likely be able to absorb any extra costs stemming from higher interest rates. Further, higher rates imply greater investment returns on cash holdings.

Downside risk is not out of the realm, however. The most likely culprit would be any increase in interest rates that is too rapid to be absorbed by the market, which would stall the housing market and have much broader implications generally.

Fitch’s ‘Higher U.S. Interest Rate Scenario’ for municipalities and transportation infrastructure is available at ‘www.fitchratings.com’.

Implementation Guide 2017-1

Read the Update.

Read the Update.

Fitch bumped up its negative rating watch listings, but didn’t issue any positive rating watches in Q1.

While the first quarter was the 12th consecutive quarter where upgrades outpaced downgrades, it outpaced them by a smaller percentage than last quarter, according to a new report from Fitch Ratings.

In the fourth quarter of 2016, downgrades were just 25% of all rating actions. In the first quarter of this year, downgrades were 40% (37 of 151 ratings actions).

Jessalynn Moro of Fitch’s U.S. Public Finance group also notes that the downgrades were bigger in terms of dollar value this quarter — mostly due to the downgrade of Illinois.

While upgrades outpaced downgrades, we saw a higher par value on the downgrades this quarter due to the Illinois downgrade of nearly $30 billion. This one downgrade accounted for 68 percent of all downgrades this quarter.
Fitch downgraded Illinois from triple-B-plus to triple B in February. That’s the second lowest investment grade rating.

Fitch also notes in its report that there was a pretty big bump in “rating watch negative” listings — to 28 from 20. The average for the last four quarters is 21.75. No securities were listed as “rating watch positive.”

Positive rating outlooks (a longer-term measure than a ratings “watch”) decreased to 86 from 91 in 4Q16, and negative rating outlooks decreased to 109 from 118.

Barron’s

By Amey Stone

Updated May 8, 2017 12:07 p.m. ET

Now that the commonwealth has filed for court protection, investors in other municipal bonds could start to feel the pain.

When Puerto Rico filed for court protection from creditors—the commonwealth’s own bankruptcy-like process created as part of the financial-rescue law passed last year—the market reaction wasn’t what you might have expected.

Some of Puerto Rico’s municipal bonds actually rose in value, and the broader muni market shrugged. Moody’s saw the filing as positive, in that it will simplify the process of negotiating separately with creditors. S&P Global Ratings saw no impact, partly because it already rates many of the bonds D for default, or close to that level.

It’s true that in some ways, not much has changed. Puerto Rico still owes a staggering $74 billion in debt that it can’t pay and needs to restructure. “People see Puerto Rico as a one-off, although it is a big one-off,” says Mark Taylor, head of municipal research at Alpine Funds. Detroit’s 2013 bankruptcy, the second largest, was just $18 billion in size.

But this isn’t the end of the story. A judge will decide how Puerto Rico’s many creditors will be treated. As the first bankruptcy under the new law, it could be precedent-setting and may eventually affect broader muni prices.

A key question is whether the general-obligation bonds, backed by Puerto Rico’s government, or the Cofina bonds, backed by sales taxes, will get preference in a restructuring. Already, investors have been betting that GO bonds will get preference over Cofinas, causing a downdraft in Cofina pricing. If Cofina’s dedicated sales-tax revenue stream isn’t validated, it could hurt similar bonds with their own revenue streams.

“If that lockbox system [of dedicated sales tax revenue] doesn’t really hold water,” says Taylor, “it could make investors more jaded” about this class of bonds.

John Miller, who heads municipal-bond investing at Nuveen Asset Management, believes any signs of favoritism based on earlier negotiations are irrelevant now that a judge will be calling the shots. But he thinks both types of bonds are due for more downside. The long-term financial plan certified by Puerto Rico’s financial-control board allows for debt repayment of only 24 cents on the dollar over the next 10 years. Puerto Rico’s GO and Cofina bonds trade between 58 and 65 cents on the dollar.

IF PUERTO RICO BONDHOLDERS suffer big losses, says Taylor, it could spill over into the rest of the muni market. He’s surprised how well prices have held up. “There is a lot of potentially unwarranted optimism in there,” he adds.

It’s too soon to know how it will shake out. Jim Murphy, a muni portfolio manager at T. Rowe Price, isn’t sure the accounting backing the control board’s projections is solid. “All these parties are about to fight over the pie, but we don’t even know how big the pie is,” he says.

Another question Puerto Rico’s bankruptcy is raising: Does it open the door for states to file for bankruptcy? Murphy’s view: “It cracks the door a little bit.”

That would clearly be a negative for state munis. But, cautions Richard Daskin of RSD Advisors, “the situation is developing and there are a lot of moving parts.” He still likes insured Puerto Rico paper—since the insurance companies backing those bonds should be able to continue to pay—but warns that uninsured bonds are more like leveraged stocks than bonds. “They go in your risk bucket,” he says.

Taylor thinks it will take two to three years to work through all these issues. The next key decision is for U.S. Supreme Court Chief Justice John Roberts to pick the district court judge who will preside over the case. When that selection is made, investors will try to handicap whether creditors or Puerto Rican citizens are likely to get preferential treatment.

“The judge is going to have a lot of sway because there is no precedent,” says Daskin. And muni investors could be looking at a lot of red ink.

BARRON’S

By AMEY STONE

May 6, 2017

The Municipal Securities Rulemaking Board (MSRB) today released municipal market statistics for the first quarter of 2017 that showed a significant increase in both the number of trades and the par amount traded compared to the first quarter of 2016. The number of municipal securities trades rose 16.2% to 2.63 million trades in the first quarter of 2017 compared to 2.27 million trades during the same period in 2016. That increase puts quarterly trading volume at its highest level since the third quarter of 2013, when 2.93 million trades occurred. The first quarter of 2017 also saw a significant increase in par amount of municipal securities traded compared to the first quarter of 2016, jumping 19% to $765.5 billion, compared to $643.3 billion traded during the same period a year ago.

DALLAS -­­ Transportation advocates, once hopeful about Trump’s promises to go big on infrastructure, are disappointed his tax plan contains no proposals to fund fixes to the nation’s crumbling roads and bridges and instead floats a one­time tax on the repatriated overseas earnings of companies as a way to pay for cutting the corporate tax rate.

Repatriation of overseas corporate earnings through a lower income tax rate had been considered as a potential source for the $200 billion of new direct federal funding that White House officials had said would be part of the president’s $1 trillion, 10­year infrastructure plan.

But the one­-page outline of the tax plan distributed Wednesday night simply promised a “one­time tax on trillions of dollars held overseas” with no mention of infrastructure, indicating that the repatriated revenue could instead help reduce the government’s financial hit from tax cuts in the proposal.

It will be more difficult to find more money for infrastructure investments without the link to corporate tax repatriation, said Carl Davis, research director at the Institute of Taxation and Economic Policy.

“This makes it harder,” Davis said, “Tax cuts have been prioritized over infrastructure funding.”

Transportation proponents have become accustomed to being disappointed by the level of infrastructure investment coming from the federal government, he said.

“I doubt that most advocates are shocked that infrastructure has been deprioritized yet again,” Davis said. “It’s telling that states as varied as California, Indiana, Montana, Tennessee, and Utah have passed increases in their fuel tax rates this year. State lawmakers are taking action even when Congress won’t.”

If President Trump had included infrastructure funding in his plan, it would likely have required paring back the tax cuts, Davis noted.

The proposed tax cuts would significantly reduce federal revenues, further imperiling new transportation funding, he said.

“Federal lawmakers are clearly prioritizing tax cuts at the moment, and that goal is fundamentally inconsistent with investing more in our nation’s infrastructure, or in any other public priority,” Davis said.

The tax proposal is too vague to get much direction from it, said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget.

“It’s the same trade­off as it’s always been,” he said. “If the administration uses $200 billion for tax reform, they can’t use it for infrastructure. My main concern with the single­-page, double­-spaced tax proposal with bullet points is that it would add $5 trillion to the national debt, and without revenue for infrastructure you’d make the revenue hole even deeper by losing all the economic gains that could be provided.”

Meanwhile, the American Public Transportation Association said President Trump’s budget blueprint for fiscal 2018 jeopardizes $38 billion in planned transit projects and could result in economic loses totaling $90 billion.

The ‘skinny’ budget plan released in March would cut off funding next year for a transit grant program that had been expected to help build 53 projects in 23 states, APTA added.

Trump’s 64­page budget blueprint for fiscal 2018 would halt grants from the $2.3 billion per year capital improvement grant program except for those projects already covered by a completed and signed full funding agreement with the Federal Transit Administration.

The budget proposal also would wipe out the $500 million expected in fiscal 2018 for the Transportation Investment Generating Economic Recovery (TIGER) grant program.

The president’s $1 trillion infrastructure plan should include $200 billion for public transportation infrastructure, said Richard White, the acting president of APTA.

It would take nearly $90 billion just to get transit systems into a state of good repair, White said.

“This additional investment is the key to addressing the nation’s aging public transportation infrastructure,” he said

The Bond Buyer

By Jim Watts
Published April 27 2017, 3:30pm EDT

A roundup of money (and other) news governments can use.

GOVERNING.COM

BY LIZ FARMER | APRIL 28, 2017

It’s happened several times in just the last few years. With so many systems severely underfunded, it’s likely that more government employees will to be blindsided.

As John M. Richardson, a pioneer in the study of system dynamics, once put it, “When it comes to the future, there are three types of people: those who let it happen, those who make it happen, and those who wonder what happened.”

That’s as good a way as any to describe what has befallen so many of our state and local government pensions systems, now facing a collective funding shortfall of $5 trillion: legislative bodies that let it happen by creating unsustainable pensions, policymakers who perpetuated the problem by not fully funding their plans, and retirees who have been blindsided, wondering what happened, when their pensions have been slashed.

Consider, for example, the nearly 200 retirees of California’s now-defunct East San Gabriel Valley Human Services Consortium, an employment and job-training agency known as LA Works, who just had their pensions cut by as much as 63 percent. Who’s to blame? Policy leaders who set up the risky pension structure; city governments that didn’t keep up with pension payments; and the California Public Employees’ Retirement System (CalPERS), which did not alert the workers that their employers had fallen behind on their pension payments until this January, just two months before slashing their pensions. It’s hardly surprising that the affected employees are questioning how, after paying into the pension fund for 25-plus years, this could have come to pass.

What’s happening with LA Works’ retirees isn’t a unique situation. CalPERS, whose pension debt stands at $170 billion, just last year drastically cut pension benefits for retirees who worked for the city of Loyalton. Many other cities, and several states, are struggling to keep their heads above water in the face of runaway pension costs.

Think it can’t happen to your city? Think again. Detroit, Mich., and Central Falls, R.I., are polar opposites in many ways, but they have one thing in common: Both slashed their retirees’ pensions when the cities filed for bankruptcy.

Detroit’s was the largest municipal bankruptcy in the nation’s history. After the city filed for bankruptcy protection in 2013, thousands of retirees saw their pensions cut by 4.5 percent, their cost-of-living allowances eliminated and their health-care benefits reduced. Just this past October, after much legal back-and-forth, a federal appeals court rejected the retirees’ challenge to reinstate their full pensions.

Central Falls cut pensions for its 133 retirees by as much as 55 percent when the city filed for bankruptcy in 2011 (although the state later eased the pain by reducing the cuts to 25 percent for the first five years). At the time of its bankruptcy, Central Fall’s pension plan was a staggering $80 million in debt. Retirees who had saved for their entire careers and assumed their pensions were secure suddenly found themselves forced back into the workforce to make ends meet.

The only truly secure guarantee that a public employee has is a fully funded pension system. But that’s a guarantee that’s likely to become rarer as cities face mounting fiscal strains. Of the nation’s 89,000 local governments, some 11,000 have defaulted on bonds at some point in our history. As pension costs continue to escalate, it’s nearly certain that the number of defaults will rise. How lucky do you feel? Will your city run out of money?

All public-sector retirees deserve safe and secure futures, not to be reduced to poverty when their pension plans fail them. Retirement benefits should be sustainable and predictable for current and future public employees. To live up to this expectation, governments need to fully fund their plans.

Today’s pension crisis may be due to policy decisions made years ago, but it’s incumbent upon current policymakers to turn the tide and make their systems sustainable. Public employees and retirees didn’t create this mess, and they shouldn’t be left wondering what happened when the money runs out.

GOVERNING.COM

BY CHUCK REED | APRIL 26, 2017

The City of Cambridge, Massachusetts recently sold $2,000,000 of community-sourced minibonds (the “Community Bonds”) to finance various capital projects, including school building renovations and street and sidewalk improvements. The Community Bonds are referred to as “minibonds” because (a) they were marketed only to residents of the City of Cambridge, (b) minimum denominations were lowered to $1,000 from the customary $5,000 and (c) individual orders were capped at $20,000. The hope of such a sale is to engage residents and to make residents partners in infrastructure investments in the community. Such a sale required an additional publicity campaign in order to engage resident, including “Invest in Cambridge” pamphlets, bus signage and a sign in front of Cambridge City Hall. There were also additional administrative burdens and costs associated with such a sale.

To meet the larger infrastructure needs of the City of Cambridge, the City also sold (on the same day) $56,500,000 of general obligation bonds (the “GO Bonds”) for purposes of sewer and stormwater projects, energy efficiency and street repair. Unlike the Community Bonds, the GO Bonds were sold to more traditional bond investors at a public sale.

Minibonds are not a completely new concept and in fact the same structure was employed many years ago to finance original infrastructure in many communities in this country. In more recent times, Denver, Colorado has used this concept to provide its residents the opportunity to invest in the community in which they live. Minibond sales are planned later this year in Burlington, Vermont, Austin, Texas and Lawrence, Kansas.

Minibonds might be what the new generation of public finance which investors desire.

Last Updated: April 26 2017

Article by Francina J. Brinker

Miles & Stockbridge

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For those of you new to bonds and not generally familiar with financial terms, you may hear the term “yield curve” thrown around and be wondering what it means and why it matters. The yield curve is a chart showing the yield of debt instruments (such as U.S. treasuries or notes) on the y-axis and the maturity (on the x-axis). So why does it matter? It can be a crystal ball into the future of interest rates.

Continue reading.

The Public Finance Tax Blog

By Alexios Hadji on May 1, 2017

Squire Patton Boggs

Amanda Albright, a reporter for Bloomberg Briefs, talks with Joe Mysak about this week’s municipal market news.

Watch video.

Bloomberg

April 27, 2017

Fitch Ratings-New York-26 April 2017: Healthy growth is in the cards for all major U.S. transportation segments despite longer-term questions brought on by shifting economic, trade and fiscal policies, according to Fitch Ratings in its latest U.S. Transportation Trends special report.

International hub airports are set to lead overall airport passenger traffic growth after passenger enplanements rose 3.5% for calendar-year 2016. ‘Growth in passenger enplanements, however, is and will continue to soften as carriers scale back on service additions,’ said Senior Director Seth Lehman. Fitch is projecting 2.5%-3% overall growth for 2017.

Growth among ports throughout the country will likely mirror that of the GDP. Much of the upward movement came from West Coast ports in the second half of last year (1.8% growth year-over-year), while East Coast ports rebounded with 3.4% growth in the second half, but only grew 0.4% overall for the year as compared with 2015. ‘Shifting trade agreements or renegotiated tariffs may affect import/export volumes, though the full effects of these changes will likely extend beyond 2017,’ said Director Emma Griffith.

As for toll roads, Southeast and Southwest facilities should continue to lead in traffic performance similar to 2016 thanks to moderate economic and population growth. ‘Toll road revenues are positioned to grow faster than traffic as many authorities implement policies of inflationary toll increases,’ said Director Tanya Langman.

Also highlighted in the report is a new metric that Fitch has introduced called ‘Peak Recovery’, which supplements Fitch’s peak-to-trough metric and shows how each credit performed in 2016 relative to their pre-recession peak volume. Fitch’s latest ‘U.S. Transportation Trends’ report is available at ‘www.fitchratings.com’ or by clicking on the above link.

Contact:

Seth Lehman (Airports)
Senior Director
+1-212-908-0755
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY, 10004

Emma Griffith (Ports)
Director
+1-212-908-9124

Tanya Langman (Toll Roads)
Director
+1-212-908-0716

Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com.

Additional information is available on www.fitchratings.com

Westinghouse filed for Chapter 11 bankruptcy on March 29. While the company doesn’t have tax-exempt debt, its filing damaged two large public utilities with municipal bonds outstanding. The utilities’ customers will pay higher rates for costly or incomplete projects, which not only causes ratepayer resistance but can make power costs uncompetitive and hurt financial operations.

The two utilities are the Municipal Electricity of Georgia (MEAG) and the South Carolina Public Service Authority, also known as “Santee Cooper”. Each borrower relied on Westinghouse to build four nuclear reactors – two for each utility – on time and within budget. As often happens with nuclear projects, there’ve been construction delays and cost overruns. But the Westinghouse bankruptcy raises the question of whether the facilities will be built at all.

So what happens now? MEAG and Santee Cooper are left with unfinished facilities that cost a lot of money, aren’t producing any power, and may not ever be completed.

There are at least three possible ways for them to proceed:

1. Hope that Westinghouse emerges from bankruptcy in a position to complete the projects,
2. Find another contractor if Westinghouse can’t come through, or
3. Abandon the plants and all the money they’ve spent so far to build them.

With option one, the utilities have to hope that Westinghouse will be able to finish within its latest budget and timeline. Let’s just say that its past performance with these projects doesn’t exactly inspire confidence.

Along the second road, there aren’t a lot of companies around anymore who build nuclear plants. And if you’re one of them, you have to ask yourself whether you want to get involved in a situation as difficult as this. It’s also worth noting that the type of reactor involved, Westinghouse’s AP1000, hasn’t yet been put into service anywhere in the world.

Finally the third route might pose the most risk. In that scenario, you’re asking your customers to pay higher rates for a white elephant. When that happens, ratepayer resistance and lawsuits can follow, draining your balance sheet.

But even if some way is found to complete the plants, ratepayers won’t be happy that they’re paying for what they’ll perceive as your mismanagement and mistakes.

On April 28 MEAG, Santee Cooper, and their partners in building the plants are expected to report updated cost and calendar estimates for project completion. The figures they disclose may well determine which of the three options above they will pursue. Each utility has about $8 billion in long-term debt, and bondholders will be paying close attention to their decisions.

The best-case scenario for bondholders at this point is that both MEAG and Santee Cooper will raise rates in amounts that are sufficient to maintain their existing credit strength.

Forbes

By Greg Clark

APR 26, 2017 @ 11:24 AM

Greg Clark is Debtwire’s Head of Municipal Research. Greg’s career has included positions at a rating agency, broker-dealer, and hedge fund as well as bond insurers and commercial banks. Greg is also a past chair of the National Federation of Municipal Analysts and of the Municipal Analysts Group of New York. He can be reached at greg.clark@debtwire.com.

The sale of bonds and notes next week by U.S. states, cities, schools and other issuers will total $7.5 billion, including a chunk of debt out of Wisconsin, according to Thomson Reuters estimates on Friday. The Regents of the University of California will sell the week’s biggest issue – $1.134 billion of taxable and tax-exempt AA-rated general revenue bonds. Lead underwriter Jefferies has planned a retail presale period for Wednesday ahead of formal pricing on Thursday. Wisconsin has a $403 million general fund annual appropriation refunding bond issue pricing through Wells Fargo Securities on Tuesday. The taxable bonds will carry serial maturities in 2018 through 2033, according to the preliminary official statement. In a separate issue also slated to price Tuesday through J.P. Morgan, Wisconsin will sell $285 million of transportation revenue bonds. The debt has serial maturities from 2020 through 2037. Milwaukee, the state’s biggest city, has scheduled three competitive debt sales for Thursday – $132.2 million of general obligation promissory notes, $120 million of revenue anticipation notes and $18.2 million of taxable GO promissory notes. U.S. municipal bond fund flows were positive for a third-straight week with net inflows of $144.5 million for the week ended April 26, according to Lipper, a unit of Thomson Reuters. That was down from $290.2 million in the previous week.

Reuters

Fri Apr 28, 2017 | 11:38am EDT

(Reporting By Karen Pierog; Editing by Bernard Orr)

The municipal bond tax exemption has a long history of success, having been maintained through two world wars and the Great Depression, as well as the recent Great Recession, and it continues to finance the majority of our nation’s infrastructure needs for state and local governments of all. Members of the Public Finance Network continue have emphasized that tax-exempt municipal bonds have been used to finance over $3 trillion in critical infrastructure including the construction of schools, hospitals, airports, affordable housing, water and sewer facilities, public power utilities, roads and public transit.

In 2015 alone, nearly 12,000 tax-exempt bonds were issued to finance more than $362 billion in infrastructure investments. Through the tax-exemption, the federal government continues to provide critical support for the federal, state and local partnership that develops and maintains essential infrastructure, which it cannot practically replicate by other means.

State and Local Fiscal Facts

Municipal securities are predominantly issued by state and local governments for governmental infrastructure and capital needs purposes, such as the construction or improvement of schools, streets, highways, hospitals, bridges, water and sewer systems, ports, airports and other public works. . Between 2007 and 2016, states, counties, and other local governments invested $3.8 trillion in infrastructure through tax-exempt municipal bonds.

Other facts on municipal bonds:

• The volume of municipal bonds hit $445 billion in 2016
• Over the last 10 years, state and local governments have invested $3.8 trillion in infrastructure through tax-exempt municipal bonds.
• Debt service is typically only about 5 percent of the general fund budgets of state and municipal governments
• Municipal securities are considered to be second only to Treasuries in risk level as an investment instrument.

Download Full Report on State and Local Fiscal Facts: 2017

Access the full Municipal Bond Resource Center.

Taylor Riggs, a contributor to Bloomberg Briefs, talks with Joe Mysak about this week’s municipal market news.

Watch video.

Bloomberg

April 20, 2017

• No price declines for longest stretch since Jan. 2009
• “The price appreciation is not over,” says one investor

Municipal bonds are having an unprecedented winning streak.

The price of benchmark 10-year U.S. state and local government debt has risen — or held steady — every day since March 14, marking the longest stretch without a single daily decline since the Bloomberg index begins in Jan. 2009. The rally pushed yields down by nearly half a percentage point to 2.05 percent by Wednesday, as investors retreat from post-election speculation that President Donald Trump would swiftly push through sweeping infrastructure and tax-cut plans.

The price gains have wiped out much of the losses suffered late last year, when investors wagered that Trump’s fiscal plans would prod the Federal Reserve to raise interest rates more aggressively to head off inflation. The potential for lower tax rates also threatened to reduce demand for municipal bonds, which are largely held by investors seeking income that’s exempt from the U.S. income tax.

Investors braced for “Trump’s policies not only being implemented but also being successful,” said Robert Waas, chief executive officer of RSW Investments, which has more than $2 billion under management. “What you’ve started to see is an unraveling of that as investors have realized it’s not as easy. Now it’s payback time as municipals are having their time in the sun and are outperforming Treasuries.”

The state and local bonds have returned 2.5 percent this year, nearly a full percentage point more than Treasuries, according to Bloomberg Barclays indexes.

The sentiment began shifting after the Republican-led Congress failed to repeal the Affordable Care Act, said Christopher Sperry, a vice president and portfolio manager at Franklin Templeton. Republicans’ inability to act on one of their long-stated priorities raised doubts that Trump’s administration will be able to tackle the arguably more difficult challenge of rewriting the tax code.

“Here you have an administration with both houses of Congress, and it’s certainly not going to be as easy for these reflationary fiscal policies as everybody thought,” Sperry said.

The municipal sector’s strong run may still have legs, according to Jeffrey Lipton, the head of municipal research at Oppenheimer & Co. “The desire for haven assets is likely to be more pronounced throughout the foreseeable future as compared to the more extended demand for risk assets that emerged following the election,” he said.

Although yields have tumbled, they remain above where they were before Trump’s election. RSW’s Waas said there may be more upside ahead: He anticipates that the yield on 10-year Treasuries — now about 2.17 percent — will slip below 2 percent by the year’s end. He estimated that municipal bond yields should be about 90 percent of Treasuries, given the tax breaks — or less than 1.8 percent.

“The price appreciation is not over,” he said. “There is more price appreciation in our future.”

Bloomberg Markets

by Rebecca Spalding and Amanda Albright

April 19, 2017, 2:00 AM PDT April 19, 2017, 7:16 AM PDT

• Mobilitie seeks sites for thousands of antennas and towers
• Fights with towns part of dash to fast 5G networks nationwide

The people of Papillion, Nebraska like the idea of faster, more powerful wireless service in their town of 19,000 — but not if it means they have to agree to an 11-story tower looming over a church. City officials rejected that proposal and three others from Mobilitie LLC, a California company that installs the infrastructure needed for next generation 5G wireless service.

“They didn’t give us any reason why they chose a place,” said Papillion spokesman Trenton Albers. “It just seemed like they put a pin on a map somewhere.”

The Omaha suburb is among places where Mobilitie’s demands to use public land for antennas and towers have raised hackles with local officials, in disputes that seem likely to grow in number as ever more towers and antennas are erected to feed the mobile boom.

Mobilitie says some localities obstruct its work, and it wants the U.S. Federal Communications Commission to impose restrictions on how much towns and cities can charge for allowing it attach antennas to streetlight poles, or for installing towers up to 120 feet tall in downtowns and neighborhoods. Fees can range from several hundred to several thousand dollars a year, depending on size and location.

The FCC on Thursday agreed to study the issue.

Some towns say Mobilitie, which works with Sprint Corp. and others, files poorly drafted applications and falsely claims connection rights as a utility on par with electricity and phone companies. Papillion, for instance, told the FCC that Mobilitie’s applications were “completely illogical” and ignored local circumstances.

Mobilitie Chief Executive Officer Gary Jabara says the company gets good cooperation from most towns and cities, and needs help to surmount problems in mainly smaller places that unreasonably hike fees to take advantage of deep-pocketed mobile carriers.

“They’re just greedy,” Jabara said in an interview April 17. “They just put their hands out and say, ‘Hey, AT&T, Verizon, T-Mobile, we want thousands’” of dollars in fees to attach antennas to utility poles.

As for the criticism about Mobilitie claiming rights as a utility, Jabara said, “We haven’t misrepresented ourselves anywhere.”

The conflict pits communities anxious to preserve streetscapes against mobile companies eager to build 5G networks for a coming era of web-connected cars, houses and appliances. The extra-fast service will ride on frequencies that carry a lot of information but don’t travel very far. Networks will use antennas numbering in the hundreds of thousands, perhaps millions. They’ll be closer together, and closer to shops and homes than today’s arrays atop cell towers.

Mobilitie has asked the FCC to limit fees municipalities can charge for attaching suitcase-sized antennas to structures such as light poles, or for accepting new towers.

The agency on Thursday asked for comments on Mobilitie’s request as it advanced rules to remove barriers to wireless broadband deployment. Commissioner Michael O’Rielly, a member of the agency’s Republican majority, said many localities act in good faith, “but bad actors are ruining it for everyone.”

The biggest wireless providers have embraced Mobilitie’s position. They say high fees threaten progress toward the new networks. They’ve also asked for tighter deadlines for local authorities to consider applications.

Cities including New York and San Francisco have pushed back, arguing that existing procedures are working just fine, and that local governments shouldn’t be required to make municipal assets available for use by wireless carriers.

The disputes could grow as the U.S. prepares for a fifth generation of wireless technology. Proponents sketch a world of ubiquitous mobile broadband connections. “5G will instantly connect hospitals with ambulances, help manage water and energy consumption, and alert first-responders in real time,” according to the CTIA wireless trade group that represents the top four U.S. carriers: AT&T Inc., Verizon Communications Inc., T-Mobile US Inc. and Sprint.

Federal regulators have signaled impatience with local authorities.

“Unreasonably high costs and excessive delays to access poles and costly and cumbersome permitting processes can make it extremely difficult to deploy infrastructure,” FCC Chairman Ajit Pai said Thursday. Last year he said the agency “must aggressively use its legal authority to make sure that local governments don’t stand in the way.”

Kentucky Derby

Closely-held Mobilitie was founded in 2004 by Jabara, a former partner at Deloitte, where he oversaw negotiations for wireless infrastructure on behalf of major wireless carriers, according to the company’s website. Mobilitie describes itself as a real estate company in filings with regulators in its home state of California.

The company also installs wireless networks for sporting venues such as stadiums and Churchill Downs, home of the Kentucky Derby. Mobilitie, based in Newport Beach, California has attracted investment from CIT Group Inc. and TD Securities USA LLC, and raised $1.1 billion in 2012 from a sale of towers and other assets to SBA Communications Corp. The company doesn’t disclose its revenue or number of employees, Jabara said. It works with all four major wireless carriers, he said.

Along the way Mobilitie has attracted criticism from several communities:

• In Denison, Texas, officials said Mobilitie workers without proper authorization erected two 80-foot towers on public land, including a spot right across from the city hall; the town forced Mobilitie to take the towers down. “Very dark of night, stealthy” deployment, said city manager Jud Rex. Mobilitie said it received authorization from a utility coordinator identified by the city.
• In Michigan and Minnesota, state utility regulators got so many inquiries and complaints about Mobilitie that each posted a notice on an official website, making clear the company didn’t have automatic rights to plant poles on public land. “Certainly, like investor-owned utilities, we have rights,” Jabara said.
• Mobilitie has falsely claimed it has legal rights to use public property, and has sought to bolster that impression by filing under at least 17 names that use “Utility Pole Authority,” such as Alaska Utility Pole Authority or Florida Utility Pole Authority, municipalities including Los Angeles, Boston and Portland, Oregon, said in an FCC filing.

“Frankly, not everybody can pronounce our name,” Jabara said. “Sometimes it’s just easier to work with the cities that way.”

Jabara said traditional permitting practices that include intensive review of each site pose “an impossible hurdle” in cost and time. He likened mobile connectivity to water and electricity supplies.

“We’re not asking for anything different from how other essential services are treated by cities,” Jabara said. “Nobody wants to force the cities to do something other than what they have done for essential services for years.”

Cities that overcharge include San Jose, California, which assesses an annual fee of $7,210, or roughly 10 times the average national price of $730 per site, according to information compiled by Mobilitie.

San Jose

San Jose officials disputed that figure, saying the cost is typically $314. Fees range from $4,200 to $8,000 for a large new pole, although in most districts costs are $2,500 to $3,000 and smaller poles are used, said Martina Davis, a supervising planner for the city. “San Jose is keenly interested in expanding broadband,” said Cheryl Wessling, a city spokeswoman.

CTIA, the trade group, said in a filing that some places have simply prohibited new wireless installations in rights-of-way. It asked for an end to moratoria, and said the FCC should shorten the time for decisions on applications to 60-to-90 days, compared with the current deadlines of 90-to-150 days.

No. 4 U.S. wireless carrier Sprint, too, told the FCC it supports Mobilitie’s petition. The Overland Park, Kansas-based company is attaching small-cell antennas to rooftops, street lamps and utility poles to saturate areas with signal coverage. It told the FCC that it “actively partners” with Mobilitie and didn’t provide details of the arrangement.

‘Work Closely’

Adrienne Norton, a Sprint spokeswoman, said the company doesn’t disclose deployment figures. “We work closely with every city to understand and address their unique issues,” Norton said in an email. “We expect all of our business partners to do the same.”

Critics say Mobilitie is simply leveraging a public resource for private gain.

“They’re looking for the low-hanging fruit” in small towns with part-time code officers, said Dick Comi, a founder of the Center for Municipal Solutions that advises localities in their dealings with telecommunications service providers. “It’s very disconcerting to the communities.”

“If you can go out onto public land it’s much easier because you’re dealing with one entity,” said Steve Traylor, executive director of the National Association of Telecommunications Officers and Advisors, a group for local government officials that opposes Mobilitie’s request. “Now they want to say, ‘We want it really, really cheap.’ ”

Proponents of easing permit processes have said the antennas for 5G, often called small cells, are far less intrusive than cell towers –“literally the size of a pizza box,” a CTIA official told Congress in April — and can go on existing structures.

That argument doesn’t wash with Traylor. He noted that Mobilitie installs poles. “Is Mobilitie’s 120-foot tower a small cell?,” he asked. “Is a 50-foot tower? That is one big pizza box.”

Bloomberg Politics

by Todd Shields

April 20, 2017, 2:00 AM PDT April 20, 2017, 1:28 PM PDT

Congress could overturn a rule that allows states to create private-sector retirement programs. But it only has a limited time to do it.

Late last month, Congress voted to overturn an Obama-era rule that cleared the way for cities to create retirement programs for private-sector workers that didn’t have one through their employer. But a similar resolution targeting the rule as it applies to states is stuck.

For the past three weeks, that resolution has lingered in uncertainty as the Senate stalls on taking an up or down vote. Many believe that signals an opportunity. “Based on the conversations we’ve had with staff and colleagues working on this,” says Cristina Martin Firvida of AARP, which supports the Obama-era regulation, “I think there are a number of senators who still have a lot of questions about the state rule.”

The rule, which was issued by the Department of Labor, reaffirmed cities’ and states’ legal right to help support private-sector savings programs for small businesses. Seven states are implementing such programs, while another dozen states and cities are considering them.

Called Secure Choice or Work-and-Save, the programs require most employers that don’t currently offer a pre-tax retirement savings program to automatically enroll employees into one. They run independently from the state, employers don’t contribute and employees can opt out at any time. The goal is to close what many feel is a retirement security gap among working Americans: Half of private-sector workers don’t have an employer-sponsored retirement plan, and only a small percentage of those 57 million people have saved enough on their own to retire.

Studies have shown that these programs don’t just help the individual but the states too. A recent analysis by Segal Consulting found that if all workers gain access to retirement plans, then states would save big on future Medicaid costs because vulnerable households would be removed from the poverty rolls by the time they retire. In the first 10 years after a retirement savings plan is introduced, 15 states would save more than $100 billion in Medicaid payments. California and New York alone would save more than $1.1 billion.

But in February, the House quickly passed two resolutions that overturned the Labor Department rule as it applied to cities and states. The Senate approved the resolution for cities a few weeks later, and it was signed by President Trump this month.

Even if the Senate overturns the state rule, it’s unclear if it would impact those places that have already approved a Secure Choice program. Sarah Mysiewicz Gill, senior legislative representative for AARP, says most of these places approved their plans before the Labor Department clarified the rule last year. One such place, Oregon, is still moving ahead with its plans to launch a preliminary version in July.

Still, overturning the rule would open states to the possibility of lawsuits. The Labor Department rule exempted Secure Choice programs from the federal Employee Retirement Income Security Act, which governs private retirement plans and requires certain legal and financial protections for plan enrollees. In other words, someone could sue a state for allowing private-sector retirement programs that don’t have the same fiduciary protections for enrollees that traditional, employer-sponsored plans have.

On top of that, many are worried that a rejection from Congress could have a chilling effect on the growth of such programs. That’s already happened in Montana. A day after the U.S. Senate overturned the rule for cities, the state legislature reversed course and voted down a proposal to create a statewide Secure Choice program. “There was a belief that the city rule impacted the state,” says Gill.

Advocates for Secure Choice say the reason the Senate hasn’t voted to overturn the state rule yet is likely ideological. During the debate this year on health care, those that wanted to repeal the Affordable Care Act argued that states should have more control over their own health systems. Voting to repeal a rule that gives states more flexibility when it comes to retirement saving programs would be in direct conflict with that idea.

“I think there are a number of senators who have a somewhat cautious feeling about voting for this because it does fly in the face of states’ rights,” says Diane Oakley, executive director of the National Institute on Retirement Security.

Unlike most things in Congress, this uncertainty for states does have a deadline. The resolutions are subject to the Congressional Review Act, so if the Senate does not follow the House and vote to reverse the rule by mid-May, it will stand.

GOVERNING.COM

BY LIZ FARMER | APRIL 19, 2017

About the Report

A quarterly snapshot containing statistics and graphs on the U.S. capital markets, including issuance, trading volume and outstanding data broken down by asset class.

Summary

Long-term securities issuance totaled $1.85 trillion in 1Q’17, a 15.5 percent increase from $1.60 trillion in 4Q’16 and an 11.3 percent increase year-over-year. Treasury, corporate, agency and equity securities experienced increases q-o-q in the first quarter, while municipal, mortgage-related, and asset-backed securities experienced declines.

View the Report.

Washington, D.C. – In the middle of Community Development Week (April 17-22), mayors and local leaders across the country today lifted their voices in support of the many accomplishments of the Community Development Block Grant (CDBG) program and its ability to positively impact residents and transform communities.

On a national press conference call today with reporters, officials vowed to fight Administration plans to eliminate the CDBG program in next year’s federal budget explaining that the program, which is celebrating 40 years, has been effective and has enjoyed a bipartisan legacy.

Newton (MA) Setti Warren, who Chairs the Conference’s Community Development and Housing Committee said on today’s call, “Simply put, this proposal to eliminate CDBG funds would make our cities and communities less safe, less healthy and more expensive to live in. Mayors across the country are dismayed and extremely concerned to see these steep cuts proposed at HUD. The CDBG program provides so many with vital resources; and in this age of economic inequality, this program helps to build a foundation of economic opportunity. … At a time when cities are continuing to struggle to make ends meet, these funds are critical and cutting them would be a disaster. … It is our ask that the Administration reconsider this proposal and we urge Secretary Carson and his staff work with us and visit our communities to see the positive effects of that CDBG funds are making across the country.”

As the most flexible stream of federal dollars allocated directly to local governments that can be used for broad purposes, Community Development Block Grants touch the lives of nearly every American in some fashion. Administered through the Department of Housing and Urban Development, CDBG funds reach more than 7,000 rural, suburban and urban communities, which rely on the funding to enhance the lives of residents, namely low and moderate income people, in a wide variety of ways, many innovative – including housing investments, public infrastructure improvements, enhanced public safety services, employment training, as well as services for seniors, youth and the disabled.

Conference Second Vice President Columbia (SC) Mayor Steve Benjamin said, “The President’s proposal is really the elimination of time-tested and effective government grant programs. Mayors are simply asking for the tax dollars that we send to Washington to be repatriated home so we can give working families an opportunity to live the American dream in the city of their choice. The President’s proposal is unacceptable and would hamstring local development when our cities and citizens can least afford it. We are appealing to the Congress to reject this proposal as wrong-headed and harmful to America’s communities.”

Benjamin also discussed local actions in Columbia to support the CDBG program and explained that mayors across the country are showing their support for the CDBG in a variety of ways including local events, proclamations and social media using the hashtag #Fight4CDBG.

Piscataway (NJ) Mayor Brian Wahler, who serves on the Conference’s Advisory Board, stressed the economic impact of CDBG funds on communities. “Most people do not realize that CDBG funds allow cities and towns to raise revenue for infrastructure. We can actually prime local economies for growth by leveraging these public dollars to raise private funding by using the CDBG as down payments on much larger projects. This program has experienced very few hiccups over the years, and is probably one of the easiest ways to make major infrastructure upgrades and create jobs. Targeting this program for elimination simply doesn’t make sense.”

Tarrant County (TX) Commissioner Roy Charles Books who serves as First Vice President of The National Association of Counties explained that CDBG funds are just as critical to counties across the United States as they are to cities, said, “This block grant encourages partnerships between the federal and local government, non-profits and private industry to focus on community revitalization, infrastructure rehabilitation, affordable housing, and public services. Through CDBG, we are expanding local investment and economic development efforts in our community.”

“CDBG continues to be one of the most powerful tools we have in the community development toolbox. I have long championed this program and I will continue to do so. We are asking Congress to ensure funding at current levels that are essential to our counties, neighborhoods and communities all over the United States,” he continued.

National Community Development Association President Shreveport (LA) C.D. Director Bonnie Moore, explained the origins of Community Development Week, “We are now celebrating 43 years of the Community Block Grant program. This program has had significant impact on community revitalization and renewal efforts throughout many low-income communities and without it we would be have very limited resources to help our poorest and most vulnerable residents. Over 300 jurisdictions are participating in Community Development Week to educate both community and our Congressional members on the many benefits of the CDBG program.”

USCM CEO & Executive Director Tom Cochran noted that the Conference has launched a fierce fight to protect this program from being eliminated. “We are encouraging mayors to sign onto a bipartisan letter to Congress in support of the CDBG and are also seeking mayoral responses for a USCM survey on the varied uses of CDBG funds,” said Cochran.

“We intend to show why CDBG funds are vital to so many urban, suburban and rural communities.

Because of the program’s effectiveness, this campaign has garnered support among small businesses and non-profit organizations in communities across the country. We are in this effort to win it.”

The United States Conference of Mayors

April 19, 2017

Trump wants to eliminate the program. But advocates argue it just needs to be reformed.

Local officials describe the 43-year-old federal Community Development Block Grant (CDBG) program as “the heart, lungs and backbone of cities and counties.” It provides municipalities all around the country with money for projects that help the economy and lower-income residents.

Over the years, however, CDBG funding has sharply declined and the number of places taking from the shrinking pot has risen. The result, critics say, is a weakened program that makes little impact and sometimes aids wealthier communities that don’t need the help. President Obama tried to shrink and redesign the program. Now President Trump wants to eliminate it altogether.

Continue reading.

GOVERNING.COM

BY J.B. WOGAN | APRIL 18, 2017

Their drive to make a meaningful impact could provide the public sector a new pool of investors.

Forty-five years ago, two novice Washington Post reporters unraveled the biggest political scandal in a generation. As depicted in the thriller All the President’s Men, a shadowy informant known only as Deep Throat — 30 years later revealed to be longtime civil servant Mark Felt — kept the young Bob Woodward and Carl Bernstein in the game by instructing them to “follow the money.”

Today, Deep Throat might instead say, “Follow the millennials.” That’s because JP Morgan estimates Americans ages 25 to 35 will invest a trillion dollars over the next five years. In the coming three decades baby boomers will turn over $30 trillion in assets to their millennial children and grandchildren, according to an Accenture-CNBC study. And that’s just in the U.S.

Even more noteworthy is just how differently millennials think about investing. A survey by Standard Life Investments showed that 65 percent of millennials care more about social and environmental issues than they care about investment returns. That’s compared to less than half of 35- to 44-year-olds and less than one-third of those over 45. Given these trends, it should be no surprise that today every 1 in 5 dollars under professional management is allocated based on the principles of socially responsible investing, according to the Forum for Sustainable and Responsible Investment. “Doing well while doing good” is quickly becoming a mainstream investment strategy.

State and local finance managers have good reason to worry about this trend. Municipal bonds don’t offer enticing returns compared to stocks and other investments. But perhaps more pertinent, sewers, roads and tunnels don’t have the same exotic appeal as microloans to Indonesian coffee farmers. And Congress is talking openly about ending municipal bonds’ cherished federal tax exemption. That last change would make infrastructure projects even more difficult to finance.

But some of the early signs show that “impact investing” is a wave that states and localities can in fact surf. Consider this example. Seattle Northwest Asset Management (SNWAM), a national leader in impact investing, maintains a “gender equity portfolio” product that’s popular with its retail clients. Many impact investors want their money to support organizations that offer equal pay for equal work, family-friendly work environments and other policies designed to promote greater gender equity.

One of the bonds issued under the portfolio is from the Oregon Housing and Community Services Department (OHCS). In Oregon, 40 percent of single mothers live below the poverty level. It follows then that investments in affordable housing and other OHCS programs deliver outsized benefits to women. The investment is made more attractive by the fact that the OHCS director and a majority of its governing body are female. Most for-profit entities can’t come close to that kind of impact on gender equity, and most nonprofits that do aren’t open for investment.

That’s just one of the many opportunities SNWAM and other advisers offer their impact investor clients. New portfolios that cover concerns like climate change, environmental conservation, public education and so on are chock-full of other opportunities to invest in states and localities.

Social impact investing’s movement from the fringe to the mainstream has a lot to do with the growth of “impact ratings” as well. Traditional credit rating agencies like Moody’s, S&P and Fitch just tell investors the likelihood they’ll get their money back, and their ratings are based on a government’s financial health, tax base and economic outlook. But impact credit rating agencies tell investors whether an investment is consistent with their social impact objectives. HIP Investor Ratings of San Francisco is one of the largest of these agencies. Its ratings criteria focus on “health, wealth, earth, equality and trust.” Many social impact portfolios won’t include a government’s bonds without a four- or five-star HIP rating. Going forward, this means measurables like public school graduation rates, minority unemployment trends and Environmental Protection Agency water quality scores, among others, might be just as important as tax collections and reserve funds.

Fortunately, most states and localities are good impact investments. If they tell their story correctly, they’ll have access to a new and robust pool of potential investors. And perhaps more important, they’ll help enlighten a new generation to the essential, often unnoticed high-impact work they perform every day.

GOVERNING.COM

BY JUSTIN MARLOWE | APRIL 2017

A roundup of money (and other) news governments can use.

GOVERNING.COM

BY LIZ FARMER | APRIL 21, 2017

Bipartisan support is growing on Capitol Hill and beyond to accelerate carbon capture deployment on power plants and industrial sources like steel and cement plants. The first week of April saw bipartisan bills in both the Senate and House to help unleash private capital to scale up more carbon capture projects to promote energy independence and reduce emissions.Government Shutdown Continues Into Weekend

The Carbon Capture Improvement Act, introduced by Senators Rob Portman (R-OH) and Michael Bennet (D-CO), would authorize states to use private activity bonds to help finance carbon capture equipment. A companion bill was introduced in the House by Representatives Carlos Curbelo (R-FL) and Marc Veasey (D-TX).

Private activity bonds are widely used to develop U.S. infrastructure, such as airports and water and sewer projects. The bonds reduce the costs of financing because interest payments to bondholders are exempt from federal tax and the bonds typically have longer repayment terms than bank debt. The legislation would promote higher rates of carbon capture by requiring projects to capture and inject at least 65 percent of carbon dioxide (CO2) to be eligible for 100 percent financing, with lesser capture amounts eligible for financing on a pro-rated basis.

Support for these bills comes from lawmakers from both parties representing different regions of the country who all share a common interest in increasing the production of domestic energy resources and reducing carbon emissions.

This broad consensus is reflected in the makeup of a coalition convened by the Center for Climate and Energy Solutions and the Great Plains Institute. The National Enhanced Oil Recovery Initiative (NEORI) brings together coal, oil and gas, electric power, ethanol, chemical and energy technology companies, labor unions, and national environmental organizations dedicated to expanding deployment of carbon capture as an energy, economic, and environmental solution.

Coalition members share a common goal of improved financing policies to accelerate carbon capture deployment. These policies include providing access to private activity bonds and strengthening and extending the Section 45Q tax credit for carbon dioxide sequestration.

Section 45Q incentivizes capturing CO2 from power and industrial sources for use in enhanced oil recovery (CO2-EOR), a decades-old process that produces domestic oil from existing fields, while safely and permanently storing billions of tons of CO2. Together, these incentives could help create conditions like those that enabled wind and solar energy to speed deployment, grow U.S. energy sector jobs, cut energy costs, and reduce emissions.

The Western Governors Association and governors from both parties in Arkansas, Montana, and Wyoming have publicly called for federal incentives for carbon capture technology. This growing support comes on top of fresh examples of successful carbon capture deployment in the U.S.

• In January, NRG began operating the first U.S. retrofit of a coal-fired power plant and the largest of its kind in the world. The Petra Nova project, which came in on time and under budget, will capture 90 percent of the CO2 from a 240 MW slipstream from the existing WA Parish plant near Houston, Texas. The approximately 1.6 million tons of CO2 it will capture annually is used for carbon dioxide enhanced oil recovery at an existing oil field nearby and stored underground.
• In April, the Archer Daniels Midland ethanol plant in Decatur, Illinois, became the world’s first commercial-scale biofuels facility with carbon capture technology. The Illinois Industrial Carbon Capture and Storage project will capture and store more than 1 million tons of CO2 in Mount Simon Sandstone.

Over a dozen commercial-scale carbon capture, use and storage projects are operating in the U.S., including at natural gas processing facilities, fertilizer plants, and ethanol plants. But many more are needed. Looking ahead, there is a significant opportunity in 2017 for policymakers to build on the growing momentum and bipartisan interest in supporting carbon capture technology as a key strategy to increase American energy independence and reduce carbon emissions.

BREAKING ENERGY

By FATIMA MARIA AHMAD – SOLUTIONS FELLOW, CENTER FOR CLIMATE AND ENERGY SOLUTIONS (C2ES)

on April 18, 2017 at 1:50 AM

Report prepared by CSG Research Managing Partner, George Friedlander.

Executive summary:

A lot has been written about what a new Federal infrastructure plan might look like, and “might” is the key word, because there is such uncertainty as to what the Administration or Congress will agree on once actual policymaking begins. In this first of many anticipated discussions of the topic, we provide a set of “guidelines” as to policy issues that lawmakers need to consider when developing any plan to increase infrastructure investment. To start off, there continues to be vat confusion between the process of “financing” a given infrastructure activity, and the process of “funding.” Availability of investible monies for a project—financing—is vast. What state and local governments need is additional access to funding: support for payment for a project, or a means to reduce the amount paid annually on debt issued to pay for the project.

Continue reading.

DALLAS ­­- The effort to determine how to pay for the restoration of America’s crumbling roads and bridges is being hindered by the failure of policymakers to distinguish between the funding and the financing of infrastructure projects, according to veteran municipal market strategist George Friedlander.

“Access to financing is clearly not the problem, while access to funding is a severe and — if anything — accelerating problem that even a $1 trillion federal program over 10 years is unlikely to ameliorate,” Friedlander wrote in a paper presented Monday at a closed­-door infrastructure roundtable sponsored by the Municipal Securities Rulemaking Board.

The availability of investable capital for a project — the financing — is vast but what state and local governments need is help with paying for a project or reducing the cost of the debt issued for the project, wrote Friedlander, a managing partner at Court Street Group Research. He joined the group in late 2015 after some 40 years with Citigroup. He currently serves as chairman of the Municipal Bonds for America Coalition’s technical advisory committee.

“Sources of capital, no matter how vast, simply do not provide funding,” he wrote in the paper.
“They provide financing.”

Recent statements by Transportation Secretary Elaine Chao that the main cause of delays in infrastructure projects is overbearing regulations rather than a lack of private capital is “scary wrong,” wrote Friedlander.

“It confuses the availability of investable funds — financing — with the availability of resources to pay for a project or to repay debt issued to finance a project — funding,” he pointed out.

The first step toward renewal should be to reinforce and support those programs that have been
effective in funding infrastructure, such as the Highway Trust Fund, he wrote.

“To be sure, more spending is needed, and in some cases, achieving this goal will require significant additional federal financial support,” he wrote. “However, that support needs to be incremental over successful existing structures, not a replacement for them.”

Any new strategy to boost spending in President Donald Trump’s infrastructure program would not
have the sort of project sorting and selection mechanism provided by the tax­exempt bond market,
Friedlander noted.

The $137 billion of federal tax credits in the Trump infrastructure plan are unlikely to stimulate $1 trillion of private investments in revenue­-producing projects as proposed, he wrote.

The revenues needed to repay private investors in a P3 project are the same ones that would be used to pay bond debt service and operating expenses, he noted.

“There are vast numbers of projects that are simply not supportable by user fees,” Friedlander wrote.

“The efficiency of the tax­-exemption as a way of disbursing financial support for projects remains vastly greater than certain critics would suggest.”

Alternative financing mechanisms such as public­-private partnerships and bank loans have their place but smaller issuers are at a distinct disadvantage to larger municipalities in accessing these, he wrote in the paper.

“While there may be ways to strengthen and sharpen the operations of the municipal market through the incorporation of alternative sources of financing, the simple fact is there is no viable substitute to municipal bonds,” he wrote.

A new program similar to the Obama administration’s stimulus­-era Build America Bonds would be a useful taxable complement to tax­-exempt bonds in funding infrastructure, according to Friedlander.

“More than $150 billion of BABs were issued and the taxable nature of the bonds opened­-up the market to nontraditional investors, such as pension funds and insurance companies as well as foreign investors,” he noted.

If the Trump administration and Congress are serious about increased spending on infrastructure, they must figure out how to make state and local governments more enthusiastic about participating in the funding, Friedlander wrote.

New­-money issuance by states and local governments, when adjusted for inflation, has virtually collapsed, he noted.

“On a net basis, state and local governments haven’t borrowed a nickel since the beginning of 2010, while borrowing in other non­-financial sectors of the U.S. economy has continued to pile up,” Friedlander wrote.

The need to cover rapidly growing pension liabilities will quickly diminish the capacity of many states and cities to fund infrastructure, according to Friedlander.

Trump said in an address on Tuesday in Kenosha, Wis., that an infrastructure bill would be ready soon that could be linked to tax reform efforts but provided no details.

“Infrastructure. Big infrastructure bill,” Trump said. “Probably use it with something else that’s a little bit harder to get approved in order to get that approved. But infrastructure is coming, and it’s coming fast.”

Congressional Democrats will be reluctant to go along with any tax reform measures until Trump releases his income tax returns, warned Senate Minority Leader Charles Schumer, D­-N.Y.

“Everyone is going to jump to conclusions that he is benefiting and maybe that’s the reason he is doing it,” Schumer said.

The Transportation Department said Tuesday it would create a new infrastructure advisory post to oversee implementation of Trump’s priorities. Secretary Chao is expected to name James Ray, a principal at KPMG, as senior adviser on infrastructure.

The Bond Buyer

By Jim Watts

Published April 19 2017, 2:48pm EDT

Public/private partnerships (PPPs) — collaborations between the public and private sectors—are increasingly important vehicles to facilitate high-quality development and redevelopment and creation of public facilities and infrastructure.

Though PPPs are not new, they are being used more widely in a variety of new contexts and are evolving to take more extensive and complicated forms of shared risk and responsibility. These changes will accelerate if the federal government moves forward with broad public investment to modernize infrastructure through the use of tax credits to engage the private sector.

There is a very good chance that the projects that will make a developer most proud in the future will involve a greater public role. Thus, it is timely to reexamine public/private partnerships and their particular challenges.

Key Activities Using PPPs

A number of key types of development activity increasingly use PPPs.

Redevelopment. Redevelopment has long been a public/private enterprise, with public sector engagement primarily involving land acquisition and gap financing. But much has changed since the 1950s and 1960s, when urban renewal programs focused directly on blight removal. Today, redevelopment encompasses such projects as transit-oriented development on underused publicly owned real property (such as surface parking lots surrounding mass transit infrastructure) and mixed-use development of railroad properties and former industrial land, military bases, and decommissioned airports, as well as other infill opportunities.

The early urban renewal programs were followed in the late 1970s by Urban Development Action Grants (UDAGs), which still maintained a strong federal role in urban redevelopment but required developers and localities to have a meeting of the minds on the project to be built.

Over time, the direct federal role in redevelopment has diminished, being replaced by incentives such as tax increment financing; tax abatement/payments in lieu of taxes (PILOT); historic, low-income, and New Markets tax credits; and various forms of community improvement district mechanisms. Municipal bond financing is a frequent companion to these programs. Such financing requires detailed underwriting of feasibility to determine if the new development will be able to pay for itself with the aid of such mechanisms.

Infrastructure development. Beyond the traditional requirements of off-site improvements such as traffic mitigation, infrastructure development has largely become the responsibility of the developer as a prerequisite for obtaining entitlements for projects.

The obligations, often involving extension of public infrastructure systems such as those handling water and wastewater, may require the developer to advance funds and use recapture agreements to recover its investment, adding a layer of public/private engagement to the process. Privately owned water systems are common, and developer financing with public approval of systems adds new complexity.

Again, public/private vehicles such as community improvement districts may replace or backstop the role of homeowners associations, adding a new layer of public sector involvement and approvals.

Public and community facilities. Public and community facilities have become more complex and now are more likely to involve public, private, and not-for-profit entities in their development and financing. Where once public bodies may have used a design-build/sale-leaseback arrangement to tap private expertise and financing for a public facility, these arrangements have evolved to include private responsibility for operations and maintenance in exchange for an “availability payment” from the public entity.

Community centers, charter schools, training centers, museums, libraries, health centers, and theaters, among others, now may be developed by not-for-profit entities using New Markets Tax Credits layered with areawide tax increment financing funds, or similar funding mechanisms. They may also use tax-exempt bonds as part of the financing.

Major transit and transportation facilities. Increasingly development of transit and transportation facilities has relied on mixed private/public financing derived from fares and tolls supplemented by tax increment financing, special assessments, or community improvement districts, as well as developer exactions or general public revenues. This helps the government entity capture some of the value created by the facility to help pay for its development.

This value capture process results in very complex financing structures. Numerous cities—including Chicago, Denver, Los Angeles, Oklahoma City, and Seattle—have passed new taxes or created tax increment districts to support transit, using the funds to secure a local match for federal transit grants or to supplement revenue from fare boxes and tolls, or both. These are the kinds of facilities that could benefit from the type of infrastructure tax credit advocated by the new administration because fares and value capture could provide the balance of funds needed for the project.

Increased Complexity

Such next-generation, more complex PPP projects share a number of elements, including the following:

They require deep engagement with government authorities—including local, state, and federal governments and special entities—that goes well beyond the traditional seeking of entitlements for support of real estate development.

They involve financial complexity—and rules and regulations—different from and greater than the rules affecting many traditional real estate projects.

They are often discretionary—with approval based on such factors as financial gaps, the need for public facilities, limited availability of credits, and competitive allocation rather than on the assistance one is entitled to once certain rules are met.

They are deeply tied to the public agenda and to public needs as reflected in agency plans, priorities, or defined facilities. The focus on public benefits introduces a different political and risk-allocation dynamic to the transaction.

Different Practices

As a result of all these elements, many more stakeholders and participants of all kinds are involved in conceiving and approving such projects, and a specialized skill set and unique vision are required in order for them to be executed successfully. Engaging in these types of projects calls for different practices than might be typical for traditional private development. These include the following:

Creating a shared vision and public purpose. In a traditional development, the public’s view may be expressed through zoning requirements, and the developer defines the project within market and regulatory constraints. But if a combination of public and private funding is involved, there must be a deeper engagement between the public and private sectors and a reconciliation of their purposes and agendas.

Inevitably, this requires deep engagement, not only with local appointed and elected officials, but also with stakeholders that may include myriad other public agencies, not-for-profit organizations, local philanthropists, major companies and institutions such as universities and hospitals, and the public at large. The processes to arrive at a shared vision require more time and expense and, often, a more deft political touch.

Assembling the development team. The development team for PPP projects will have more members and require special expertise serving both the private parties and the public sector. This may range from greater skill in facilitating public dialogue to the highly specific skills of municipal advisers, redevelopment counsel, bond counsel, and the like. Developers new to the public/private arena often underestimate the importance of specialized expertise to achieving a successful transaction.

Engaging in proactive predevelopment. The predevelopment process is intrinsically more complex and entails more time, cost, and risk for a project that can only be accomplished as a PPP. In PPPs, land acquisition, demolition, and often cleanup can present unique challenges when compared with a typical development transaction and, thus, can be more costly and time-consuming. These risks are often difficult for the private sector to bear—and the public sector may not be certain of the outcome should it proceed without a developer.

In facility PPPs and infrastructure PPPs, part of what is involved is often shifting responsibility for the design, construction, and long-term operation to the private sector, necessitating that the public sector have a very detailed and clear understanding of its requirements for the facility and its operation.

Creating relationships. Public procurement regulations can make establishing relationships between developers and public entities involved in a PPP complex and filled with risk for both sides.

The public entity is not motivated in the same way the private sector is. The public sector is focused on goals and is motivated by avoiding risk, avoiding failure, and politics. In contrast, the private sector is focused on achieving the highest price at the lowest cost and with minimal ongoing compliance obligations, such as specialized reporting and recordkeeping required by public financing sources. For its part, the private sector often is stymied by a perceived lack of public sector understanding of private capital underwriting criteria.

How much can the private developer provide in project specifications upfront if there is no commitment on the part of the public entity to proceed? What are the specific mechanisms available in a jurisdiction to select a developer and complete a transaction? Under what circumstances should one use a design/build/operate model rather than a design/bid/build model for public facilities in order to secure the potential savings? Strong working relationships are critical to bridge this divide.

Making a fair deal. The public sector should not be putting more public funds into a deal than is required for the project to provide a commercially reasonable return to investors while meeting the public goals. Whether specifically embedded in the law or not, husbanding public funds is a fiduciary responsibility of public officials. But how do the public and private sectors know where the balance lies?

Answering this requires deep and careful financial analysis of the project at hand—a process in which the private sector must be prepared to disclose more than it may like and which the public sector needs to undertake with more seriousness and at greater cost than it may have thought necessary. However, the deep analysis of need and structure—often called a gap analysis, or the “but for . . .” test—is the way to fulfill this requirement and allay the valid fears of elected officials.

Assessing fiscal impacts and community benefits. Just because a project has a financing gap does not mean it is worth executing as a partnership. The fiscal and community benefits also must be analyzed to ensure a positive cost/benefit balance, as well as that community needs are being met—a test against the very public policy goals that are the reason for the PPP. These public goals include direct tax benefits, lower public costs, creation of direct and indirect jobs, and often a community benefits agreement demonstrating the benefits and establishing a commitment to provide them.

Structuring the PPP. The financial and business structure of a PPP will vary according to the type of deal and the types of financing involved. In addition to financial tools, many nonfinancial tools exist as well, including rezoning, regulatory relief, and the waiving of fees and exactions, which can be employed before financial tools are used. Layered financing is typical, however, with many sources of such financing to fill the many gaps. For example, the Flats East Bank project in Cleveland—a $750 million waterfront redevelopment that includes an office tower, a hotel, residences, restaurants, and other uses—required more than 30 sources of financing to complete the capital stack.

In PPPs for developing facilities and infrastructure, the roles of fees, rents, tolls, fares, value capture, and others are all critical and must be prudently estimated in determining the structure of the deal.

Sharing risk and reward. One of the most contentious challenges to be overcome in a PPP is arriving at a mutually comfortable agreement on how to share risk and reward. The debate often focuses on the risks that the private sector is taking on the downside, while the public wants to share in the upside potential but not in that downside risk.

What the public sector is bringing to the transaction may be critical: public land brought in at market value justifies sharing if the project is a home run yielding prices to the developer significantly above those initially expected, for example. Construction cost savings on a project with public financing can be shared with the public sector partner while maintaining the developer’s incentive to achieve those savings. At the same time, the developer (including facility and infrastructure entities) must deal with the requirements of its capital sources. On top of that, it is critical that the public sector acknowledge the downside risk and understand the plan for how that risk will be compensated.

To overcome these challenges, each party must thoroughly understand the transaction through the eyes of the other.

Documenting and monitoring deals. Finally, and perhaps most prosaically, all of this complexity and agreement must be properly documented and monitored. Because so many parties and so many elements are involved, this is not a simple matter, even if at the core a developer is simply buying a piece of public land.

Instead of a purchase-and-sale contract, there will be a redevelopment agreement that lays out everyone’s commitments. (Often planned development and redevelopment approval are simultaneous.) The execution must be monitored, often imposing on public sector officials responsibilities they are not accustomed to carrying out and imposing on the developer an unfamiliar layer of additional scrutiny. To a developer unfamiliar with the process, the documentation and monitoring may seem quite unusual.

Why bother with something so complex as a public/private partnership? Because creating great places, healthy places, and sustainable communities requires infill redevelopment, more careful new development, and shared responsibility for facilities and infrastructure—all better achieved through public/private partnerships. The result is a better balance of public and private goals, greater efficiencies, greater rewards, and better development than can be achieved through traditional methods.

The Urban Land Institute

By Stephen Friedman and Clayton Gantz

April 20, 2017

Stephen B. Friedman is president of SB Friedman Development Advisors in Chicago. Clayton B. Gantz is a partner at Manatt, Phelps & Phillips in San Francisco.

Foreign investors are increasing their ownership of U.S. municipal bonds, according to Fed data. But should advisers be recommending muni investments to clients?

Not everyone is impressed with the muni market, or the increased participation of foreign buyers.

“It’s a late-cycle behavior,” says David Haraway, a principal at Substantial Financial, a planning firm in Colorado Springs, Colorado.

At the end of 2016, foreigners owned $106.4 billion in U.S. muni debt, up 32% from the end of 2014, according to the Fed data.

Continue reading.

Financial Planning

By Joseph Lisanti

April 21 2017, 10:30am EDT

The builder constructing the first new nuclear power plants in the U.S. in more than 40 years recently filed for bankruptcy protection. What does this mean for the project’s completion, and, on a broader scale, the municipal market?

The U.S. nuclear power industry is currently comprised of 99 nuclear reactors in 30 states, supplying approximately 20% of the country’s electricity needs.1 These facilities are held by both investor-owned utilities and municipal or public power utilities. The public power utility sector as a whole is viewed as a relatively safe and secure sector of the municipal market due to the stable demand for electricity and the ability of public power utilities to recover cost burdens through electricity rate increases to customers.

A combination of factors, including nuclear accidents at Three Mile Island in 1979 and Chernobyl in 1986, health and safety concerns and cost overruns due to regulatory issues and construction delays, led to a discontinuation in nuclear plant construction in the U.S. for decades. Now, rising fossil fuel prices and concerns regarding greenhouse gas emissions over the past several years have fueled what many believed to be a nuclear renaissance in the U.S. and other countries around the globe.

Westinghouse’s role in nuclear renaissance

Westinghouse Electric Company, a subsidiary of Japan’s Toshiba Corporation and the largest builder of nuclear power plants in the world, is the lead construction contractor of the first nuclear plants to be built in the U.S. in nearly 40 years: Plant Vogtle in Georgia and Virgil C. Summer in South Carolina.

Substantial cost overruns and delays have led to massive financial losses for Westinghouse and the eventual Chapter 11 bankruptcy filing on March 29. The result is a heightened degree of uncertainty about the projects’ future and an increase in the perceived riskiness for municipal bonds and the public power utilities involved with the projects.

Bond issuers exposed to Westinghouse

Six municipal bond issuers have varying degrees of exposure to these nuclear projects.2 Given their ownership interests in the facilities, the following four municipal bond issuers have already incurred substantial costs and issued debt to finance the construction.

• South Carolina Public Service Authority (Santee Cooper) is 45% owner of the Summer project.
• Oglethorpe Power is 30% owner of the Vogtle project.
• Municipal Electric Authority of Georgia (MEAG) is 22.7% owner of Vogtle.
• City of Dalton, GA is 1.6% owner of Vogtle.

Since the following two issuers have agreed to purchase power, they may experience financial pressure as costs are passed along to all participants:

• Jacksonville Electric Authority (JEA) is a purchaser of Vogtle plant power under a 20-year contract that includes responsibility for construction cost overruns.
• PowerSouth is a purchaser of Vogtle plant power under a similar 20-year contract.

Who pays for cost overruns?

Prior to the Westinghouse bankruptcy filing, the various project owners benefited from a fixed-price construction contract provided by Westinghouse, thereby shielding the municipal utilities from substantial cost overruns. Westinghouse, however, is likely to reject this contract in bankruptcy court and attempt to shift the burden of future cost overruns to the project owners, with likely negative impacts to the credit quality and ratings of the various owners. The project owners benefit from a limited guarantee provided by Toshiba, but Toshiba’s tentative financial footing calls into question the potential benefit of the guarantee.

To continue the project or not to continue

The public utility owners are now in the process of deciding whether or not to complete the project. The decision will impact the future cost burden, the need to raise additional debt and the magnitude of any future electricity rate increases to customers.

Municipal utilities benefit by having autonomous rate-setting ability, which means that the electricity rates the utilities charge to their residential, commercial and industrial customers are set by the utilities themselves and do not need approval from a regulatory body. Thus, plant construction cost overruns potentially can be recouped through higher electricity rates charged to customers.

This ability to raise rates fairly easily is one of the reasons public power is generally a high-quality, stable sector of the municipal market. Therefore, although the bond prices of the municipalities with exposure to these projects could further weaken, ultimate repayment is not likely to be an issue.

Bottom line

We believe that some credit ratings fallout from the Westinghouse bankruptcy is likely. However, we remain confident that the public power utility sector as a whole is a relatively safe and secure sector of the municipal market because of the stable demand for electricity and the ability of public power utilities to recover cost burdens through electricity rate increases to customers.

1. Source: Nuclear Energy Institute, 2016; https://www.nei.org/Knowledge-Center/Nuclear-Statistics/US-Nuclear-Power-Plants
2. Source: Barclays Municipal Research, April 2017

Article by Chad Farrington, CFA – Columbia Threadneedle Investments

A coalescing of economic momentum underpins credit conditions for state and local governments as of early in the second quarter. Any upside implications of the outlook, however, are tempered by elevated risk stemming from political and policy-based uncertainty emanating from Washington D.C., in S&P Global Ratings’ view. Our baseline economic forecast anticipates real GDP will expand at a moderately paced 2.3% during 2017 and 2.4% in 2018. Additionally, we place the odds of a recession occurring over the next year at a less than likely 20% to 25%. As in recent years, we estimate that growth in the first quarter was slow at 1.6%, coming off a somewhat disappointing 2.1% growth rate in the fourth quarter of 2016. While economic growth was slower than expected in late 2016 and early 2017 and has weighed on state tax revenue trends, we believe the sluggishness could give way to somewhat faster collections in fiscal 2018.

Overview

• Economic growth will accelerate but remain around 2.0%;
• Tighter labor markets should lead to rising wages;
• State tax revenue collections should gather momentum, but an equity market correction is a key risk;
• The West South Central region will have the fastest growth, and New England the slowest.

Continue reading.

18-Apr-2017

Read the Digest.

National Center for Public Private Partnerships

Interest in the public private partnership project model (PPP) has increased in recent years as governments look to alternative procurement methods to address their growing infrastructure gaps. The broad concept of PPP is becoming increasingly understood across the world; however, more work is required in understanding the key factors that make a PPP successful. One such factor is ensuring that the PPP project is a “bankable” project.

“Bankability” refers to the overall structure of a project being such that lenders are prepared to finance it. As lenders fund the vast majority of capital required to undertake projects (in some cases, up to 90 per cent of required capital), bankability is of critical importance during the project structuring phase.

In addition, PPP projects are unique to other more traditional procurement methods, as financing by lenders depends heavily on the ability of the project to repay lenders’ loans. Therefore lenders have a very close eye on the structuring of the project, including all project agreements (and not just the financing agreements). Put simply, if the parties are unable to find a bankable structure, the project will not proceed.

Download the PDF report to read the complete issue.

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Article by Neil Cuthbert and Atif Choudhary

Last Updated: April 19 2017

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As hiding eyesores gets harder, there’s more need to get creative with utilitarian facilities and integrate them with their surroundings

Utility and public-works structures in cities traditionally have a pretty uniform reputation: They’re ugly.

But a new generation of projects are being designed to weave infrastructure into cities’ social fabric, offering amenities and standing as works of public art.

More than half of the world’s population lives in urban areas, and by 2050 almost two-thirds of people will be city dwellers, according to the World Health Organization. As cities become more densely populated and land becomes scarcer, it’s harder to hide eyesores.

So, there’s more impetus to get creative with utilitarian facilities and integrate them with public spaces and neighborhoods.

“Development pressure in American cities today doesn’t allow for continuing the old model of single-use infrastructure that isn’t designed to be compatible with other uses,” says Marie Law Adams, principal architect in the Boston firm Landing Studio and a lecturer in the department of urban studies at the Massachusetts Institute of Technology. “There’s not only less space available as old industrial edges of cities become redeveloped, but there’s also more of an expectation that infrastructure projects…also contribute to a better public realm experience through their design.”

Here’s a look at some of the new projects.

Continue reading.

The Wall Street Journal

By Barbara Sadick

Updated April 14, 2017 10:31 a.m. ET

States are stepping up a push to rein in the power of local governments to make laws.

Politicians in Florida, Texas and Pennsylvania are backing broad-based approaches to block city ordinances, rather than fighting cities on specific issues like minimum-wage rules. Arizona passed such a law last year that is currently being tested in the courts.

Proponents say these wide-ranging bills are a way to get ahead of a flurry of local actions around the country, such as a plastic-bag levy in New York City, a paid sick-leave requirement in Philadelphia and ride-sharing regulations affecting companies such as Uber.

These municipal-level measures create a regulatory patchwork that can make it costlier to do business, hampering growth, according to state lawmakers seeking to override them.

But many mayors say the lawmakers, usually Republicans, are simply waging an ever-more aggressive campaign to override local control of cities.

“We’re elected by the people,” said Carol McCormack, mayor of Palm Shores, Fla., a town of roughly 1,100 people, and president of the Florida League of Mayors. “Our residents expect us to create a safe and healthy environment for us to live in.”

Republican Florida state Rep. Randy Fine, who proposed a broad-based law earlier this year, argues that the state is the nexus of government in Florida. Mr. Fine said he isn’t targeting any specific issue with his bill, which would pre-empt and prohibit local business regulations that aren’t authorized by state law.

“We’re simply trying to rein in some of that regulatory abuse,” said Mr. Fine. “We end up spending a lot of time in the legislature dealing with these one-off issues.”

At its core, the debate—which stretches back to the 19th century—revolves around whether states or cities ultimately control local governance. Legal experts say that while each situation is different, generally cities in most states can legislate only in the gaps between state laws, and tend to lose when their policies are in direct conflict.

“State supreme courts are very reluctant to set aside state law in favor of local law,” said Roderick Hills, a law professor at New York University who studies pre-emption.

The fault lines aren’t always political: Lawmakers in New York, which has a Democratic governor and Democratic-led House, passed a bill in February to halt a planned five-cent fee on plastic shopping bags in New York City, which has a Democratic mayor.

But opposing politics are often in play. Republicans control both the legislatures and governors’ offices in 25 states, compared with just six for the Democrats. Democrats, however, remain dominant at the local level, with mayors from the party running two-thirds of the nation’s 100 largest cities, according to nonpartisan Ballotpedia.

There is also rising tension between many Democratic-led cities and the Republican Trump administration, which is seeking to withhold funding to cities that protect undocumented immigrants from federal prosecution.

One of the biggest recent pre-emption showdowns took place in North Carolina, where the Republican-led legislature passed a law last year that overrode a Charlotte ordinance and said transgender people must use the public-facility bathrooms associated with their birth sex. State lawmakers there recently repealed the measure, but with a block on local bathroom regulations until late 2020.

Supporters of state-level pre-emption measures say they are needed to assert states’ authority and stop cities from creating uneven regulations that scare off businesses. The states are reacting to increasingly aggressive pushes for local rules, said Ben Wilterdink, director of the commerce, insurance and economic-development task force at the American Legislative Exchange Council, which says it is dedicated to limited government, free markets and federalism.

In Texas, Republican Gov. Greg Abbott said local-level rules can raise costs while restraining growth for businesses and driving up prices for customers.

A number of bills in the Texas legislature aim to override local rules on specific issues. But it would be simpler and easier for businesses if the state adopted “an overriding policy,” Mr. Abbott said during a recent address at a Texas Conservative Coalition Research Institute event. He didn’t mention any specific bill.

In Pennsylvania, Republican state Rep. Seth Grove said he decided to aim wider with a bill restricting employer mandates in cities after introducing two unsuccessful bills that would pre-empt paid-leave ordinances like the one in Philadelphia.

“Instead of us constantly chasing it, why don’t we lock it down and be done with it,” he said.

A high-profile battle is playing out in Arizona, where the state’s Supreme Court is considering whether state law should displace a Tucson ordinance authorizing city police to destroy firearms obtained in the course of law enforcement.

The case is the first test for a 2016 Arizona law—seen by critics as among the most extreme pre-emption laws in the nation—that requires municipalities to rescind ordinances found in conflict with state law or face the loss of state funding.

“Our purpose is not to punish the city,” said Attorney General Mark Brnovich, a Republican. “It’s to ensure the cities are in compliance with state law.”

Tucson has asked the court to strike down the law, arguing it violates the independence guaranteed to local government by the Arizona Constitution.

If legislators “from other parts of the state get to dictate how their city is run, then those city voters have effectively been disenfranchised,” said Tucson Mayor Jonathan Rothschild, a Democrat.

The Wall Street Journal

By Jon Kamp and Joe Palazzolo

April 12, 2017 7:00 a.m. ET

Write to Jon Kamp at jon.kamp@wsj.com and Joe Palazzolo at joe.palazzolo@wsj.com

 

Taylor Riggs, a contributor to Bloomberg Briefs, talks with Bloomberg Briefs contributor Amanda Albright about this week’s municipal market news.

Watch the video.

Bloomberg

April 12, 2017

• State law allowed bank to win with best price in an auction
• Wells Fargo was sanctioned over fake accounts scandal

California’s suspension of Wells Fargo & Co. from investment work hasn’t completely prevented the beleaguered bank from underwriting the state’s bonds.

Wells Fargo submitted the lowest competitive bid Wednesday to sell $636 million of California general obligations. The 12-month ban imposed in September by State Treasurer John Chiang applies to negotiated sales, in which the underwriters are picked in advance. State law requires Chiang to accept the lowest bid submitted at an auction.

“We were pleased with the price that they offered,” said Marc Lifsher, a spokesman for Chiang. “It doesn’t reflect our feelings about their behavior toward their customers.”

Yields on the bonds, which refinanced higher-cost debt, ranged from 0.81 percent for securities maturing in August to 2.66 percent for those due in 2030, data compiled by Bloomberg show. Five-year bonds were priced 0.07 percentage point over benchmark securities, a lower premium than the 0.16 percentage point demanded on similar maturities sold in March.

In evaluating the market and the liquidity of California bonds, Wells Fargo bankers decided to “be aggressive, put our best foot forward for the state and save them money,” said Parks Lineberger, a director who worked on the deal. “This shows our commitment to the state.”

Federal regulators announced in September that Wells Fargo employees had opened potentially 2 million unauthorized accounts. The scandal has led to fines, firings, claw backs of bonuses, lawsuits and lost business with municipal governments.

Bloomberg Markets

by Romy Varghese

April 12, 2017, 11:32 AM PDT

No one likes making pension fund payments. You have to take money that you could be enjoying right now, and hand it over to some stranger, in the hopes that decades hence, when you’re ready to retire, said stranger will hand it back to you and enable to live out your golden years in reasonable comfort. The connection between sacrifice and reward is, let us say, a little too distant for proper enjoyment.

You know who likes pension funds payments the least of all? Taxpayers. Because they’re not even sacrificing for their own retirements, but so that someone else can enjoy a comfortable old age.

Naturally, this leads to a lot of wrangling. And the nature of this wrangling is that most of it will be, to the average taxpayer, insanely boring: knock-down drag-out fights over financial arcana such as “discount rates” and “funding ratios.” This tends to sound, to your average person of normal interests and intelligence, like the adults talking in a Charlie Brown cartoon.

Unfortunately, no matter how boring and technical this stuff sounds, it matters. Getting these boring, technical details right is how we ensure that pensioners do not, suddenly and for no apparent reason, find themselves without their long-awaited pension check. And that taxpayers do not find that their taxes have, suddenly and for no apparent reason, risen to levels they cannot afford.

Nonetheless, there will always be a constituency arguing for a more optimistic assessment of how to sacrifice less now and still meet future obligations. Sometimes that even includes the folks getting the pensions.

The political left often prefers a looser (and therefore riskier) standard, because the more conservative the method you use to value the liabilities, the more the government has to put into the fund right now. This makes generous pension benefits seem more expensive to current taxpayers, lessening support for them. The stricter standards also limit the government’s ability to spend money right now on stuff the left wants to do. Thus, those of us who think that a conservative standard is the correct one, periodically end up contending with a new report that brightly suggests that everything would be much better if we fiddled with the accounting standards to lower the amount we require governments to contribute.

One recent installment in this perennial debate comes out of Berkeley’s Haas Institute for a Fair and Inclusive Society. The author, Tom Sgouros, has a background in public finance, and his arguments are careful and mathematically literate. Nonetheless, I find them unconvincing.

I favor a conservative approach, and I mean “conservative” in the accounting, rather than the political sense. To err on the side of caution. And why should we be cautious? So we can make darned sure that workers get what they’re owed.

Sgouros agrees, in fact, that such conservative standards are the correct approach for valuing private-sector pension contributions, in case the business goes bust and the pension needs to stand on its own. But he says that governments are different, because they can’t go out of business. In other words, government pensions are less risky, so they don’t need such strict standards.

This is … sort of true. A government pension plan can, in theory, operate underfunded forever — as long as the tax base and the workforce are growing faster than their current pension liability.

It’s not quite true that governments are permanent. But if the U.S. government has gone down and Illinois is just a name in the history books, the status of the state teachers’ pension fund is probably going to be the least of everyone’s worries.

In less extreme scenarios, government finances are ultimately constrained by the much-maligned Laffer Curve. There is some point, however high the percentage, beyond which raising the tax rate not only doesn’t bring in more revenue, but actually lowers government income. And the smaller the level of government, the lower the tax rate at which Laffer effects kick in. If your block had the ability to levy a 25 percent tax on your income, and actually did so, you’d sell your house pretty quick. It’s much harder to pick up and move to another country. We also have to factor in the fact that, in a democracy, voters can go to the polls and say “no more,” which is a sort of secondary Laffer point that people planning in decades have to reckon with.

Cities tend to declare bankruptcy precisely because they’re near one of those points, through some combination of financial mismanagement and local economic decline. When they have exhausted their ability to borrow, or wheedle bailouts out of some larger government entity, they end up with an unpalatable choice between cutting municipal services or failing their creditors — of which the future beneficiaries of an underfunded pension plan are one.

But even if you argue that the ability of governments to tax is greater and more flexible than I credit, that doesn’t suggest we can do away with conservative accounting standards for government pensions. We need them more than ever.

If you argue that government pensions don’t need huge assets on hand, because they have more protection in the form of an unlimited claim on taxpayer wallets, then you need to add a stakeholder to the pension calculation: the taxpayer.

Those taxpayers have a right to decide how much they’re willing to spend on the people employed by their municipality or state. Hiding the true cost of that compensation by lowering the pension funding requirements — while simultaneously relying on an unpriced, undisclosed call option on their future earnings to make the math work — is both unfair and undemocratic.

There’s one more reason that we should use a conservative standard: It increases the amount of money we have to put in right now, but it lowers the amount that has to be put in over time. Compound investment returns are a powerful force, one that, over decades, can dramatically reduce the percentage of salaries and taxes that have to be devoted to the pension system. Forgoing those gains because they require political pain now is a mistake.

Most state and local pension plans are not at a point where they’d have to cut benefits tomorrow, and few of them will be in that situation in the near future. But the whole point of a pension is to allow people to know that they’ll be secure decades from now, when things may be very different.

Which means that the people in charge of the pension should be planning for that, not saying “Well, the taxpayer of tomorrow will figure out some way to make the numbers work.” Current contributions should be invested to cover the future benefits for current workers; future contributions should be devoted to the workers who make them. And no one should be relying on future taxpayers to bail them out of a jam, not least because there’s no way to know if they’ll be able to.

This isn’t a liberal or a conservative idea. It’s the basic common-sense reasoning of people who want to make sure they can pay their bills.

Bloomberg View

by Megan McArdle

April 11, 2017

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of “The Up Side of Down: Why Failing Well Is the Key to Success.”

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor responsible for this story:
Philip Gray at philipgray@bloomberg.net

• AustralianSuper prefers assets such as toll roads, airports
• Could be four years before money committed, Delaney says

President Donald Trump’s plan to fix America’s crumbling infrastructure with $1 trillion of private and public investment over a decade is drawing interest from 10,000 miles away.

AustralianSuper Pty, Australia’s biggest pension fund with over A$100 billion ($75 billion) in assets, is eyeing the U.S. market for infrastructure debt and equity investment prospects, said Mark Delaney, its Melbourne-based chief investment officer.

“Anyone who has traveled to the U.S. would say there are aspects of the infrastructure that could do with updating,” he said in an interview. While the fund is somewhat cautious on valuations, “if there are additional infrastructure opportunities available, we will certainly look at them,” he said.

The U.S. faces a $1.4 trillion infrastructure funding shortfall in the period from 2016 to 2025, according to estimates by The American Society of Civil Engineers. Without improvement, the U.S. will lose $3.9 trillion in economic output by 2025, ASCE data show. There are signs that, at least globally, infrastructure is becoming more appealing after investors thirsting for stable income pumped a record $413 billion into the asset class last year, according to data provider Preqin.

At the same time, the lack of detail in Trump’s plans is tempering interest both in Australia and elsewhere. Public private partnerships are evolving slowly in the U.S and account for less than 5 percent of infrastructure investment, according to data from Bloomberg Intelligence.

Much of the U.S.’s infrastructure assets are held on government balance sheets and funded out of the municipal bond market, making it difficult for funds to get involved. Sam Pollock, head of Brookfield Asset Management Inc.’s infrastructure group, told Bloomberg in March that the amount of red tape involved, modest equity required and small returns would act as a deterrent.

More Deals

Delaney said with the shape of any new U.S. infrastructure program still unclear, it could easily be three or four years before actual dollars are committed, but he was clear about what assets are of interest: “We have a preference for less volatile assets: toll roads, airports or things like that.”

AustralianSuper has historically partnered with other investors to buy infrastructure assets. Last year, in conjunction with IFM Investors Pty, the fund bought a A$6 billion stake in the New South Wales state power network Ausgrid and this is “an approach we want to follow in North America,” Delaney said. AustralianSuper has about A$9.14 billion, or just under 10 percent of its investment portfolio, in infrastructure assets, according to its 2015-2016 annual report.

The fund is not alone in its appetite for infrastructure investments. AMP Capital Investors Ltd., one of Australia’s biggest money managers, has said Asian pension funds and insurers are ramping up investments in infrastructure debt globally as they seek to combat waning returns from traditional fixed income assets.

Michael Hanna, head of Australian infrastructure at IFM Investors, expects there will be significant opportunities in the U.S. “The infrastructure deficit in the U.S. is quite extraordinary,’’ he said by telephone. Since Trump’s election, there had been very strong interest in IFM’s funds from both new and existing investors, and “everyone’s feeling more positive about there being more deals in the U.S. space,” he said.

Australia’s pension fund industry collectively sits on A$2.2 trillion of assets, making it the fourth largest in the world. The wall of money means the funds are increasingly looking for global opportunities. “The big drivers of the portfolio are based outside of Australia,’’ Delaney said.

Bloomberg

by Emily Cadman and Ruth Liew

April 10, 2017, 11:00 AM PDT April 10, 2017, 5:56 PM PDT

Pennsylvania is going with passive funds. That was the message this week from State Treasurer Joe Torsella, who says he plans to move the state’s $1 billion in actively managed public equity (stock) funds over to index funds within six months.

Index, or passive, funds are known for their lower fees and lower volatility. Rather than managed by a trader, these funds are built using computer models that are designed to mimic the performance of stock indexes like the S&P 500. Torsella expects the shift to save at least $5 million a year in fees.

The treasurer’s announcement is part of an effort to return faith in the office after his predecessor left in disgrace amid a pay-to-play scandal. Former Treasurer Rob McCord pleaded guilty in 2015 to federal charges that he used his office to influence future investment deals and other contracts as a way raise cash for a failed gubernatorial bid.

The Takeaway: The decision to switch to passively managed funds and save money on fees is a growing trend among large investors. Nevada’s $35-billion pension plan, for instance, has long embraced the strategy. And within Pennsylvania, the $509-million Montgomery County Employees Retirement Plan shifted most of its investments to index funds in 2013. So far, the plan has out-performed the state’s pension plan — and at a far lower cost.

While Torsella’s announcement is ostensibly about the state’s own investments, it raises the possibility that the treasurer will push for a similar shift in the state’s troubled pension funds. If he does, he’ll have to get a consensus: Pennsylvania’s pension funds are controlled by boards.

Either way, Torsella said of the decision: “We shouldn’t treat investing public funds like a casino game, trying to ‘beat’ the market, and paying casino prices to do it.”

GOVERNING.COM

BY LIZ FARMER | APRIL 14, 2017

A roundup of money (and other) news governments can use.

GOVERNING.COM

BY LIZ FARMER | APRIL 14, 2017

It hasn’t worked that well in business. In the public sector, it has sometimes been disastrous.

I started paying attention to business management in the late 1970s, and my timing could not have been better. I saw all the business fads of the late 20th century paraded before me, from “management by objectives,” “Theory Z” and “in search of excellence” through “reengineering the corporation,” “good to great” and “Six Sigma.” At one point I wondered, are all these management theories actually the same ideas with new titles?

The fads seemed harmless enough — and may have been useful if they encouraged executives to think about their businesses in new ways. But one struck me, then and now, as dangerous. And that was “pay for performance.” Even more frightening, it has made its way into government, with terrible consequences.

In one sense, there’s nothing new about paying people for performance. Factories have long paid for “piece work” — that is, for each unit a worker turns out. Salespeople often receive commissions, which are a share of each sale. And if you tip a waiter, a hair stylist or a parking attendant, you’re paying for performance.

But extending this idea to employees who work not as individuals but as team members and are involved in complex tasks and not simple, easy-to-measure transactions is a new idea. Like a lot of bad new ideas, it came out of Wall Street.

It began with CEO pay, which Wall Street wanted tied to stock appreciation. If you want to know how executive pay became so grotesque with so little to show for it, that’s the reason. But why stop with CEOs? In the 1980s and ’90s the idea trickled down in corporations, aided by an army of consultants. It was easy to see the appeal. Employers wanted their staffs to work harder with better results. They wanted to hold on to the best workers and didn’t mind if the others left. And if pay — in the form of incentives for performance — could do all that, why not use it?

There’s just one problem: It doesn’t work in the way you’d think. Oh, it produces results all right; but some can be downright destructive.

Consider the Wells Fargo scandal that became public last year. The bank set goals for its customer-service representatives that most people considered unrealistic. One was to “close” (that is, sell) 20 new bank accounts a day. And one way was by convincing existing customers to set up at least eight separate accounts with the bank-checking, savings, credit cards, mortgage and so on. (The CEO had a phrase for it: “Eight is great!”)

You can probably guess how this turned out. To keep their jobs and earn bonuses, employees began opening accounts for customers without their knowledge. And not a few rogue employees; thousands were involved in the fraud.

That’s a problem in a high-pressure environment like a bank. But it couldn’t happen in a government, could it? Well, it has happened. The Atlanta public schools’ test-cheating scandal of 2009 began when the superintendent announced that she would measure principals’ performance by their schools’ progress in standardized tests. For years this strict-accountability approach brought extraordinary gains in test scores — until it became known that some principals and teachers were changing their students’ answers in what were called “erasure parties.”

It happens once in a while in police departments, too, when a zealous chief decides there ought to be a quota for traffic tickets. (“Eight is great!” or something like that.) Predictably, cops start writing tickets just to meet the quota. Not exactly a formula for great police-community relations.

If setting quotas and paying for performance can turn into a disaster, then how should we think about compensation and motivation? Here’s the sensible alternative:

• Pay employees a fair wage that compensates them for their skills, experience and education.

• Encourage teams to set their own measures of performance, ones that they will commit to meeting or exceeding.

• If you feel compelled to offer bonuses for superior performance, award them to the teams and not individuals.

• Understand that there are other motivations that drive people to work smarter and harder. You’ll find that, once employees have reached a livable wage, personal pride and the esteem of colleagues and superiors work as well as bonuses with none of the disastrous side effects.

In other words, if you want people to perform complex tasks and do so at a high level, don’t cheapen their work with simple measurements and simple-minded rewards. Try coaching, praise, promotions — and maybe a simple “thank you.”

GOVERNING.COM

BY OTIS WHITE | APRIL 12, 2017

Those who are looking closely at how state and municipal governments handle pension costs know the problem is going to require some creativity.

“Whatever share (of budgets) these pension costs are currently making up … it’s likely to increase” Gabriel Petek told Chicago City Wire. Petek is a managing director and sector leader in the U.S. Public Finance States group at S&P Global Ratings in San Francisco.

He said city and state officials are looking anywhere they can to balance finances under pressure.

“Governments will have to make cuts elsewhere,” Petek said.

S&P Global Ratings, which measures the creditworthiness of states and municipalities, has observed “a profound shift unfolding” in states where pension system funding is in distress, Petek wrote for The Hill, specifically citing Illinois, Kentucky and New Jersey.

“The pervasiveness of budget pressures in these and other states is inconsistent with a mature national economic expansion and signals real credit stress,” Petek wrote. “Our recent negative rating actions on several states’ debt reflect this. Since January 2016, we have issued 11 state credit rating downgrades and just two upgrades.”

A 2016 report calculated that Illinois’ pension debt reached $130 billion last year – a 17 percent increase from 2015 – and account for more than a quarter of the state’s annual budget, according to the Commission on Government Forecasting Accountability.

The combined total cost of unfunded debt related to local and state government retirement commitments is more than $267 billion, the Illinois Policy Institute reported in March.

Whether Republican Gov. Bruce Rauner and legislators in both parties and local government officials succeed in tackling pension problems will likely depend on whether officials adopt the try-everything approach that experts like Petek suggest may lead them out of the debt wilderness.

For example, Petek said, some governments are holding off on infrastructure investments or changing how they invest in higher education. As states cut funding to colleges and universities, higher education administrators can respond by adjusting tuition or changing the financing of programs.

Reducing existing pension benefits could give taxpayers some relief, Petek said. That would be good for Illinois resident. The Illinois Policy Institute report calculated that the rise in unfunded pension-related debt shakes out to $56,000 per household in added future taxes.

“It’s easier said than done,” Petek said.

That’s because cutting spending can be complicated. Many parts of state budgets are dictated by law. Others, like cutting contributions to secondary education, pose other challenges.

“It’s a sensitive part of the budget to cut,” he said of school funding.

In general, he said, governments are looking in every corner for programs that can be cut, or other ways to decrease deficits in ways that won’t enrage constituents.

“That’s the tension that we see playing out,” Petek said. “It will squeeze governments.”

Chicago City Wire

Justin Stoltzfus | Apr 14, 2017

Popular in Europe, the do-good debt is growing in the U.S., too—part of the mainstream acceptance of sustainable investing

Some $150 billion of green bonds are expected to be issued this year, compared with just $3 billion 2012.

“Green bond” issuance is growing fast, part of the overall trend of do-good investments becoming more popular. And U.S. fund companies are looking to tap into investor demand for these bonds, which finance environmentally friendly projects from green infrastructure and real-estate development to energy-efficiency initiatives.

About $81 billion of green bonds were issued last year, according to the Climate Bonds Initiative, a nonprofit that promotes the debt market as a way to raise money for projects related to climate change. It expects $150 billion of green bonds to be issued this year, compared with just $3 billion were issued in 2012. These figures cover “labeled” green bonds, meaning they have been reviewed externally and meet certain definitions, including those of the Climate Bonds Initiative.

A range of private and government organizations have issued green bonds, from Apple Inc. AAPL 0.55% and Toyota Motor Corp. TM 1.86% to municipalities, New York’s Metropolitan Transportation Authority and the governments of France and Poland. They have proved popular with investors, with most of the issues oversubscribed, according to the Climate Bonds Initiative. “These are no longer niche investments,” says Neena Mishra, director of ETF research at Zacks Investment Research.

The growth of the market has sparked interest from fund companies, with the first U.S.-listed exchange-traded fund focused on green bonds—the VanEck Vectors Green Bond ETF (GRNB)—launched in March.

The ETF was launched to meet growing investor demand for environmentally focused products, says Edward Lopez, head of ETF product management at VanEck, an investment-management firm based in New York. The green-bond market has grown large enough in recent years to allow for an ETF to be listed, he says.

The fund tracks the S&P Green Bond Select Index, which was launched by S&P Dow Jones Indices last month to track the most liquid segment of the broader S&P Green Bond Index.

The S&P Green Bond Index had an annualized return of negative 0.81% over the five years through the end of March, compared with negative 0.39% for its parent index, the S&P Global Aggregate Developed ex-Collateralized Index, which tracks the performance of a broad range of investment-grade debt around the world.

The VanEck ETF was launched on the heels of the Mirova Global Green Bond fund (MGGYX), a mutual fund that launched in late February. Mirova, a subsidiary of Natixis Asset Management that focuses on sustainable investment, had already launched a green-bond fund in Europe, the Mirova Green Bond-Global fund.

In demand

“Both institutional plan sponsors and wealth-management advisers are hearing demands from their participants and clients for investments with positive impact,” says Kenneth St. Amand, vice president and client portfolio manager at Mirova, explaining the impetus behind the Mirova funds.

The two new U.S.-listed funds join Calvert Green Bond fund (CGAFX), a $74 million mutual fund that was launched in October 2013 by Calvert Investments, one of the original sustainable-investing firms.

The Calvert fund takes a broad approach, investing both in labeled green bonds and in the bonds of companies it considers to be leaders on environmental issues. For example, the fund will buy any bond issued by Apple—even if a bond doesn’t finance an environmentally friendly project—because of the tech giant’s efforts to reduce its carbon footprint, says Vishal Khanduja, the fund’s portfolio manager.

However, the fund’s makeup has changed over the years, Mr. Khanduja says. The percentage represented by green bonds has increased with the growth in their issuance, so that they now account for more than half of the fund’s assets.

Bigger in Europe

The U.S. is behind Europe in the listing of green-bond funds; there are several in Europe that aren’t open to U.S. investors. That includes the Lyxor Green Bond UCITS ETF, launched in late February by Lyxor Asset Management, part of the Paris-based Société Générale Group , which just beat VanEck’s GRNB as the world’s first green-bond ETF.

There are numerous Europe-based mutual funds focused on green bonds, including the Allianz Green Bond fund, the AXA WF Planet Bonds fund and NN Investment Partners’ NN (L) Euro Green Bond fund. BlackRock Inc. BLK 1.27% launched a Europe-listed Green Bond Index fund in March, while State Street Corp.’s STT 1.53% State Street Global Advisors operates the State Street Global Green Bond Index fund in Europe.

Europe has shown greater interest in the green-bond market than the U.S., in terms of both issuance and investor demand, says Chris McKnett, head of State Street Global Advisor’s global environmental, social and governance, or ESG, investments business.

He points to several reasons, including the relatively early issuance of green bonds on the continent by organizations like the European Investment Bank in 2007 and the World Bank in 2008, which helped foster an investor base.

About 37% of the green bonds outstanding, by face value, are denominated in euros, according to the Climate Bonds Initiative, the most for any currency.

Mr. McKnett says that bodes well for the market’s further development there, because potential issuers will be confident the market can support new supply.

Still, the number of U.S. dollar-denominated green bonds has grown quickly over the past year or so, and they now account for 36% of the global total.

Mr. McKnett says State Street would consider launching a U.S. fund, “given the increasing level of awareness and burgeoning state of the market.”

Brown Advisory, an investment-management company based in Baltimore, is aiming to launch a mutual fund focused on green bonds before the end of this year, says Thomas Graff, head of fixed income.

Brown Advisory currently includes green bonds in a number of the accounts it manages for it clients. “I believe that more and more investors are going to be thinking about sustainability issues,” Mr. Graff says.

Broader choices

One potential drawback of mutual funds and ETFs focused on green bonds is that they still have a relatively narrow universe to choose from, despite the recent growth of the market, says Jon Hale, head of sustainability research at fund tracker Morningstar Inc.

There are other funds that take a broader approach and therefore have a greater range of bonds to choose from, while retaining an ESG theme, Mr. Hale says. He points to the TIAA-CREF Social Choice Bond Fund (TSBRX), a $1.1 billion fund that invests primarily in intermediate-term investment-grade bonds that meet certain ESG criteria, in areas from affordable housing to renewable energy.

Still, the green-bond market looks set to continue growing, and the new mutual funds and ETFs are crucial in opening access to individual investors, as well as raising the profile of climate change as an issue, says Sean Kidney, chief executive of the Climate Bonds Initiative.

“Once you own a green bond, you also start engaging with the whole issue,” he says. “You start thinking ‘There are solutions, I can do something.’ ”

The Wall Street Journal

By Gerrard Cowan

Updated April 9, 2017 10:56 p.m. ET

Mr. Cowan is a writer in Northern Ireland. He can be reached at reports@wsj.com.

As global populations migrate towards cities, the need for new infrastructure has become more urgent. Oil and commodity producing countries, such as Brazil, Colombia and Peru, as well as Gulf Cooperation Council countries like Dubai, Qatar and Saudi Arabia are looking to build new roads, railways, ports, water, and power facilities as part of broader strategies for driving economic growth in non-oil sectors. At the same time, US President Donald Trump swept to power promising to spend $1 trillion on new bridges, roads, tunnels, sewers, water systems and dams to stimulate economic growth and employment — and rejuvenate creaking infrastructure.

According to the McKinsey Global Institute, from 2015 to 2030, global demand for new infrastructure could amount to more than $90 trillion. But who is going to fund these new projects? Low oil prices have left the aforementioned Latin American and GCC countries with depleted government coffers. And the US Congress is unlikely to support the hefty increases in federal spending required to fully fund President Trump’s ambitious infrastructure plans. This can already be seen with talk of federal funding cuts for mass transit projects in Silicon Valley and the new Hudson River tunnel.

The Trump administration also proposes scrapping the federal Department of Housing and Urban Development’s Community Development Block Grant program, which many cities and towns across America rely on to fund housing, education and other public infrastructure. This creates a funding gap that must be addressed.

McKinsey estimates that $7.7 trillion will need to be found annually for the next 15 years to pay for additional global infrastructure needs. With the public sector unable or unwilling to shoulder total financial responsibility for all of this much-needed infrastructure investment, due to budgetary constraints and other considerations, some of the financial risk and burden is likely to shift to the private sector.

A recent study by the Brookings Institution in the U.S. found that Public-Private Partnerships (P3s) are “integral to the overall capital investment and infrastructure strategy of the nation.” However, P3s are still a relatively small component of overall infrastructure investment, and are not as well established as other forms of infrastructure development.

Most public infrastructure in the US is financed either in the form of government appropriation — which does not include a mark-up for risk in the case of a default or cost overrun — or municipal bonds, which offer low rates of interest and are subsidized through tax exemptions. According to the Brookings Institution, from 1985 to 2011, there were just 377 P3s in the US, which constituted a mere 9% of total infrastructure P3 nominal costs around the world.

P3s, wherein private investors finance and build public infrastructure in exchange for a relatively decent inflation-linked return on their investment, are gaining in popularity. Greater private-sector investment in public roads, bridges and railways — among other projects — is likely to be welcomed by lenders and/or the financial markets. Private investors have more to lose if a project fails or goes over budget, as they have more “skin in the game.” They often bring greater cost discipline to a project than the public sector and are less inclined to invest in “pet projects” that curry favor with the voting public and require a disciplined approach during construction.

Other benefits of P3s include: committed financing during the construction period — and frequently during the bid phase of projects; the inclusion of experienced Project Finance banks, who will carefully consider the feasibility of a project and help develop a financing structure that works. This is in addition to providing financing for such projects using their balance sheets and via capital markets. Private investors can also help when it comes to dealing with construction, regulatory issues and managing the entire group of lenders to a project.

In general, private investment can bring greater investment rigor and scrutiny to infrastructure projects. Depending on how the partnership is structured, the private sector takes on part or all of the commercial/market risk of a project. However, that does not mean that the government loses control or ownership over the project and its assets. But in contrast to many tax-exempted financing structures, it protects the users from unexpected toll increases, as the rate mechanism is typically inflation indexed for P3s, whereas tax-exempted transactions have a rate covenant, which can force a substantial increase in tolls when needed. At the same time, private investment generates taxable income, whereas the municipal market offers tax subsidies.

The commonly-held assumption is that infrastructure projects with a high level of financial involvement from governments are more likely to appeal to private investors. While this helps mitigate demand risk (i.e. revenue risk) and development risk, it can also create political and regulatory risk. Investors may, in fact, prefer to invest in projects that are less regulated, or where government involvement is not overbearing.

However, there still needs to be a determination that the private sector can build the project and run it at a lower all-in long-term cost than the state could, or at least deliver the project faster than a Public procurement. Private investors may have more “skin in the game” (equity risk), which is a strong incentive, but that doesn’t guarantee high quality, efficient infrastructure development that benefits the public.

Governments should not assume that P3s will save the public money without proper structuring. After all, private investors are in it to make a profit. And although average cost overruns for P3 schemes are below that of “traditionally procured” projects, to help mitigate against any unanticipated delays, events, cost overruns or unplanned risks, a clear contractual framework with the appropriate protocols needs to be put in place before a project begins.

The Bond Buyer Commentary

by Willem Sutherland

April 12 2017, 10:33am EDT

Willem Sutherland is managing director and head of infrastructure finance, Americas, at ING.

With $3.8 trillion in bonds from more than 50,000 issuers, the municipal market is remarkably large and diverse. But right now, the vast muni universe is focused on one city, Washington.

Numerous proposals of the Trump administration and the Republican-controlled Congress could rattle the market if enacted.

President Trump’s call for $1 trillion in infrastructure spending could swell the nation’s municipal bond supply, for example, while the possibility of lower corporate tax rates could reduce the appetites of banks and insurers, which now own about 30 percent of muni bonds.

What’s more, if personal income tax rates went down (another possibility in Washington these days), demand for muni bonds could drop because the tax-sheltering features of the bonds could be less enticing. Even more troubling for the market, the tax exemption of interest income — the very foundation of municipal bonds — is always part of discussions about changing the tax code.

The muni bond market initially reacted negatively to these possibilities. The iShares National Muni Bond ETF fell 4.2 percent from the presidential election until Dec. 2. That was a rough stretch for all kinds of bonds, as interest rates climbed and the Federal Reserve indicated it was on the cusp of more aggressive rate increases, though the muni slide was more pronounced. The iShares Core U.S. Aggregate Bond ETF, which tracks the high-grade taxable market, lost only 2.75 percent in the same period.

But the market may have overreacted, said John V. Miller, co-head of fixed income at Nuveen Asset Management. “There is a perception that every one of the policies being discussed will be passed and passed in short order and all will be deeply harmful to municipal bond investors,” he said. The reality is different. “I expect there will be a delay, and even if some of the proposals get through, they aren’t all unequivocally negative,” Mr. Miller said.

Indeed, after the initial shock wore off, the Bloomberg Barclays Municipal Bond index gained 3.2 percent from its December low through the end of the first quarter, while an index of taxable bonds rose 1.3 percent. “It’s not 100 percent clear it is going to be a rocky year,” said Cormac Cullen, co-manager of Fidelity Municipal Income Fund.

Professional municipal bond investors are generally sanguine that while policy changes may cause some near-term volatility, they are not an existential threat. Depending on how negotiations in Washington play out, there could even be some good news for munis.

For example, the precarious condition of the compromised Oroville Dam during California’s heavy rainfall this winter once again put the spotlight on the need for major infrastructure investments. The early estimates to repair the damaged spillway for the tallest dam in the United States are as high as $200 million. While Oroville is an extreme case, there is no shortage of other dams, bridges, roads and transit systems across the country in need of serious care.

The $1 trillion for infrastructure the president proposed may not roil muni bonds too greatly because the outlay would probably be spread out over a decade, making it more digestible for the $3.8 trillion market. Moreover, all or a portion of the money may be earmarked for funding private-public partnerships, which could resemble something along the lines of the taxable Build America Bonds that were issued as part of the 2009 stimulus. In that case, the supply of traditional tax-exempt munis would not swell. “You can’t presume all the spending would be for projects financed with tax-exempt money,” Mr. Miller said.

Nor is a reduction in the corporate tax rate all bad news. Peter Hayes, head of the municipal bond group at BlackRock, believes that a new rate would not be low enough to cause insurers and banks to high-tail it out of municipal bonds. “What we could see is that they let their municipal portfolios mature and, over time, shift money into other assets,” he said. Yet, Mr. Hayes said, “There’s also the possibility that the ability of corporations to deduct corporate bond interest goes away.” That would lead to less issuance of corporate bonds — and that could increase demand for muni bonds.

A reduction in personal income tax rates is also not expected to be a seismic event. One possibility is that the top rate would fall from 39.6 percent to 33 percent. That’s a lot less than the fall from 50 percent to 28 percent under the Reagan tax cuts, which the municipal market survived. Moreover, it is not as if any state with a high income tax rate is talking about cuts. And right now, a 10-year high-grade municipal bond has the same 2.5 percent yield as a taxable 10-year Treasury note. That works out to a 3.73 percent taxable equivalent yield for someone in a 33-percent federal income tax bracket

As for eliminating the exemption for interest income, changing it would affect thousands of municipalities that rely on muni bonds to finance their public works. For that reason alone, it is widely seen as unlikely to happen.

What has a much higher probability of affecting muni bonds this year is rising interest rates, though even here, the damage may not be great. While a sharp rate spike would cause bond prices to suffer bigger losses, Christopher Ryon, municipal bond manager at Thornburg Investment Management, noted that “we are not in a situation where rates are going to take off.” (Bond prices and bond yields move in opposite directions. Total return is the sum of the yield and the price change.) With expectations for rates that are higher but not too high, “you will be getting more income, which is why you own municipals,” Mr. Ryon said.

And that rate rise is making municipal bonds a better value. “Before the election, you were not getting paid to take risk,” Mr. Ryon said, citing the fact that the inflation-adjusted yield for a 10-year municipal bond was below zero. Today it is back at 0.65 percent. That is still below the longer-term norm of two percentage points, but it is moving in the right direction.

Nonetheless, rising rates merit some attention. Gary Schatsky, a financial adviser based in New York City, is sticking with short-term municipal bonds maturing in three years or less. The yields are small (around 1 percent before factoring in the tax break), but you aren’t exposed to much price movement as rates rise, or if policy changes materialize.

Another way to eke out more yield is to look for portfolios that emphasize bonds rated A (often called single-A) over AA and AAA bonds. A single-A bond is still considered high quality, just a little less than AA and AAA. The 3 percent yield for a 10-year A-rated bond is about a half a percentage point more than the yield for AAA bonds.

Funds and ETFs that track a municipal index hold less than 20 percent in single-A bonds. Actively managed high-quality funds including Fidelity Municipal Income and T. Rowe Price Summit Municipal Income now invest more than 30 percent in single-A issues.

“Single-A bonds offer good risk-reward,” said Kevin Ramundo, co-manager of Fidelity Municipal Income. That’s a balancing act that will be ever more valuable this year as policy makers bear down.

THE NEW YORK TIMES

By CARLA FRIED

APRIL 14, 2017

NEW YORK, NY, April 13, 2017 – CUSIP Global Services (CGS) today announced the release of its CUSIP Issuance Trends Report for March 2017. The report, which tracks the issuance of new security identifiers as an early indicator of debt and capital markets activity, found an uptick in the pre-trade market for corporate and municipal bonds in March. This volume of pre-trade activity in corporate and municipal bond markets is suggestive of future growth in new securities issuance volume.

Read Report.

Fitch Ratings-New York-29 March 2017: Fitch Ratings has published an exposure draft for revisions it is proposing to its criteria for public sector revenue-supported debt.

The four key rating drivers for public sector revenue-supported debt are:

–Revenue defensibility;
–Operating risks;
–Financial profile;
–Asymmetric additive risk factors.

There are approximately 50 ratings that will be covered solely by these criteria, and Fitch anticipates that about 15% of this portfolio will be affected, with a roughly equal mix of upgrades and downgrades. Following the publication of this exposure draft, Fitch expects to place eight ratings on Rating Watch. Rating changes are most likely to result from better identification of issuers whose leverage positions relative to their business profiles suggests a rating higher or lower than the current rating. We do not expect downgrades to exceed one rating category.

Fitch will be accepting market feedback for its proposed revisions until May 9, 2017. Comments can be emailed to ‘pfcomment@fitchratings.com’.

Fitch will apply the criteria described in this exposure draft to new issuers/transactions rating assignments during the exposure draft period. Upon finalization of the ‘Public Sector Revenue-Supported Debt Rating Criteria’, not-for-profit credits currently covered by the ‘U.S. Nonprofit Institutions Rating Criteria’ will be covered by the criteria for public sector revenue-supported debt instead. Fitch’s ‘U.S. Nonprofit Institutions Rating Criteria’ will then be retired.

‘Exposure Draft: Rating Criteria for Public Sector Revenue Supported Debt’ is available at ‘www.fitchratings.com’ or by clicking on the above link.

Contact:

Margaret Johnson, CFA
+1 212 908 0545
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Thomas McCormick
+1 212 908-0235
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The sale of debt by states, cities, schools and other issuers in the U.S. municipal bond market totaled $86.5 billion in 2017’s first quarter, a drop of 9.5 percent from the same period in 2016, according to Thomson Reuters data on Monday.

Citigroup Inc was the top underwriter of muni bonds during the first three months of 2017 with $14.25 billion of debt in 123 deals.

Bank of America Merrill Lynch ranked second with $11 billion of debt in 118 deals, while J.P. Morgan Securities was third with $7.77 billion in 86 deals.

California was the first quarter’s top issuer, selling $2.79 billion of debt, followed by two New York issuers. The Empire State Development Corp sold $1.8 billion and the Triborough Bridge and Tunnel Authority sold $1.2 billion.

Reuters

Mon Apr 3, 2017 | 4:55pm EDT

(Reporting By Karen Pierog; Editing by Andrew Hay)

Read the Kroll Research Report.

It’s a strange time to have a landmark day for U.S. community development financing. Crucial community development programs at Housing and Urban Development, the Treasury Department and the Department of Agriculture are on the budget chopping block.

That makes it all the more significant that the Local Initiatives Support Corporation, or LISC, is today announcing it is issuing $100 million in general obligation bonds to raise capital for its community development work in the first offering of its kind.

As one of the nation’s largest nonprofit community development organizations, LISC is breaking new ground to access urgently-needed long-term capital for community development.

“Irrespective of what happens in DC…this is providing a channel for the capital markets to go to work in communities across the country that we are trying to make into high-opportunity communities,” says LISC CEO Maurice Jones, who previously worked in HUD under the Obama Administration.

The projects to be funded span 31 urban and rural areas in 44 states. Standard & Poor’s, or S&P, has given the offering a ‘AA’ rating, and Morgan Stanley is underwriting the 10- and 20-year bonds.

Access to capital

The bond markets represent serious capital. At the end of last year, the U.S. bond market stood at $39.3 trillion, including $3.8 trillion in municipal bonds. By comparison, HUD’s Community Development Block Grants in 2016 totaled just $3.2 billion.

But for places like Puerto Rico, or for the school systems of Chicago or California, bonds have represented a temptation to pile up excess debt, as well as a minefield of deceptive practices. Jones believes LISC can avoid the problems, in part by attracting like-minded investors.

“We are seeking investors who are interested in us both as a business investment and a business that can serve the communities and people that we are serving,” Jones says.

Founded in 1979, LISC has invested $17.3 billion to build or rehabilitate 366,000 affordable homes and apartments and develop 61 million square feet of retail, community and educational space. LISC is among the more than 1,000 community development financial institutions, or CDFIs, certified by the U.S. Treasury. CDFIs – nonprofit funds and credit unions and for-profit banks – specialize in providing access to capital and basic financial services to historically marginalized neighborhoods and groups. The U.S. Treasury typically requires CDFIs to target at least 60 percent of their lending to low-and-moderate income areas; they typically exceed that percentage.

According to Elise Balboni, LISC’s vice president for lending, the bond proceeds will provide “more flexibility to fund a range of high impact products and programs that don’t fit within the geographic and programmatic constraints of individual funders or the short time-horizons or underwriting limitations of individual investors.”

LISC is the first CDFI that doesn’t take deposits to offer its own bond to private investors. Historically, nonprofits have worked with local or municipal governments to access tax-exempt bond financing.

LISC cut its teeth in the bond market through the U.S. Treasury’s CDFI Bond Guarantee Program. The federal government has exclusively purchased or authorized more than a billion dollars in Treasury-guaranteed CDFI bonds since 2013. LISC credits that program with helping it get ready to offer bonds to private investors.

“There is pent up desire on the part of impact investors, especially at the family and foundation level, to deploy longer-term capital domestically,” says Andrea Armeni, executive director of Transform Finance, an impact investor network. “This instrument allows for that, matching the timeline alignment of the projects that need funding with a solid credit rating.”

CDFIs typically raise capital through grants or donations, or deposits in the case of banks and credit unions. They can also access short-term loans from larger banks seeking credit for meeting their obligations under the Community Reinvestment Act or CRA.

Bond ratings

As some CDFIs have grown, they have sought new sources of capital. CDFIs as a group have around $108 billion dollars in assets. LISC is one of five non-depository CDFIs with an S&P rating.

“This is a hybrid of municipal and corporate issuers,” says Ki Beom K Park, a credit analyst at S&P who works on CDFI ratings.

CDFIs are similar to housing finance authorities that issue tax-exempt bonds, Park explains. They get a significant amount of revenue from public sources, sometimes around 35 percent. They also each have a lot of real estate in their lending portfolio, especially in low-to-moderate-income census tracts.

Like other lending companies, factors like portfolio quality, underwriting guidelines, management experience, non-performing loan ratios, and cash reserves to cover for losses are key factors for CDFIs. Despite CDFIs working in neighborhoods historically considered “risky,” some CDFIs have non-performing loan ratios as low as 1%.

Park says to get an ‘AA’ rating S&P likes to see that CDFIs have enough equity set aside to survive a “doomsday scenario” of 51.8% of their loan portfolio defaulting.

“We’re hoping that five to ten years from now, the notion of CDFI and other community-based organizations issuing bonds will not be news,” says LISC’s Jones. “The markets will become more familiar with us, and we will become more familiar with them.”

IMPACT ALPHA

BY OSCAR PERRY ABELLO • APRIL 4, 2017

Oscar is a New York City-based journalist, covering people and ideas that help create a more just and equitable world. He is a 2015-2016 Equitable Cities Fellow for Next City.

They’re lower-risk than their corporate counterparts, and their tax advantages now look more secure.

Investors in search of better yields—but who want to avoid taking too much risk—should consider an often-misunderstood sector: high-yield municipal bonds.

The funds that invest in these low-rated—or unrated—tax-advantaged bonds are staging a comeback after getting slammed after the November election.

So far this year, high-yield muni funds are up 2.7%, compared with 1.66% for long-term national muni funds and 2.48% for high-yield corporate-bond funds, according to Morningstar.

While high-yield muni funds do take more credit risk than investment-grade munis, they have a much lower default risk than their similarly rated corporate-bond counterparts. Yet their yields, at about 5%, are close, says Richard Daskin of RSD Advisors. “On a tax-equivalent basis, you are really way ahead of the game,” he adds.

High-yield muni funds have long average maturities, and thus are subject to interest-rate risk—but they don’t correlate with Treasuries as much as investment-grade munis, adding some diversification. Plus, the odds of interest rates spiking this year are lower, now that the Trump administration’s plans to add economic stimulus are getting bogged down in Washington, and some economic data, like Friday’s March payrolls report, are pointing to slower growth. Prospects for major tax cuts—one reason munis sold off last fall—are fading.

“This year is unfolding a little more favorably than most projections for the asset class,” says John Miller, portfolio manager of the Nuveen High Yield Municipal Bond fund (ticker: NHMAX), which is up 3.37% this year and 7%, on average, over the past five years. “Sweeping changes to taxes and budgeting aren’t going to be as easily accomplished as many assumed.”

Closed-end high-yield muni funds, which use leverage, typically offer higher yields and are cheaper than usual. These funds, which trade on exchanges, can be bought at a discount when out of favor, which is the case now. For example, Pioneer Municipal High Income Advantage Trust (MAV) is trading at a 7% discount, while for the past three years it has traded at an average premium of 10.5%. Its yield is 5.16%.

Like other closed-end muni funds, this Pioneer fund has had to cut its distributions recently, as the rise in short-term interest rates increased the cost of borrowing, and its high-coupon holdings were called, requiring the manager to buy new bonds at lower rates. Both trends are likely to continue, which explains the discounts.

“The yields aren’t necessarily sustainable, but if you’re buying them at a discount, and they are liquid, I think they are attractive,” says Jay Hatfield, CEO of Infrastructure Capital, who has been adding the funds to some portfolios lately.

FOR LONG-TERM INVESTORS who want to minimize the risk of needing to sell at a discount, Alexander Reiss, a closed-end-fund analyst at Stifel, recommends Eaton Vance Municipal Income 2028 Term Trust (ETX). It has a 4.3% yield, is selling at a 3% discount, and matures at par in 11 years. “You have a good idea where you’ll land,” says Reiss. The fund’s weighted average credit rating is triple-B-minus, just one notch into investment grade.

“We like high-yield tax-exempt, but it has had quite a run” in recent years, says Jim Robinson of Robinson Capital. He owns Nuveen AMT-Free Quality Municipal Income (NEA), which has more exposure to high-yield than the average muni closed-end fund.

RSD’s Daskin thinks that exchange-traded funds—such as VanEck Vectors High-Yield Municipal Index (HYD), which yields 4.4%—are a good option now. The VanEck fund is liquid, has low fees and no leverage, and about 30% of its holdings are rated investment-grade. “I haven’t felt the need to reach for yield in this space” by turning to closed-end funds, says Daskin.

BARRON’S

By AMEY STONE

April 8, 2017 12:21 a.m. ET

U.S. states have entered a new era characterized by chronic budget stress. For the past 130 years, states have mostly been financially resilient through a range of economic conditions. In fact, no state has defaulted on its debt since Arkansas in the 1930s. This long period of relative calm may have lulled some people into complacency when it comes to state finances. It shouldn’t have.

S&P Global Ratings has been evaluating the creditworthiness of U.S. states and municipalities since 1940. We now see a profound shift unfolding in states such as Illinois, Kentucky, and New Jersey, whose pension systems are funded at distressed levels. The pervasiveness of budget pressures in these and other states is inconsistent with a mature national economic expansion and signals real credit stress. Our recent negative rating actions on several states’ debt reflect this. Since January 2016, we have issued 11 state credit rating downgrades and just two upgrades.

Nevertheless, the states continue to benefit from certain inherent advantages that result in mostly high credit ratings. Among these are self-imposed controls against financial excess, such as balanced-budget requirements and limits on borrowing. We shouldn’t forget that states adopted these restraints in response to a series of debt crises from 1840 through the 1880s.

To this day, these fiscal institutions remain important pillars underneath states’ credit standings. The states’ co-sovereign status and fiscal integration with the federal government has also protected them in tough economic times. Now, however, demographic and macroeconomic shifts are creating stress that, for some states, render these institutions inadequate.

Low oil prices explain the fiscal gaps for the leading energy states like Alaska and North Dakota. But slower revenue growth, declining worker-to-beneficiary ratios in state retirement systems, and rising Medicaid enrollments are widespread and have meant that fiscal stress is no longer confined to recessionary times. This stress is leading states to forego crucially needed investment in infrastructure and higher education.

There is an asymmetry to the new era for state finances. While the budgetary gains to states during the current expansion have been subdued, recent downdrafts have been severe. In the aggregate, from 1951 through 2001, state tax revenues never posted year-over-year declines, but have done so three times in just the past 15 years.

The most dramatic decline was also the most recent, when in 2009 revenues plunged 8.5 percent. Furthermore, we believe states can expect to largely go it alone the next time a recession strikes. In our view, it’s unlikely that in a downturn the current Congress would deliver enhanced aid to states via Medicaid as previous Congresses did in response to the last two recessions.

Large unfunded pension and retiree health care liabilities will also continue to squeeze state finances. The aging population and low gains in productivity imply a federal funds rate that — even after the expected round of tightening monetary policy — is low by historic norms. Yet most states still assume investment rates of return in the range of seven to eight percent, incentivizing greater risk taking, which brings with it greater risk of underperformance.

Recent equity market appreciation and various business sentiment readings indicating improved confidence offer a reasonable basis for near-term optimism. But even a burst of federal fiscal stimulus and deregulatory zeal is likely to lift gross domestic product growth (GDP) growth only temporarily considering the structural headwinds facing the U.S. economy. Therefore, whatever pace of expansion materializes in 2017 or 2018, we expect economic growth will revert to around two percent over the long term.

Not all states will stumble on this more challenging landscape. Those that have maintained pension funding discipline and consistently sought balance between revenues and spending will fare best. The strongest states will also likely expand their efforts at pension reform to cover retiree health care, which will become more important as time goes on.

With the potential for less countercyclical federal aid, states will need larger budget reserves and fiscal policy guided by a goal of aligning spending with revenue. Healthy budget reserves, balanced fiscal operations, and funding discipline vis-à-vis long-term liabilities will help any state better withstand the effects of protracted slow growth. A review of our rating actions over the past two to three years bears this out and shows that state credit quality has already begun to diverge along these lines.

THE HILL

BY GABRIEL PETEK, OPINION CONTRIBUTOR – 04/04/17 01:20 PM EDT

Gabriel Petek is a managing director and sector leader in the U.S. Public Finance States group at S&P Global Ratings in San Francisco.

View the Snapshot.

Hutchinson, Shockey, Erley & Co. | Apr. 4

The billionaire philanthropist has vowed to secure retirement for public employees. So why do so many public employees despise him?

John Arnold wasn’t a pension guy.

The billionaire financier, who made a fortune in the stock market before retiring at 38, hadn’t ever really been interested in public retirement plans. But in early 2009, just months into the global financial crisis, Arnold began seeing a flurry of news articles about public pension funds collectively losing billions in the stock market crash. Assets had plummeted, causing unfunded liabilities to shoot up. Cash-strapped governments couldn’t afford to fix the shortfall, and the longer they delayed putting more money in their pensions, the worse the problem would get. In short, it was a policy nightmare.

Arnold became intrigued. “The fact that you could go in one year from having a system that was well-funded to having a major gap — that affected me,” he says. He started digging and found a book called Plunder: How Public Employee Unions Are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation, by conservative writer Steven Greenhut. As the title suggests, the book is an anti-union take on public pensions that details the misdeeds of the system’s bad actors — public employees who game the system and wind up with pensions that are equal to or better than what their working salaries had been. Reading that book, says the now-43-year-old Arnold, “just made me mad.”

Plenty of other people have gotten mad over the same thing. But Arnold, whose net worth is pegged somewhere near $3 billion, realized there was something he could do about it. He and his wife had just started a foundation they hoped would help governments make decisions based on evidence and data to produce concrete, measurable and lasting improvements to society. Over the nine years since it was started, the Laura and John Arnold Foundation has supported a range of initiatives, from education and criminal justice policy research to programs that bolster scientific research integrity by trying to replicate the findings of studies. He and Laura have signed on to the Giving Pledge, Warren Buffett and Bill Gates’ challenge to wealthy individuals to give away the majority of their money to philanthropic causes. To date, the Arnold Foundation has given away nearly $700 million.

As he learned more about the challenges plaguing public pensions, Arnold started donating money to help study possible reforms. Initially, his foundation doled out relatively small grants of less than $200,000 to think tanks and nonprofits. Then in 2012, it awarded nearly $5 million over three years to the Pew Charitable Trusts to support its Public Sector Retirement Systems project. In total, the foundation has given $9.7 million to Pew to study pensions through 2019. All told, the Arnold Foundation has now directed nearly $28 million to fund pension policy research. John and Laura have also personally donated millions more to pro-reform political candidates and ballot initiatives, such as a failed 2014 measure in Phoenix that would have moved city workers to 401(k)-style plans. The measure was backed by $1 million from the Action Now Initiative, which is bankrolled by Arnold.

All of that has made Arnold public enemy No. 1 among lots of government workers and union leaders, many of whom see any threat to change pensions — no matter how small — as something to be feared and fought. “When people hear of an effort to get rid of pensions,” says Bailey Childers of the National Public Pension Coalition (NPPC), which is supported by unions, “the source is almost always John Arnold.”

For those who despise Arnold, it’s easy to paint him in an unflattering light. He made his first billions as a trader for the energy firm Enron. After the company imploded in bankruptcy and scandal in 2002, Arnold walked away unscathed. (He himself was never accused of any wrongdoing.) He then started a hedge fund that became one of the most successful energy trading funds in history, even as America was plunging toward the Great Recession. Along the way, Arnold, who lives in Houston, bought a place in the city’s tony River Oaks neighborhood, a three-acre plot that included a turreted red brick home built in the 1920s by two famous Houston architects — a rare cultural and architectural gem in a sprawling city with few historic preservation protections. It soon became clear Arnold intended to raze the home and replace it with a sleek modern house. Residents protested in front of the property; preservationists met with Arnold but say he was indifferent and condescending. He ultimately tore the house down.

Sometimes the vilification of Arnold can get personal. A recent video produced by the NPPC shows a man sitting poolside, sipping a tropical drink. “John Arnold may have retired in his 30s,” the announcer quips. “But the rest of us can’t. And we won’t be able to retire at all unless we fight back against his efforts.” In 2013, the progressive-leaning Institute for America’s Future released a report called The Plot Against Pensions: The Pew–Arnold campaign to undermine America’s retirement security — and leave taxpayers with the bill. It accused the Arnold Foundation of being “run by conservative political operatives and funded by an Enron billionaire.” The same year, Rolling Stone’s Matt Taibbi described Arnold as “a dickishly ubiquitous young right-wing kingmaker” and “a lipless, eager little jerk with the jug-eared face of a Division III women’s basketball coach.”

Arnold may be a lot of the things his enemies say he is. But at a time when many people believe the public retirement crisis has become untenable, Arnold also might just represent governments’ best shot at ensuring their public pensions can endure.

There are basically two ways to look at the current pension problems in this country. The first is how unions see it, as a string of broken promises.

Back in the ’90s, stock market gains helped fuel pension investment growth so much that by 2001, the average pension was fully funded. That meant the money it had in assets would grow through investment returns to eventually cover the pensions promised to current workers and retirees. That’s when many governments got too comfortable and made two fatal mistakes: They stopped regularly paying their annual pension bill, and they boosted retirement benefits for workers.

Even in the best of times, those were financially questionable decisions. But then the first baby boomers began to retire. Every day, there were fewer people paying into the pension system and more people taking money out of it. By 2005, the average pension was just 86 percent funded. Then came the financial crash: In 2008 and 2009, pension funds saw roughly one-quarter of their assets disappear. Meanwhile, governments grappling with major budget shortfalls skipped pension payments to make ends meet. Unfunded liabilities grew even larger. Around 2012, government budgets and the stock market began recovering, and pension funding levels stabilized. But as a whole, pensions haven’t regained any ground. They have remained around 73 percent funded, on average, for the past four years. (Of course, that doesn’t describe the path of all pension plans. New York state’s plans are more than 90 percent funded, while Wisconsin’s retirement system is fully funded.)

If governments had only kept up their end of the bargain and continued to responsibly fund pensions, most experts agree that today’s troubled systems would be in far better shape. For unions, then, the argument is simple: Lawmakers must step up and pay more into the pension funds now, be it by raising taxes or finding some other source of revenue, to make up for their predecessors’ broken promises.

But that’s not the way Arnold sees it. For him and many others, the current situation isn’t a question of failed promises or unfair policies. It’s a math problem.

Arnold is a mathematics whiz whose remarkable skill with numbers had enabled him to develop new option-pricing models for oil and gas trading while at Enron. The same understanding of systems and figures fueled the unmatched growth of his hedge fund, Centaurus Advisors. At heart, Arnold is a data nerd. He doesn’t just want to understand what is going to happen next, he wants to know why. So when he first began looking into public pensions, what he found didn’t make sense to him. Here was a system that forced governments to shoulder all the risk for paying out pensions in the event of a market crash, but offered no immediate repercussions for governments that chose not to fund their obligations like they were supposed to. Everyone had skin in the game, but there was no referee. “It seemed like an issue,” he says, “where every actor involved had an interest in the system [but] there was no objective voice that was really the voice of the next generation and of fiscal stability.”

Arnold began zeroing in on places where the math — thanks to lawmakers’ inaction over the years — simply wasn’t viable anymore. That included places like Kentucky, which had habitually skipped its pension payments for years and had less than one-third of the assets it needed to meet its promised pension benefits. Or San Jose, Calif., where retirement costs were eating up nearly a quarter of the city’s budget. Plans such as these, in which previous lawmakers had ignored a problem to the point of threatening a system’s stability, were prime candidates for the kind of data-driven and evidence-based policy change the Arnold Foundation supports. “That’s the kind of conversation we want to facilitate,” says Josh McGee, the foundation’s pension expert and vice president of public accountability. “This is an issue that folks on the ground are struggling to figure out, and they often don’t have the resources. The fundamental piece we need to solve this problem is understanding the data.”

In 2012, the foundation financially supported two major efforts in those places that have become indicative of its approach since then — either providing research assistance directly to lawmakers or funding the efforts of a like-minded research partner. Kentucky lawmakers, after receiving research assistance and advice from Pew, promised to increase funding to the state’s public employees’ plan while creating a cash balance plan for new employees. The latter shifted much of the future pension investment risk away from the state, a major theme of reforms the foundation’s money tends to support. In San Jose, voters approved a ballot measure that included cuts to retiree health care and eliminated bonus payments to retirees when the pension fund had a good investment earnings year.

These approaches have now been repeated in dozens of places across the country. Funding from the foundation has also gone to think tanks and research institutes that produce public pension literature. Some of these are advocates — the libertarian Reason Foundation has received more than $3.5 million for pension research, for example — but many of them are not. Boston College’s Center for Retirement Research, for instance, receives Arnold funding to maintain its well-regarded and widely used databases on pension fiscal health. The Nelson A. Rockefeller Institute of Government recently published a series of papers, funded by the Arnold Foundation and Pew, warning of the increasing risk involved in current pension accounting and investment practices.

Sometimes the foundation and unions actually find themselves on the same side. In Arizona last year, for example, voters approved a ballot measure that reduced cost-of-living payments to retired police and firefighters; the measure had received support from both the foundation and organized labor. More often, however, the foundation’s money assists groups that want to press through with plan changes after union negotiations have failed. In San Jose, former Mayor Chuck Reed said city officials negotiated for months with the city’s 11 unions, even bringing in state mediation services. (Reed now works for the advocacy group Retirement Security Initiative, which receives Arnold funding.) “When we got down to it, there were three or four of them that were almost to the point of getting to an agreement, but they didn’t want to be the first and be out in front of crossing other unions,” he says. “So ultimately they never agreed to anything.”

As a result, unions feel railroaded by the kinds of overhauls backed by Arnold. Although the foundation’s partners like Pew and Reason say they want input from all stakeholders when they are consulting on pensions, public employee buy-in isn’t a requirement. “Obviously labor organizations are an essential part,” says Pew’s Greg Mennis. “We just try to focus on the fact of the numbers … to bring the analysis to light and educate stakeholders what it means.”

Policy papers funded by the foundation tend to focus on changes to pension systems that shift risk away from the government and taxpayers, and toward the public worker. For instance, a 2012 white paper written by McGee lays out principles for creating a new pension plan. The paper outlines what’s wrong with the current system — insufficient government contributions, lower-than-expected investment returns and unpredictable retiree costs — and then offers five potential solutions. None of the solutions propose keeping the traditional pension structure, and four of them would partially or fully incorporate a 401(k)-style plan for workers.

Those kinds of ideas, in combination with the Arnold Foundation’s fealty to data and numbers, have led many people to perceive the group as anti-union and set on eliminating pensions. “Pension reform is more than a math problem — it’s not simply solving for X,” says Vijay Kapoor, an independent consultant who has no connection with either the foundation or unions. Kapoor advocates a mediation approach to pension reform that requires agreement and sacrifice from all parties. “These are human beings and this is their retirement,” he says. “Any actuary can run a scenario where you can make the numbers work. But the question is, how do you get a comprehensive solution that actually addresses the problem? To do that, you need buy-in from everybody.”

All the unions’ vitriol against Arnold suggests a larger-than-life villain, a fast-talking conservative Wall Street tycoon in a $3,000 suit and slicked-back hair. In reality, he’s much more boring. He’s a soft-spoken and thoughtful policy wonk. He and Laura give money to causes on the political right and left — charter school networks as well as Planned Parenthood — and they once hosted a fundraiser for Barack Obama at their home. Arnold’s Twitter feed consists mostly of dry policy observations and the occasional wry joke. In January he tweeted, “Did everyone have a relaxing two months between the end of 2016 and the start of the 2020 campaigns?” He’s reserved and private about his personal life. He doesn’t smile much in photos. He says he likes to blow off steam with his three kids, all under the age of 10, but when pressed on what he does for fun, he hesitates. “Probably shouldn’t put that in print.”

Much of the focus on the foundation and on Arnold himself comes from the fact that he’s one of the very few outside players in an arena where unions have long held sway. Arnold says the vitriolic nature of the attacks against him, while surprising at first, are now a badge of honor. “If we were not being effective in these conversations,” he says, “then we’d be getting ignored.”

To public employees, the insinuation from outsiders — especially billionaire outsiders — that pensions need to be fixed is practically a personal affront. Workers didn’t get us into this mess, they say. Political leaders did, through years of neglect and underfunding.

That may be true, say Arnold and others, but so what? The focus should be on how to fix things going forward, not on casting blame about how we got here. Politicians aren’t likely to start throwing significantly more money at pension funds any time soon. States and cities, Arnold believes, must look at where the numbers are heading and at least explore some other possible reforms. Doing nothing is not an option.

Arnold doesn’t just preach to others about living by the data. When his physician recommended that he begin taking anti-cholesterol medication, he wanted to know if there was solid research to show that the medicines actually helped and why. His doctor’s response was frank. “We don’t know what the marginal value of taking them is,” he said. “But we do know that people who don’t take them are dead.”

John Arnold took the medicine.

GOVERNING.COM

BY LIZ FARMER | APRIL 2017

A roundup of money (and other) news governments can use.

GOVERNING.COM

BY LIZ FARMER | APRIL 7, 2017

Wouldn’t a constitutional amendment be necessary for prison construction bonds? This is a question I asked state officials last year as the Governor’s initial proposal for a mega-prison construction plan was first revealed. The answer was no, because the proposal was funded by revenue bonds, which do not count toward Alabama’s constitutional debt limits.

The constitutional limit on general obligation bonds makes lawmakers and state agencies accountable to voters. To fund large capital projects beyond the debt limit, they need voters to approve a constitutional amendment. Revenue bonds avoid that accountability, because in theory they don’t require taxpayers to foot the bill.

Some revenue bond projects – toll bridges and hospitals, for example – do generate revenue which can be used to pay back the principal and interest. But do prisons? Not really. While the Alabama Department of Corrections (ADOC) does collect some revenue from prison labor contracts, it is nowhere near enough to cover the tens of millions of dollars required to make the bond payments on even one new 4000-inmate facility. The bonds won’t be repaid with revenue at all, but from projected budget savings of lower operating expenses on the new prisons. But to avoid the hurdle of voter approval, the bond issues create a legal fiction, where revenue comes in the form of lease payments from ADOC to a new legislatively-created prison finance authority, headed by the governor.

Essentially, the state would move money from one pocket to the other and call it “revenue” to get around the popular vote required for General Obligation Bonds.

Setting aside the ethical question of avoiding voter approval, Alabamians should be concerned about lease-revenue bonds. Because they rely on uncertain sources of revenue to pay them, revenue bonds are viewed by the market as riskier than general obligation bonds. This means the interest rates are higher, and therefore cost more to pay back.

Perhaps a bigger problem is that these bonds make long-term commitments for state and local governments in response to short-run problems. County and municipal bonds are in some ways even worse; they commit local governments with relatively small tax bases to decades of bond payments and hundreds of millions in total debt. Although they would more plausibly be collecting revenue from the state to pay the bonds, ultimately Alabama taxpayers are still on the hook if ADOC’s promised savings don’t materialize.

All government debt, including revenue bonds, creates a fiscal illusion. Debt allows large increases in spending with no apparent need for higher taxes. Yet, this mentality only commits more discretionary future tax revenues to servicing past debt. Without reform, state debt will increasingly compound the growing burden of the federal debt. Only fiscal transparency and taxpayer constraint can reverse this trend.

A more transparent approach to fixing the problems of overcrowding and poor conditions would be to fund construction and renovation from existing tax revenue or go through the proper channel of seeking voter approval. It would cost taxpayers less in interest, and it would be more honest.

Al.Com

by Dr. Stephen Miller

April 06, 2017 at 9:25 AM, updated April 06, 2017 at 9:27 AM

By Dr. Stephen Miller, executive director of the Manuel H. Johnson Center for Political Economy at Troy University. The views and opinions expressed are those of the author and do not imply endorsement by Troy University.

States had a cheaper option for investing in infrastructure, but they didn’t take it. Now, they must pay the price.

There’s a lot of talk in Washington about spending more — perhaps $1 trillion more — on infrastructure over the next decade. It’s too bad a free-spending approach wasn’t taken sooner.

Interest rates are starting to tick up after years of historically low levels. That means that any capital projects that get underway in coming years are inevitably going to cost more than they would have if states and other jurisdictions had been more aggressive about taking on debt at those now-disappearing bargain rates. Financing for new projects between 2011 and 2015 cost half as much as during the previous decade. Rather than taking advantage of this opportunity, though, states retrenched.

As interest rates plunged, the volume of borrowing actually dropped. Back in 2009, state and local government spending on capital projects, encouraged by the federal stimulus and the Build America Bonds program, represented 2.6 percent of GDP. By 2014, its share dropped to 1.9 percent — a decline of nearly 25 percent. Borrowing rose last year, but most of that was refinancing old debt, not money for new projects. “There was an opportunity to lock in interest rates for a 20- to 30-year period to address these infrastructure problems that everyone seems to recognize,” laments Ron Fisher, an economist at Michigan State University.

Politically, though, it was very difficult to take on new debt. Some states have imposed caps on the amount of capital debt that can be added in a given year. Meanwhile, the cost of addressing leaky lead pipes and failing dams and bridges continues to rise. And now states and localities have to worry that their borrowing costs will go up not only due to rising interest rates, but as a result of new federal rules eroding or erasing the tax exemptions of the bonds they issue.

Perhaps such tax breaks will be maintained. And interest rates haven’t risen dramatically yet, despite the Federal Reserve’s recent hike. Nevertheless — with the notable exception of public colleges and universities — government agencies missed a golden opportunity to go on a building spree. “We squandered a decade of low interest rates to get some of this stuff done,” says John Engler, a former governor of Michigan and until recently president of the Business Roundtable.

GOVERNING.COM

BY ALAN GREENBLATT | APRIL 2017

States and localities are wary of the president’s support for the Build America Bonds program.

A popular Obama-era infrastructure financing program may get revived this year as President Trump moves forward on his pledge to invest $1 trillion in infrastructure. But this time around, state and local governments might not be as excited about it.

The program, Build America Bonds (BABs), was created in 2009 as one of many recession-era initiatives aimed at jump-starting the economy. Unlike tax-exempt municipal bonds, BABs are taxable, and, as a result, open up the municipal market to new investors, such as pension funds or those living abroad. But BABs are also more expensive for governments. So to defray the added cost, the federal government offered a direct subsidy of 35 percent of state and local governments’ interest payments on BABs.

But the program became a casualty of sequestration: cutbacks in federal subsidies promised under the program left state and local governments scrambling to fill the void. A recent estimate by the Institute of Government and Public Affairs at the University of Illinois found that so far Illinois and its localities have had to pay out a collective $70 million to offset the higher costs of BABs.

The study comes as economic advisors to Trump have expressed support for the BABs program as a financing tool. While details are light on the president’s plan to incentivize infrastructure investment, most experts agree that taxable and tax-exempt municipal bonds are likely to play a role. And that has states and localities wary.

“With direct subsidy bonds, until the bond matures, you’re exposed to the federal process,” says Martin J. Luby, the author of the study. “So the question is, is the lower borrowing cost worth the risk that it could increase [should the federal government defund the program]?”

Dan White, senior economist at Moody’s Analytics, predicts that the answer is no. “[The feds] could theoretically design a program that protects states against this,” he says. “But states know this has the potential to be changed at a moment’s notice by policymakers in Washington.”

Back when BABs started, few — if any — considered the baked in exposure to federal policy. Therefore, the program was largely heralded as a success. All told, state and local governments sold more than $151 billion in BABs between 2009 and 2010. The program even propelled total bond issuance in 2010 to $433 billion, a record that still holds today.

But when sequestration hit in 2013, the mandated cutbacks in federal appropriations included the federal subsidies for the popular program. Annual subsidies for BABs dropped by anywhere from about 7 percent to nearly 9 percent. In addition, notes Luby, most BABs were not eligible for refinancing, so governments were stuck with the higher bills for the life of the bond. In Illinois, he estimates that will cost governments $400 million over the next two decades for roughly $11 billion in BAB debt. Cash-strapped Chicago would lose out on $56 million alone.

Nationwide, Luby figures the total subsidy losses are in the billions. “It’s stressing out these governments one way or the other,” he says. “And the expectation is, it’s just going to continue.”

GOVERNING.COM

BY LIZ FARMER | APRIL 6, 2017

When the American Society of Civil Engineers published its latest Infrastructure Report Card last month, the results were sobering: a grade of D+ for the U.S. and an estimated price tag of $4.6 trillion to make needed repairs by 2025. Such shortcomings have gotten widespread coverage in recent years, with images of Amtrak derailments, crumbling highways and the damaged Oroville Dam vividly illustrating the costs inflicted by decades of underinvestment.

So far, though, Congress has been unable to come up with a sustainable model for funding necessary improvements. President Donald Trump wants to spur $1 trillion of investment by relying on tax credits and public-private partnerships. Senate Democrats have announced their own $1 trillion program, with more conventional federal appropriations aimed at repairing roads, bridges, railways and water systems.

Yet even if these proposals could be enacted, they wouldn’t be sufficient. Due to continual pressure on federal and state budgets, new and more reliable sources of funding are needed.

One promising solution is for states or regional economic zones to lead the way by creating their own infrastructure banks, modelled on successful development banks in other countries. The Northeast has taken the first step, with Massachusetts filing bills in January to establish a state infrastructure bank and examine a regional one. This model could be easily replicated across the U.S. to accelerate investment and economic activity.

How would it work? Taking the Northeast as an example, states from Massachusetts to Maryland could create a jointly owned entity capable of financing critical projects, including those that cross borders. Each state would contribute part of the initial equity, which could then be leveraged with private debt to invest in revenue-producing projects. The equity could be boosted through annual contributions from state transportation budgets — or from other sources — with every new dollar having a multiplier effect.

This approach has several benefits. Projects could be funded on a portfolio basis, with excess cash flow from one investment subsidizing another. Smaller projects could be aggregated to create critical mass. And regional banks could become repositories of best practices, acting as centers of excellence for negotiating complex projects on behalf of taxpayers.

Perhaps more important, regional banks could draw investment from institutions such as pension funds and sovereign wealth funds that generally don’t invest in the traditional municipal bond market. That would significantly expand the pool of available capital for infrastructure, while enabling bigger investments with longer maturities.

Regional banks wouldn’t replace the states’ role in issuing municipal bonds, or eliminate the need for federal dollars. Nor would they aim to privatize public assets. They would simply expand the universe of funding sources and viable projects, thereby boosting regional competitiveness.

This is a tried and tested model. The European Investment Bank, founded in 1958, last reported more than 450 billion euros in disbursed loans, about two-thirds of which were for infrastructure projects. In 2016, China launched the Asian Infrastructure Investment Bank, with $100 billion to help accelerate investment across developing Asia. Canada is creating a bank that will leverage C$35 billion in state funds with private capital to pay for domestic construction.

Although the U.S. attempted to create a National Infrastructure Bank, the legislation stalled in Congress. And our current approach to funding is too fragmented and politically fraught to make transformative investments. By seizing this opportunity, the U.S. could mobilize capital to finally invest in infrastructure for the 21st century — creating high-paying jobs and boosting economic growth in the process. States can lead the way by seeing beyond their borders, and investing in a more prosperous future.

Bloomberg View

By Suneel Kamlani

APRIL 5, 2017 6:00 AM EDT

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Taylor Riggs, a contributor to Bloomberg Briefs, talks with Bloomberg Briefs contributor Amanda Albright about this week’s municipal market news.

Watch the video.

Bloomberg

April 6, 2017

Read the testimony.

Foreign investment in municipal bonds has doubled since 2009

America’s asset managers are finding new ways to take advantage of the latest trend: the wave of foreign investors buying the debt of U.S. cities and states.

Overseas dollars have been flooding into the municipal market for several years, with foreign investment in munis doubling since 2009 to $106 billion of the $3.8 trillion market, according to Federal Reserve data. The trend picked up in the last quarter of 2016, with foreign investors adding an unprecedented $21 billion in municipal bonds.

Foreign companies see no benefit from the tax-exemption that comes with most muni bonds, so they tend to gravitate to higher-yielding taxable bonds. But some foreign investors are also interested in tax-exempt bonds, testing an assumption of the muni market, that buyers typically are drawn in part by tax advantages.

Attempting to meet the surge in demand, Nuveen Asset Management and a subsidiary of Citigroup Inc. C -0.77% will soon launch a mutual-fund type municipal-bond investment vehicle. The fund will be managed by Nuveen, according to people familiar with the matter.

Other money-management firms are wooing banks and insurance companies in Taiwan, Korea and Japan by offering private municipal-bond funds. Another firm is selling shares in exchange-traded funds to Swiss and British investors.

“Munis are global now,” said Rob Amodeo, head of municipals at Western Asset Management, a Pasadena, Calif.-based bond manager that is a subsidiary of Legg Mason .

Since November 2015, Western Asset has run a private fund that invests in municipal debt on behalf of Japanese financial institutions in partnership with Japan’s Shinsei Bank Ltd.

Standish Mellon Asset Management LLC, a unit of Bank of New York Mellon , recently won a commitment from a Korean insurance company to run a separately managed account filled entirely with municipal bonds, senior portfolio manager Jeffrey B. Burger said. The firm is in talks with other insurers in Korea, China and Japan as well as an investor in Australia, he said.

The typical overseas investors in municipal debt are foreign life insurers in search of long-dated securities to match their long-term liabilities, bankers and asset managers said. Banks have also made up a substantial portion of the demand.

The trend means these overseas investors are often buying the debt of towns they couldn’t find on a map. At Nuveen Asset Management, which already manages the municipal-bond investments of some Asian and European institutions, “We’ve brought an atlas into meetings before,” said co-head of global fixed income John Miller.

These investors are tempted by the bonds’ relative safety, longer duration and relative yield. Some are also seeking diversification. A strengthening dollar—which the Federal Reserve could promote by raising short-term interest rates—could also help bolster the investments.

There are risks, given the bonds often won’t mature for decades and rising long-term rates could reduce their value. Municipal bonds aren’t as liquid as Treasurys. In addition, U.S. municipalities have, on rare occasions, defaulted.

Even so, several factors continue to tempt buyers.

At asset manager VanEck, about 8% of its $1.8 billion municipal high-yield ETF is foreign investment, up from 3% one year ago.

“Muni high yield has compared very favorably across the globe,” said senior municipal strategist Jim Colby.

The majority of the international investment in the VanEck ETF—$116 million—comes from Taiwan. Investors in Canada, Switzerland and the United Kingdom each hold more than $5 million. These investors have bought in despite the fact that the bonds in the VanEck ETF carry a tax-exemption that doesn’t benefit foreign investors.

More typically, foreign investors gravitate to higher-yielding taxable bonds, of which there are about $450 billion outstanding, according to Barclays. The S&P Taxable Municipal Bond Index returned 1.72% in the past year, compared with a negative-2.05% return for the S&P U.S. Treasury Bond 7-to-10 year Index and a negative 0.75% for the S&P Global Developed Sovereign Bond Index.

The heightened demand is a likely contributor to increased market activity.

Trading in taxable municipals has shown a steady climb in activity since 2014, according to an analysis of Municipal Securities Rulemaking Board data by Natalie Cohen, head of municipal research at Wells Fargo Securities.

The new market players are also changing the work life of professionals accustomed to a quiet and slow-moving domestic market. Mr. Burger, the Standish portfolio manager, hadn’t visited Asia once in his 41 years before October. He has now been to Beijing, Hong Kong, Seoul and Tokyo.

“If you were to ask me even in early summer of last year would I ever expect that this career would change to where I am now about to embark on my fourth trip to Asia in six months,” he said, “the answer would have been ‘no.’”

THE WALL STREET JOURNAL

By HEATHER GILLERS

Updated April 4, 2017 7:28 p.m. ET | WSJ Pro

NEW YORK — So much for that sleepy reputation.

The municipal-bond market used to be a reliably boring one, full of small cities, state governments and others borrowing to build sewers, roads and hospitals. But in the last decade, the muni market has been all-too-interesting and whipped investors through several sell-offs.

The latest struck in November, when the largest muni-bond fund had its worst month since the 2008 financial crisis. It lost 3.4 percent on worries that the incoming White House and Congress would cut tax rates and pursue other moves that could weaken muni bonds’ appeal. Since then, though, muni funds have clawed back about half their losses and look to be on their way to erasing yet another downturn.

“That’s the nature of the muni market, it overreacts,” says James Dearborn, head of municipal bond investments at Columbia Threadneedle.

Looking ahead, muni fund managers say they expect the market to remain interesting. Volatility will likely remain as Washington continues to debate changes to the tax system. Returns, meanwhile, will likely be lower than in past years, but managers say they can still grind out modest gains.

“What the last two years have taught us is: Don’t panic,” says Hugh McGuirk, head of municipal bonds at T. Rowe Price.

Few were taking that advice in November, after Republicans swept elections for the White House, Senate and House. Prices for all types of bonds fell on expectations that faster economic growth and inflation may be on the way.

Munis fell even more on fears that some proposals would directly hit the market, chiefly a rewrite of the tax code. “Any time you talk tax reform, the muni market quivers,” McGuirk says.

The income that municipal bonds pay can be exempted from income taxes. That’s why investors buy a muni with a lower yield than a similarly rated corporate bond, because the return will be better after taxes. Tax reform could put the exemption in the crosshairs. Even if it survived, muni bonds could be hurt if tax rates dropped and diminished the exemption’s benefit.

Beyond that, investors worried that a big infrastructure program from Washington could mean a deluge of new municipal bonds hitting the market and overwhelming demand from buyers.

November’s tumble in prices for munis followed earlier sell-offs, such as in 2010 and 2013. But this past one didn’t last as long as those.

“That was the most interesting part of this particular sell-off in November, how quickly it reversed,” says Karl Zeile, portfolio manager at Capital Group. “It really lasted only about four weeks, and then the market woke up to oversold valuations and started moving.”

Part of it is who was doing the buying. The muni market is usually dominated by individual investors, who can be prone to follow the tide. Prices for munis eventually fell enough that hedge funds and other big institutional investors got interested and helped set a floor.

On top of that, it’s becoming clear that change could be slower to occur in Washington than initially expected, if it happens at all. Republicans last month pulled their proposal to revamp the nation’s health care system due to a lack of support.

“Taxes are even more difficult than health care,” says Peter Hayes, head of the municipal bonds group at BlackRock. “The complexity of the tax code and difference of opinion tells us that it’s more likely to be later than sooner.”

Even if tax reform and an infrastructure program do pass, the effects may not be as bad for the market as many had feared. A drop in the top tax rate would likely hurt muni bond prices but doesn’t have to be a catastrophe. Munis held their own after President George W. Bush enacted tax cuts in 2001, for example. And the federal government could make sure bonds for infrastructure get issued outside the tax-exempt market.

Now, regular investors are coming back to the market. They’ve put more money into muni funds than they’ve taken out for three straight months, after fleeing in November and December.

So, how much is fair for them to expect in returns?

One benchmark index that many muni funds follow has already returned close to 1.7 percent in the first quarter of the year. Don’t except that every quarter.

Broad muni funds generally have yields around 2.5 or 3 percent, and returns for 2017 will likely be close to there, managers say. The 10-year yield on the AP Municipal Bond index is 2.54 percent.

Volatility is also likely to remain. The Federal Reserve is in the midst of raising rates off their record lows, and higher rates knock down prices for all kinds of bonds. If the Fed can stick to its promise to move slowly and modestly, bonds can continue to chug along. But if the economy and inflation pick up their pace, the Fed would have to get more aggressive.

And prices could quiver again as talk inevitably heats up on tax reform. When that happens, though, managers say they don’t expect the drop to be as steep as in November.

“The muni market has become less sleepy,” Hayes says. “People understand that these big sell-offs represent buying opportunities.”

By THE ASSOCIATED PRESS

APRIL 6, 2017, 3:16 P.M. E.D.T.

Taylor Riggs, a contributor to Bloomberg Briefs, talks with Editor Joe Mysak about this week’s municipal market news.

Watch Video.

Bloomberg

March 30, 2017

A roundup of money (and other) news governments can use.

GOVERNING.COM

BY LIZ FARMER | MARCH 31, 2017

St. Louis is looking at a public-private partnership. If the issues are properly addressed, it’s an idea well worth considering.

St. Louis Mayor Francis Slay recently asked the Federal Aviation Administration to consider allowing his city to enter into a public-private partnership to lease its airport to a qualified airport manager backed by private infrastructure funds — a model that exists in much of the rest of the world but not so much in the United States. The mayor’s plan has the potential to unlock value now trapped in the airport to address broader city needs, and it could serve as an example of how local governments can produce resources without adverse budget or ratepayer impact at a time when the country is starved for infrastructure investment.

Local officials who have pledged to keep an open mind on the proposal have nevertheless raised issues that will need to be addressed. The issues are familiar ones to me. As mayor of Indianapolis in the 1990s, I did the country’s first major full outsourcing of an airport. At the time our airport, as is true of St. Louis’ Lambert International, was successful and well managed. I wanted to market-test whether a private company that specializes in airport management, with access to worldwide technology and best practices, could produce more customer satisfaction, better airline relationships and more net revenue while holding down increases in passenger enplanement costs.

My Indy transaction preceded and in part brought about congressional authorization of the Airport Privatization Pilot Program that Mayor Slay is requesting permission for St. Louis to join. This FAA program permits a limited number of cities to unlock the value they have created in this asset and deploy that value back into the community. Since in Indianapolis we did not have access to this FAA program, no matter how much money we saved the city could in no way benefit. This made no sense to me. If the airport didn’t operate at maximum efficiency, the airlines and thus the passengers would pay more. If it did operate better, then why shouldn’t the city benefit in a share of the revenues or receive repayment for some of its original contribution of land?

But we did it anyway, both to improve passenger satisfaction and enhance the airport’s net revenues — both of which got better during the time the airport was operated by BAA, at the time the operator of London’s airports. BAA agreed to a performance-based contract in which goals for improved operations, maintenance cost savings and better passenger experience levels had to be met before it received compensation. The project ended when BAA exited the U.S. market.

The anxieties raised by various St. Louis stakeholders are reasonable and should be addressed, and the best way to do that is by laying out at the rules from the beginning. Neither passengers nor the airlines should pay more as a result of any transaction. The city should be a financial partner in the deal, with its long-term interests aligned with the private operator through an ongoing revenue share. Customer-service levels should go up based on measurable, enforceable operating standards. The successful private manager should have specific requirements and incentives for significant capital investment in the airport and ancillary economic development. Overall, the transaction should be perceived as a win for the city, the community, the airport and the airlines.

A good model for the process is the most recent large U.S. airport public-private partnership, that of San Juan’s airport. The Puerto Rico government brought the necessary political will to the P3 market and ran a thorough proposal process that resulted in a contract providing for over $1.2 billion in unrestricted proceeds to the territory’s government and another $1.4 billion of capital investment at the airport over the 40-year lease to the private operator.

Mayor Slay’s bold move to test this evolving market deserves support. The flying public, St. Louis taxpayers and the airlines deserve protection and continued excellence in operations and capital investment, and all of that can potentially be accomplished while producing significant unrestricted proceeds for the city.

GOVERNING.COM

BY STEPHEN GOLDSMITH | APRIL 3, 2017

The president’s budget proposal has many in the industry worried that he might break his promise to spend $1 trillion on infrastructure.

One of President Trump’s most popular promises has been his oft-repeated pledge to spend $1 trillion in infrastructure improvements. While he has never given much detail about how he’d do that, the idea was enough to give hope to local officials, state highway departments and transit agencies.

But those hopes are beginning to dim.

Earlier this month, the Trump administration released a budget outline that called for cutting funding for the U.S. Department of Transportation by 12.7 percent. The new president also proposed eliminating popular programs, such as competitive TIGER grants, which are used to build large, intermodal projects, and New Starts, which funds transit construction.

In addition, the administration wants to ax subsidies for air service in small cities and eliminate Amtrak services for unprofitable routes in the South and West. The plan, which has informally been referred to as the “skinny budget,” would cut Energy Department programs for researching new vehicle technologies, and scale back funding for the U.S. Army Corps of Engineers, which maintains ports, rivers and other waterways throughout the country.

Cuts like these, many observers say, are at odds with a president who envisions himself a builder.

“There’s clearly an inconsistency between the campaign promises and the very first budget proposal,” says Robert Puentes, the president and CEO of the Eno Center for Transportation. “We know [infrastructure] is not the first policy priority, but the skinny budget has left people scratching their heads.”

Trump’s top budget aide, Office of Management and Budget Director Mick Mulvaney, acknowledged the dissonance while discussing the budget outline.

“People might say, ‘Well, goodness gracious, that doesn’t line up with what the president said about a commitment to infrastructure.’ That was done intentionally,” Mulvaney told reporters. “Why? Because we believe those programs to be less efficient than the infrastructure package that we’re working on for later this year. So what we’ve effectively done is try to move money out of existing, more inefficient programs, and hold that money for what we expect to be more efficient infrastructure programs later on.”

But without any details about what would be in the new infrastructure package, that explanation isn’t likely to sit well with transportation advocates.

“Actions that result in a reduction to U.S. transportation system investment concern us, so we’re anxious to see the president’s full infrastructure investment package to put the proposals outlined in this budget in context,” says Bud Wright, the executive director of the American Association of State Highway and Transportation Officials.

Linda Bailey, the executive director of the National Association of City Transportation Officials, went further, saying the Trump budget outline would be a “disaster for cities.”

“President Trump has promised to rebuild our nation’s infrastructure with a widely touted $1 trillion infrastructure plan,” she says. “But it is impossible to square his words with his budget proposal.”

Trump’s budget proposal also suggested large cuts to popular programs like Meals on Wheels, public television and energy assistance for low-income Americans in order to pay for increases in military spending.

Marcia Hale, the president of Build America’s Future, says the combination of all of those unpopular proposals makes it unlikely that Congress will go along with the Trump blueprint. She doesn’t think the fate of the budget proposal will directly affect the president’s plans to invest in infrastructure. But Hale anticipates that the administration will focus on areas that could attract private financing, such as toll roads, water and broadband.

Puentes, the president of the Eno Center, says Trump’s background may give him a different perspective on what is crucial infrastructure. Trump may be more interested in spurring real estate developments than, say, funding public transportation.

In his first weeks in office, Trump’s biggest impact on infrastructure will ultimately benefit private developers. The president signed executive measures that encouraged construction of two controversial oil pipelines, the Keystone XL Pipeline and the Dakota Access Pipeline.

Just weeks before Election Day, Trump’s campaign released a short infrastructure plan that would have relied primarily on tax credits for private investors. That plan received only tepid support from transportation advocates because it did not include any new revenue to pay for projects. It also focused solely on projects that would generate their own revenue, which wouldn’t really help residents in rural areas or agencies with major repair and maintenance needs.

Both Commerce Secretary Wilbur Ross, one of the two authors of the Trump campaign proposal, and Transportation Secretary Elaine Chao, said during their confirmation hearings that new federal revenues would be needed to address the country’s infrastructure needs. But they didn’t elaborate.

“The infrastructure paper I put out was meant to provide another tool, not to be the be all and end all,” Ross told a Senate panel in January. “There will be some necessity for [direct federal spending on transportation], whether it’s in the form of guarantees or direct investment or whatever.”

For now, though, transportation advocates will have to wait to see whether that funding materializes and, if it does, whether it will be used to pay for the needs at the top of their lists.

GOVERNING.COM

BY DANIEL C. VOCK | MARCH 27, 2017

Municipal portfolio managers are sticking with their health care strategies after the failure of the American Health Care Act last Friday, saying they expect the Trump administration to continue its quest to undo Obamacare.

With tax reform replacing health care on the front burner, they predicted the prospect of lower rates or a change in the muni tax exemption will have a greater impact on overall market demand and other technicals than on their individual strategies.

“On any given day, we are and will remain open to sourcing value across the hospital sector – or any other major municipal sector for that matter – as long as the end product in our portfolios is properly diversified and all credits have been thoroughly reviewed,” Jonathan Law, a portfolio manager at investment and financial services firm Advisors Asset Management, said on Wednesday.

Law, who has been pro­-health care sector since prior to President Obama’s Affordable Care Act becoming law in 2010, said his exposure was steady through the first quarter of 2017 and he doesn’t expect to do anything different in light of the AHCA defeat.

His firm is responsible for $1.1 billion of client assets under management, of which $370 million consists of municipal assets, as of Dec. 31, 2016.

He said he will keep his sights set on larger, nonprofit systems with multiple hospitals in multiple states, organizations with leading market share, and/or well-­diversified revenues that aren’t overly reliant on Federal funding.

“The sound and rational municipal investor was generally unaffected by the proposal and the failure of the American Health Care Act,” Law said. “Compared to the rest of the market, the health-care sector did not trade out of the ordinary at any point during the lifespan of this bill.”

Law said it is also unlikely that health care bonds will rally and spreads significantly tighten following the AHCA’s demise.

Dawn Mangerson, who co­-manages municipal portfolios with Jim Grabovac at McDonnell Investment Management, said the team continues to like the hospital sector, in which it was recently overweight.

McDonnell oversees $11.5 billion in client assets, 63% of which are tax­-exempt municipal assets, including separately­-managed accounts and two sub­-advised municipal mutual funds, as of Dec. 31, 2016.

“We were looking for an opportunity to take advantage of spread widening – which we did see – but there was not enough supply” in the first quarter, Mangerson said on Tuesday.

She and Grabovac will be looking for more opportunities from the sector as the second quarter rolls in next week.

While portfolio managers are seeing little impact from the failure of the AHCA, the event is triggering more of a reaction in the overall municipal market, municipal experts said this week.

Price, performance, and value are just some of the market technicals being influenced – or expected to be impacted – by the non­-vote of AHCA, according to municipal experts this week.

For instance, municipal bonds already outperformed along the curve, following U.S. Treasuries to “decidedly higher levels” last week, Jeffrey Lipton, managing director and head of municipal research and strategy at Oppenheimer & Co. wrote in a March 27 report.

Municipal yields finished unchanged on March 24 – the day the AHCA vote was removed from the previous day, which Lipton said indicated “support for haven assets evident early this
week.”

The 10­-year and 30­-year Municipal Market Data triple­-A benchmark yields declined by 12 and 11 basis points, respectively, Lipton pointed out, while comparable maturity U.S Treasury yields declined by seven and eight basis points, respectively.

Other impacts from the defeat of the AHCA are being seen in municipal volume and flows, managers and analysts said.

“With municipal yields off their highs of the quarter and supply limited on year­-over-­year basis, it wouldn’t be a surprise to see issuers returning to the market with more new money and refunding deals during the second quarter,” Law of AAM said.

The volatility and uncertainty surrounding the new administration “and its ability to pursue a successful fiscal stimulus policy with tax­-reform at the core would likely create a more uneven trajectory of muni bond mutual fund flows,” according to Lipton’s report.

For example, he said, flows turned positive after three consecutive weeks of outflows, according to Lipper Inc.

Meanwhile, some managers agreed that the impact from the passage of the AHCA would have put the municipal health care sector in critical condition.

“The potential to restrict Medicaid funding would have been a negative for the hospital sector,” Grabovac said.

Secondarily, it would have also been a negative for states, which would have been responsible for picking up the slack in a market where states and hospitals make up a quarter of the debt.

He said the market is “breathing a little easier” in the wake of AHCA’s failure. “To have dodged that bullet is a credit positive,” especially for smaller, rural hospitals, Grabovac added.

Managers like Lipton said the negative consequences could have included significantly reduced funding for Medicaid beneficiaries, a more restrictive deployment of subsidies, and elimination of the newly applied taxes under ObamaCare, as well as associated budgetary implications.

Alan Schankel, managing director of research at Janney Capital Markets, said it would have triggered investor concerns about the healthcare sector, since fewer customers covered by insurance in coming years would have reduced hospital revenues.

“The state sector would also have been pressured by the conversion of federal Medicaid matching funds into block grants, which would have reduced federal payments to states over time,” Schankel added.

The bill’s failure serves as an example of “rhetoric meeting reality,” according to Grabovac.

“The failure of the AHCA to even come to a vote in the house is really significant and a significant indication of how difficult the legislative road is going forward,” he said.

Schankel said although the ACA “emerged from the Congressional process intact, uncertainty remains, with the potential for Congress to revisit in future.”

Lipton said the “much­-heralded, yet perhaps ill­-conceived” AHCA would have been the fulfillment of one of the “hallmark promises” of President Trump’s campaign.

“Given the events of last week, we would expect market performance to be more sensitive to potential disruptive forces regarding the President’s agenda,” Lipton said. “Undoubtedly, there is likely to be an extended post mortem of the AHCA.”

Now that health care is taking a backseat, managers say the focus on tax reform under the Trump administration creates some challenges and uncertainty for the municipal market. But like the failure of the AHCA, it will not damage or alter their investment strategies or goals.

“The House failure to pass the AHCA does not render tax­-reform improbable,” Lipton wrote in his report.

“It does, however, make it more difficult with potential delays, especially given the observation that the Republicans have competing ideological agendas within their own party, and we have to wonder how easily they can come together on other policy legislation.”

Lipton predicted tax reform will be a fourth quarter event – or possibly a 2018 first quarter occurrence – with the Border Adjustment Tax a widely­-debated issue, and infrastructure spending and deregulation also crucial topics.

“We remain skeptical over just how much GDP growth can actually offset the Republican tax cuts,” Lipton wrote, adding that there is a potential impact on economic growth from tighter Fed policy and a stronger dollar.

Lipton predicts three increases to short­-term rates this year, with June and December being
appropriate dates.

“If Congress demonstrates continued divergent views that inhibit the Administration’s agenda, there could very well be a recalibration of economic growth and inflationary performance expectations,” he added.

Lipton said as the market moves into the tax­-reform phase of fiscal policy, he expects the relative value ratios to remain “generally range­bound.”

On March 24, the Bloomberg Valuation 10­ and 30­-year ratios stood at 95.56% and 102.86%, respectively.

“While we remain cautious of the potential effects these various tax proposals could have on the municipal market, the concrete issues at hand that we prepare and adjust our investment strategy around continue to be rising interest rates and inflation,” Law said.

He seeks a defensive duration versus his benchmark, above average coupon bonds, and properly diversifying across various sectors, states, as well as parts of the yield curve to manage his composite portfolios through a rising rate environment – despite the potential tax proposals.

Tax reform is not as complex as health care economics, according to Grabovac, who believes any potential tax changes will involve smaller reductions in rates compared to some of the more significant cuts that have been floated as ideas.

“There were concerns that if a significant change in marginal rates were implemented that could reduce demand from insurance companies and banks, which are 30% of the market,” Grabovac said.

“To the extent those changes are very likely to be moderated significantly that has removed some potential concern,” he added.

In fact, the failure of the AHCA could end up sparking increased appetite for municipals, portfolio managers and analysts predicted.

“Perhaps we may see a change in sentiment now that health care reform has been tabled and chances of Republican consensus have now been diminished,” Lipton’s report said, suggesting the possibility of a “more enduring appetite” for less risky assets.

“Other than an immediate sell­off following the election, the market has held in extraordinary well, and there has been no significant lessening of the demand,” Grabovac said.

Similarly, there is less concern if individual tax cuts are likely to be moderate and take longer to implement “rather than more quickly and at an extreme fashion,” according to Grabovac.

“I think the big issue of potentially the border tax and deductibility of interest are extreme changes to the tax system and probably will have a difficult time getting resolution even within the Replication party – if they chose to take a path other than through reconciliation,” Grabovac said.

He said tax reform issues highlight the difficult political balance that Congress and the Trump administration face. He said it will likely be “much more difficult to accomplish the fiscal initiatives than the market anticipated.”

The Bond Buyer

By Christine Albano

March 30, 2017

WASHINGTON – Having failed to get Congress to enact a health care bill to replace the Affordable Care Act, President Trump may now be setting up a contentious debate with lawmakers over the budget for fiscal 2017, which is almost half over.

The Office of Management and Budget has proposed $17.9 billion in additional spending cuts beyond the program levels already negotiated by the House and Senate in the continuing resolution for fiscal 2017, which ends on Sept. 30. The CR is due to expire on April 28 and the failure to extend it, adopt a new one, or pass an omnibus bill by then could force a shutdown of the federal government.

The cuts proposed for fiscal 2017 were made just two weeks after President Trump released a skinny budget proposing major cuts for domestic programs for fiscal 2018, which starts on Oct. 1 of this year. Senate Appropriations Committee Vice Chair Patrick Leahy, D­-Vt., criticized the cuts.

“Unfortunately, this appears to be more of the same partisan campaign gestures from the Trump Administration, making shortsighted and draconian cuts on the backs of the middle class and the most vulnerable Americans,” Leahy said. “Cutting cancer research, slashing affordable housing and programs to protect the environment, and making middle class taxpayers pay for a wall that Mexico was supposed to pay for? I’ve already made some blunt statements about the idea of an enormously expensive and ineffective wall. These may be the Trump Administration priorities, but they aren’t the priorities of the American people.”

In its chart of the $17.9 billion of cuts proposed for fiscal 2017 that was sent to the lawmakers and made available by publications such as CQ and Politico, OMB proposed eliminating the $499 million for the popular Transportation Investment Generating Economic Recovery (TIGER) grant program. The House and Senate agreed in the current CR to provide $499 million to the program, which supports innovative projects, including those that are multi­modal and multi­ jurisdictional and are difficult to fund through traditional federal programs. The $499 million figure was a compromise from the $450 million in the House CR and the $525 million in the Senate CR.

Since 2009, the TIGER grant program has provided a combined $5.1 billion to 421 projects in all 50 states, the District of Columbia, Puerto Rico, Guan, the Virgin Islands and tribal communities. The program is so popular that demand far exceeds available funding. In 2016, the Transportation Department, which administers TIGER, received 585 eligible applications requesting more than $9.3 billion – well over the $500 million that was leveraged to support $1.74 billion in transportation investments.

OMB told lawmakers in the chart that the $499 million cut “eliminates funds for the TIGER program, which provides localized benefits that can be funded through other existing funding streams.”

Susan Monteverde, vice president of government relations for the American Association of Port Authorities, said many lawmakers have been very supportive of the TIGER program, which is broader and more flexible than other federal grant programs, such as FASTLANE.

The FASTLANE grant program, established by the Fixing America’s Surface Transportation (FAST) Act, provides grants to fund critical freight and highway programs, but is not multimodal, she said.

TIGER grants can be used for freight or rail projects connected to ports and are not just for local projects, Monteverde said. “Seaports provide national benefits,” she said, adding, “They handle imports and exports that come into and go out of the country.”

OMB also proposed cutting $447 million from the Transit New Starts program, the Federal Transit Administration’s primary grant program for funding major transit capital investments, including heavy rail, commuter rail, light rail, streetcars and bus rapid transit. The current CR makes $2.16 billion available for the program, after the House initially called for $2.5 billion and the Senate $2.34 billion.

OMB said the cut would “cover the cost of projects with existing full funding grant agreements” but that the administration “proposes to suspend additional projects from entering the program and believes localities should fund these localized projects.”

OMB proposed to cut $1.49 billion from the Community Development Block Grant (CDBG) program, about half the $2.99 billion level the House and Senate agreed to in the current CR.

Both chambers had initially proposed $3.0 billion for the program before dropping the level in the final CR.

OMB said in the chart: “No grants have been awarded for the fiscal year. The program is unauthorized and has been challenged to demonstrate its effectiveness given the breadth of activities it can support.”

The CDBG is one of the longest­-running programs with the Department of Housing and Urban Development and funds local community development activities such as affordable housing, anti­poverty programs, and infrastructure development. The grants are allocated to local and state governments according to a formula.

“This program has very deep roots and is widely supported by both sides of the aisle” in Congress, said one source at the U.S. Conference of Mayors. “It would be devastating to get this kind of cut. This program serves more than 1,200 jurisdictions.”

“We’re almost half through fiscal 2017,” said the source, who did not want to be identified. “I don’t think this is doable. Cities have been going on as if they were going to get this revenue.”

The Bond Buyer

By Lynn Hume

March 28, 2017

Steve and Deona Thomas manage a 13-unit apartment building on Chicago’s South Side, and they needed to refinance the mortgage on it this year. Through their small property management and rehab company, the Thomases have become award-winning preservers of affordable housing in the city. Such developments don’t get the familiar 30-year, fixed-rate mortgages that individuals and families use to buy their homes. Commercial loans, which apply in the Thomases’ case, tend to have terms of five to 10 years. Typically, in order to lower monthly payments during the life of the loan, commercial loans are structured so that the last payment is a very large lump sum of the remaining balance (what’s known as a balloon payment). As they near the end of a current loan, businesses usually refinance — and pay off the existing mortgage with a new five- to 10-year loan. That comes with a new balloon payment looming at the end.

For many small businesses and nonprofits, this mortgage game becomes a stress-inducing cycle.

A few weeks ago, the Thomases were able to obtain a 20-year loan for that property, fully amortized — meaning no balloon payment — from the Chicago Community Loan Fund (CCLF). No more endless refinancing cycles. At the end of the 20 years, the building will be free and clear of commercial mortgage debt.

That loan was made possible thanks to the newest program of the U.S. Treasury’s CDFI Fund, known as the CDFI Bond Guarantee Program, or BGP. It was created by the Small Business Jobs Act of 2010. The federal government purchases bonds issued by federally certified community development financial institutions, or CDFIs. The bonds are 100 percent guaranteed by the U.S. Treasury, and each bond provides capital at up to 29.5-year terms. The BGP is currently the only source of long-term, fixed-rate capital for community development.

Continue reading.

NEXT CITY

BY OSCAR PERRY ABELLO | MARCH 30, 2017

• Tobacco debt beat the market four times in past five years
• Buyers snap up bonds after Trump rout as yields scarce

California’s taking advantage of investors’ taste for tobacco.

Tobacco bonds are returning 10 percent this year, over seven times that of the municipal market as a whole, as buyers itching for yield pick up the securities and drive prices higher. California on Thursday plans to sell $619 million to refinance a portion of a deal from a decade ago.

The new securities, which are backed by payments from tobacco companies under a settlement based on nationwide cigarette shipments, come just days before smokers in California will see state taxes on each pack jump to $2.87 from 87 cents on April 1.

“This is probably the top” of the market for tobacco bonds, said Alan Schankel, a managing director at Janney Montgomery Scott. “There’s not a lot of supply. Yields are hard to find.”

Tobacco bonds have been rallying since a rout in November sparked by Donald Trump’s presidential victory forced fund managers to sell the securities to meet redemptions. Tobacco bonds have outperformed the overall market four of the past five years, according to S&P Municipal Bond Indices.

Municipal high-yield funds have seen inflows for the past 11 consecutive weeks, according to Lipper US Fund Flows data. New York took advantage of the improved appetite in January by selling $1.1 billion in tobacco refunding bonds. Some of the securities have since traded with less in extra interest, or spread, indicating demand.

The securities come with unique risk. Higher cigarette taxes have contributed to declines in smoking, and nine states are considering raising them, according to an analysis by forecasting firm IHS Global Inc. The fewer cigarettes the tobacco companies sell, the less in revenue the governments get to pay bondholders.

The firm projects cigarette consumption to drop by an average of 3.1 percent annually through 2029. National shipments of cigarettes in the year ended in December totaled 258 billion, a 28 percent decline from 2007, bond documents show.

S&P Global Ratings gave an A rating, the sixth-highest level, to the California securities maturing through 2020, and rated the longest maturities three steps lower at BBB, based partly on the credit quality of the two largest participating tobacco manufacturers, Altria Group Inc. and Reynolds American Inc.

The refinancing would lower the overall 2007 deal’s carrying costs, which would improve the performance of the bonds not being taken out, said New York-based underwriter Ramirez & Co., which is working on the transaction.

The bulk of the offering isn’t being refinanced, demonstrating there are limited arbitrage opportunities, noted Janney’s Schankel. With the market expecting the Federal Reserve to continue raising rates this year, states are facing a smaller window to retire higher-cost tobacco bonds.

Last year, $474 million in bonds were issued, compared with $2.7 billion in 2013, data compiled by Bloomberg show.

“They’re squeaking out these refundings,” Schankel said.

Bloomberg Markets

by Romy Varghese

March 28, 2017, 9:39 AM PDT

March 31 (Reuters) – Debt sales by states, cities, schools and other issuers in the U.S. municipal market slumped 10.1 percent to $85.87 billion in the first quarter of 2017, compared with the same quarter last year, according to preliminary Thomson Reuters data on Friday.

Refundings of existing bonds totaling $44.7 billion slightly outpaced new money issuance of $41.16 billion.

In March, issuance of $29.8 billion was up from $21.8 billion in February, but lagged March 2016’s $40.9 billion supply.

In the coming week, sales of bonds and notes are estimated at nearly $7.5 billion.

Next week’s biggest deal is a $778 million Massachusetts general obligation bond issue pricing through Citigroup on Thursday.

The deal includes $400 million of bonds with serial maturities in 2032 through 2037 and term bonds due in 2042 and 2047, according to the preliminary official statement.

Nearly $277.6 million of refunding bonds are due in 2017 and from 2022 through 2027. Green bonds totaling $100 million carry serial maturities from 2023 though 2027 and in 2037, as well as a 2047 term maturity.

Meridian Health will sell $620 million of new and refunding revenue bonds through the New Jersey Health Care Facilities Financing Authority. Bank of American Merrill Lynch is scheduled to price the bonds on Wednesday.

Flows into U.S. municipal bond funds perked up in the week ended March 29. The funds reported net inflows of $265 million, up from $173.5 million in the prior week, according to Lipper, a unit of Thomson Reuters. (Reporting by Karen Pierog; Editing by Jeffrey Benkoe)

Government incentives to boost issuance?
Despite the rapid growth seen across the green bond market, it may not be enough to meet the climate goals set out by governments globally. In addition to creating clear definitions and standards to promote market confidence and transparency, government incentives may also be needed to spur further growth. Tax advantages for investors, similar to the benefits individual investors in U.S. municipal bonds receive, may be one option governments can explore. Alternatively, direct subsidies to issuers, preferential treatment for green bonds that are held on bank balance sheets, or preferential withholding tax rates are other avenues worth exploring. A massive increase in issuance, as well as a robust secondary market and additional ways for investors to access green bonds, are essential for continued market growth.

 

What can add to further growth?
In order for the green bond market to expand further, government roles are vital. Government policies and standardizations will lead to more transparency in the green bond market and thus reduce the issuance of unlabeled bonds. The proceeds from green bonds are needed to fund and finance projects to mitigate climate-related risks.

The proceeds from these bonds have been used in various environmental projects, as you can see in the above graph. Green companies earn 50%–100% of their revenues from clean technologies such as renewables (QCLN) and energy efficiency (IEO).

You can get exposure to the clean energy industry by considering the VanEck Vectors Global Alternative Energy ETF (GEX), the PowerShares WilderHill Clean Energy ETF (PBW), and the iShares Global Clean Energy (ICLN).

Some governments have gotten involved in supporting and developing the standards of the green bond market. A research paper by the OECD (Organisation for Economic Co-operation and Development) stated that in 2015, Switzerland was the first national government member of the Climate Bonds Partners to show support in the development of the Climate Bonds Standard.

José Ángel Gurría, the secretary-general of the OECD, stated in a research paper on green bonds, “Government policies can play a central role in influencing how private capital is mobilised and shifted. It will only be green if the investment landscape is supportive.”

Governments can add to the growth of the green bond market by mobilizing and making efficient use of public capital. That could lead to a faster transition to a low-carbon economy.

By VanEck | Mar 31, 2017

Advisory:
GFOA Advisories identify specific policies and procedures necessary to minimize a government’s exposure to potential loss in connection with its financial management activities. It is not to be interpreted as GFOA sanctioning the underlying activity that gives rise to the exposure.

Background:
Pension obligation bonds (POBs) are taxable bonds1 that some state and local governments have issued as part of an overall strategy to fund the unfunded portion of their pension liabilities by creating debt. The use of POBs rests on the assumption that the bond proceeds, when invested with pension assets in higher-yielding asset classes, will be able to achieve a rate of return that is greater than the interest rate owed over the term of the bonds. However, POBs involve considerable investment risk, making this goal very speculative.2 Failing to achieve the targeted rate of return burdens the issuer with both the debt service requirements of the taxable bonds and the unfunded pension liabilities that remain unmet because the investment portfolio did not perform as anticipated. In recent years, local jurisdictions across the country have faced increased financial stress as a result of their reliance on POBs, demonstrating the significant risks associated with these instruments for both small and large governments.

Recommendation:
The Government Finance Officers Association (GFOA) recommends that state and local governments do not issue POBs for the following reasons:

1. The invested POB proceeds might fail to earn more than the interest rate owed over the term of the bonds, leading to increased overall liabilities for the government.
2. POBs are complex instruments that carry considerable risk. POB structures may incorporate the use of guaranteed investment contracts, swaps, or derivatives, which must be intensively scrutinized as these embedded products can introduce counterparty risk, credit risk and interest rate risk.3
3. Issuing taxable debt to fund the pension liability increases the jurisdiction’s bonded debt burden and potentially uses up debt capacity that could be used for other purposes. In addition, taxable debt is typically issued without call options or with “make-whole” calls, which can make it more difficult and costly to refund or restructure than traditional tax-exempt debt.
4. POBs are frequently structured in a manner that defers the principal payments or extends repayment over a period longer than the actuarial amortization period, thereby increasing the sponsor’s overall costs.
5. Rating agencies may not view the proposed issuance of POBs as credit positive, particularly if the issuance is not part of a more comprehensive plan to address pension funding shortfalls.

Committee:
Retirement and Benefits Administration

Notes:
1 The Tax Reform Act of 1986 eliminated the tax exemption for pension obligation bonds.

2 Alicia H. Munnell, Jean-Pierre Aubry, and Mark Cafarelli, “An Update on Pension Obligation Bonds,” Center for Retirement Research at Boston College, July 2014.

3 See GFOA Advisory – Using Debt-Related Derivatives and Developing a Derivatives Policy (2015)

Approved by GFOA’s Executive Board:
January 2015

NEW YORK — Officials from so-called sanctuary cities met in New York on Tuesday to discuss their response to threats from the Trump administration to cut off some funding to cities and states that fail to assist federal authorities in arresting illegal immigrants.

Attorney General Jeff Sessions threatened on Monday to strip U.S. Justice Department grants from cities and other local governments that choose to shield illegal immigrants from deportation efforts under President Donald Trump.

His remarks were aimed at dozens of cities and other local governments, including New York, Los Angeles and Chicago, that have joined a growing “sanctuary” movement aimed at protecting immigrant communities.

Tuesday’s meeting in New York marked the second straight day of brainstorming on the immigration issue by leaders of some of America’s biggest urban centers.

Public officials, liberal activists and academics from around the country shared information on a host of issues. Topics discussed included when and how to challenge requests from Immigration and Customs Enforcement (ICE) to hold illegal immigrants under arrest, for separate local offenses.

Attendees came from California, Texas, Wisconsin, Pennsylvania, Connecticut, Washington State and elsewhere.

Sanctuary cities in general offer safe harbor to illegal immigrants and often do not use municipal funds or resources to advance the enforcement of federal immigration laws. Sanctuary city is not an official designation.

Federal records show the Justice Department doled out $1 billion to state governments and $430 million to nonprofits in 2016, but only $136 million directly to cities and counties.

Crime is generally lower in sanctuary counties, according to a study presented by University of California San Diego assistant professor Tom Wong. He said the findings echoed those of law enforcement officials themselves, since they have found they are more effective when they can focus on day-to-day policing instead of immigration enforcement.

Chicago City Council member Carlos Ramirez-Rosa said that although his city is a sanctuary jurisdiction, immigration agents raided a home there on Monday where eight people, including three children, were sleeping.

The agents shot and wounded Felix Torres, though he was not the person agents were seeking, Ramirez-Rosa said.

“This guns blazing raid … is exactly why my city should refuse to comply with ICE, under all circumstances,” he said.

By REUTERS

MARCH 28, 2017, 2:33 P.M. E.D.T.

(Reporting by Hilary Russ; Editing by Daniel Bases and Tom Brown)

SAN FRANCISCO — U.S. Attorney General Jeff Sessions’ threat to strip Justice Department grants from cities and local governments that shield illegal immigrants from deportation would have minimal impact on municipal credit ratings, according to S&P Global Ratings.

The financial rating firm said on Thursday that an analysis of 10 large so-called sanctuary jurisdictions found the Justice Department funds made up on only 0.2 percent of budgets, on average.

The term sanctuary is not an official designation but has come to be used generally to describe cities and local governments that offer safe harbor to illegal immigrants and often do not use municipal funds or resources to advance the enforcement of federal immigration laws.

The 10 jurisdictions reviewed were: Cambridge, Massachusetts; Detroit; Josephine County, Oregon; Los Angeles County, California; New York City; Oakland, California; San Francisco; Santa Fe, New Mexico; Seattle; and Washington, D.C.

Of the places reviewed by S&P, funding from the Justice Department made up the largest share of federal funding in Oakland, with 8 percent of federal funding, and Seattle, with 7 percent.

S&P said it expected both cities’ financial strength and economic growth to offset any potential losses.

Grants for health, community development and transportation generally make up the largest share of federally derived revenue for jurisdictions. But this funding is typically allocated by formulas set in statute and lack any connection to immigration enforcement. As a result, S&P said it viewed “the likelihood of Congress withholding or deferring these funds to sanctuary jurisdictions as more remote.”

Justice Department grants were among the most at risk, because this funding is “generally provided on an annual basis in the form of competitive grants,” said S&P.

Some local governments receive as much as 41 percent of their budgets from the federal government, while others receive none at all. Counties tend to have more exposure than cities, as counties generally administer their own criminal justice programs, according to S&P.

By REUTERS

MARCH 30, 2017, 3:06 P.M. E.D.T.

(Reporting by Robin Respaut; Editing by Bill Rigby)

Fitch Ratings-New York-21 March 2017: The fiscal pressures on Westinghouse Electric Company LLC and its parent company, Toshiba Corporation, are weighing on the credit quality of the public power issuers that are involved in two nuclear power projects, Fitch Ratings says. The three issuers with co-owner interests have been subject to negative actions since 2015 when Toshiba’s credit began to weaken, construction delays continued and additional cost overruns began to develop.

Westinghouse and Toshiba are the lead contractor and guarantor, respectively of the Alvin W. Vogtle Electric Generating Plant (Vogtle) and the Virgil C. Summer Nuclear Generating Station (Summer) development. The public power co-owners include Municipal Electric Authority of Georgia (MEAG), Oglethorpe Power Corporation, GA and South Carolina Public Service Authority (Santee Cooper), all of which remain on Negative Watch or Outlook. JEA and PowerSouth Energy Cooperative have agreed to purchase project output, but have Stable Outlooks.

The current financial strain on Westinghouse and Toshiba could lead to higher completion costs and further delays. In the event of bankruptcy, the Engineering, Procurement and Construction contract could be terminated and allow the co-owners to draw on letters of credit posted by the developer. However, the co-owners’ abilities to recover additional costs and damages from the project guarantor could be limited in bankruptcy, undermining the benefits of the fixed-price agreement.

Fiscal pressure rose last week as the Japanese government said it was not considering supporting Toshiba and the company missed, for the second time, a reporting deadline for its audited third quarter results. Its application to delay its results until April 11 was approved, but it remains at risk of being delisted for failure to meet the requirements of the Tokyo Stock Exchange. Toshiba has undertaken a number of initiatives to bolster its liquidity and improve credit quality, including the proposed sale of its profitable memory chip business, but the success of these strategies is uncertain.

The public power issuers we rate have begun to make their plans for completing the plants with substitute contractors more detailed should Toshiba enter bankruptcy. The transition to a new construction team would almost certainly result in further revisions of the in-service dates past 2020 and higher costs to be borne by ratepayers.

The public power issuers have different supports that limit their rating downsides from these possible outcomes, including the unconditional obligation and ability to recover project-related costs, whether or not the projects are completed or operated. Each of the public power issuers also has the ability to set rates necessary to recover those costs independent of external regulatory approval. However, the willingness of each issuer to maintain robust financial metrics in the wake of higher costs is uncertain.

Contact:

Dennis Pidherny
Managing Director, US Public Finance
+1 212 908-0738
Fitch Ratings, Inc.
33 Whitehall Street, New York, NY

Robert Rowan
Senior Analyst, Fitch Wire
+1 212 908-9159

Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com.

NEW YORK — The sell-off of municipal bonds tied to the bankruptcy filing of Westinghouse Electric Co paused on Thursday as investors reconsidered concerns on the likelihood that construction of four U.S. nuclear power plants hit by billions in cost overruns will be completed.

The four reactors are part of two projects known as V.C. Summer in South Carolina, which is majority-owned by SCANA Corp and Vogtle in Georgia, which is owned by a group of utilities led by Southern Co.

Westinghouse is a unit of Japanese conglomerate Toshiba Corp.

Tax-exempt bonds issued by the Municipal Electric Authority of Georgia (MEAG), which owns 22.7 percent of the Vogtle units, and South Carolina Public Service Authority (Santee Cooper), which owns 45 percent of the V.C. Summer units, reversed a recent slide, albeit in thin trading volumes.

“It could be considered a dead-cat bounce in the market as people are starting to get comfortable with their ability to pay their bonds and it doesn’t appear that this is going to lead to a default,” said Brett Adlard, municipal strategist at Piper Jaffray in Chicago.

Adlard said there could be near-term weakness in the bonds because of headline risks, but there is a slow realization that there are underlying strengths, such as Santee Cooper’s flexibility to raise electricity rates given that the rates are considered low when measured against the rest of the nation.

On Wednesday, SCANA executives told analysts that in the case of the V.C. Summer operations, most of the components are already bought and on site, which employs about 5,000 people.

“The Trump administration, being so pro-jobs, shutting down these two large nuclear plants would look like a negative from their goal,” Adlard said, adding that Westinghouse’s involvement in military operations makes this a national security interest.”

MEAG’s 6.637 percent bond maturing in 2057 saw improvement with the yield spread over the benchmark MMD yield curve narrowing by 4.5 basis points to 285.7 basis points. However, over the last 10 trading days, spreads are wider by a significant 26.9 basis points, according to Thomson Reuters data..

Santee Cooper’s 5 percent bond maturing in 2028 improved on Thursday with the yield spread narrowing by 16.7 basis points to 95.1 basis points. That is still 35.6 basis points wider over the last 10 trading days. Wider spreads indicate weak performance in a credit.

Costs for the projects have soared due to increased safety demands by U.S. regulators and also due to significantly higher-than-anticipated costs for labor, equipment and components.

“These are fundamentally strong credits, but that said, they have made a lot of investments in these plants and now there is more uncertainty on how much more it is going to cost or how much longer it will take to complete the plants,” said John Ceffalio, municipal credit analyst at AllianceBernstein in New York.

“To date, both MEAG and Santee Cooper have had a lot of political support. We question how strong that support will be going forward given additional costs and delays,” he said.

By REUTERS

MARCH 30, 2017, 6:27 P.M. E.D.T.

(Reporting by Daniel Bases; Editing by Leslie Adler)

Taylor Riggs, a contributor to Bloomberg Briefs, talks with Editor Joe Mysak about this week’s municipal market news.

Watch the video.

Bloomberg

March 23, 2017

Bloomberg Markets with Carol Massar and Cory Johnson.

GUEST: John Bonnell Senior Portfolio Manager USAA Investments Discussing outlook for the municipal bond market infrastructure spending, healthcare and tax reform on the horizon.

producer: Paul Brennan +1-212-617-8292 or pbrennan25@bloomberg.net

Play episode.

Running time 09:30

March 23, 2017 — 12:15 PM PDT

HSE Municipal Market Update – March 17, 2017

The U.S. Department of the Treasury’s Bureau of the Fiscal Service (the “Treasury”) announced on March 8, 2017 the suspension of sales of State and Local Government Series (SLGS) nonmarketable Treasury securities, effective 12:00 noon Eastern Time, March 15, 2017.

SLGS are special purpose securities that the Treasury issues to state and local government entities to assist them in complying with federal tax laws and Internal Revenue Service arbitrage regulations. SLGS are issued at the request of the government entity when it has cash proceeds to invest from the issuance of tax exempt bonds. SLGS securities are purchased only by issuers. As a result of the SLGS suspension, also known as closing the SLGS window, the Treasury will no longer accept new subscriptions for SLGS securities. The Treasury is anticipated to reopen the SLGS window when Congress enacts, and the President signs, legislation raising the debt limit.

Please note that entities must submit their intention to purchase SLGS either 7 calendar days before the issue date, if for more than $10 million, or 5 calendar days before the issue date if for $10 million or less. Therefore, the window for subscriptions closed on Wednesday, March 8 and Friday, March 10, respectively. Treasury’s past practice has been to honor all SLGS subscriptions submitted by the specified time and date of the SLGS suspension. Unless otherwise prohibited for another reason, SLGS maturities, interest payments, and early redemptions will be processed as normal during the SLGS suspension. Open-market Treasury securities, which are purchased after soliciting bids from banks and other financial institutions are still an option.

Last Updated: March 22 2017

Article by Luisella P. McBride and Francina J. Brinker

Miles & Stockbridge

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

City of Cambridge, Massachusetts General Obligation Bonds, 2017 Series A (Minibond Program) (MA)

Official Statement posted 3/3/17

Preliminary Official Statement posted 2/24/17

A trend that has been catching attention is purchases of U.S. municipal bonds by foreign investors. A terrific summary was recently published by VanEck’s Michael Cohick and that can be found by clicking here.

As that research points out, the Federal Reserve data on foreign investor holdings has jumped to end 2016 at $106 billion. That data can be found on page 125 of the Federal Reserve Statistical Release March 9th 2017.

Some factors that could be making U.S. municipal bonds attractive to foreign investors include:

• A strong U.S. dollar or perspectives of a strong for longer U.S. dollar.
• U.S. municipal bonds, whether tax-free or taxable, offer incremental yield relative to the negative or near zero yield environments seen in the Eurozone and Japan.
• The relatively high quality of investment grade municipal bonds to other asset classes such as U.S. corporate bonds and in some cases sovereign bonds.
• The low historical default rate of investment grade municipal bonds.
• Shorter duration than U.S. investment grade corporate bonds. For example, investment grade municipal bonds tracked in the S&P National AMT-Free Municipal Bond Index have more than a two year shorter duration than those tracked in the S&P 500/MarketAxess Investment Grade Corporate Bond Index. Note: both indices designed to reflect more liquid segments of the markets.
• Relatively lower volatility of U.S. municipal bonds as compared to U.S. corporate bonds.
• Due to these factors, U.S. municipal bonds can also be a diversifying asset class.

Liquidity: Due to the large number of U.S. municipal bond issuers and the sheer number of municipal bonds outstanding the depth of liquidity for U.S. municipal bonds has been a factor impacting the market for decades. The lower depth of liquidity for U.S. municipal bonds helps keep yields higher as a liquidity “premium” is demanded by the market in return for this risk. The advent and growth of diversified municipal bond Exchange Traded Funds (ETF’s) could be helping to provide access to and liquidity for municipal bonds. The Federal Reserve Statistical Release shows assets in municipal bond ETF’s have grown from $15.1 billion at year end 2014 to $24.7 billion at year end 2016.

J.R. Rieger
Head of Fixed Income Indices

S&P Dow Jones Indices

MARCH 27, 2017 – 1:00 »

• Company unit that’s building facilities considering bankruptcy
• Public utiltities in two states issued muni bonds for projects

The financial meltdown at Toshiba Corp.’s nuclear power-plant business is seeping into the U.S. municipal-bond market.

Debt issued by public utilities in Georgia and South Carolina that helped finance the first U.S. nuclear reactors built in 30 years has gotten riskier as exploding construction costs threaten the solvency of contractor Westinghouse Electric Co., a unit of Toshiba.

As the company reels from losses, Westinghouse is considering bankruptcy and Toshiba may sell a majority stake in its memory chip business to stem the bleeding. While the Japanese company guaranteed that Westinghouse will finish the work, the security of that backstop has been cast into doubt by Toshiba’s weakened condition. Moody’s Investors Service warned this week that it may downgrade the municipal debt tied to the projects, with S&P Global Ratings following suit late Thursday.

“A bankruptcy would raise a level of uncertainty about what happens,” said Moody’s analyst Michael Haggarty. “Our concern is they may have to go back to the ratepayers for potential additional costs.”

The Municipal Electric Authority of Georgia is working with Southern Co. to build new reactors at Plant Vogtle, about 30 miles (48 kilometers) southeast of Augusta. The South Carolina Public Service Authority, known as Santee Cooper, and Scana Corp. are constructing two new units at the V.C. Summer plant some 30 miles northwest of Columbia, the state capital. Santee Cooper owns 45 percent of the new units, while the Georgia power authority owns about a quarter of the project in its state.

Moody’s changed its outlooks on the ratings of $7.1 billion of municipal debt issued by Santee Cooper and $2.9 billion from the Georgia agency, saying a Westinghouse bankruptcy could call into question its ability to complete the projects and shift costs onto those agencies. Moody’s rates Santee Cooper’s debt, A1, the fifth-highest level. The Georgia bonds are graded either A2, one step lower, or Baa2, two steps above junk, depending on the legal security that backs them.

“We would argue the plants most likely get finished, but what is that additional cost going to be and who’s going to absorb that cost,” said Lyle Fitterer, who oversees $40 billion, including securities issued by Santee Cooper, as head of tax-exempt debt for Wells Capital Management. “Most likely, if Westinghouse files bankruptcy the onus is going to be put on the owners of these plants.”

The difference between the yield on some bonds issued by Santee Cooper and top-rated securities — a measure of the risk perceived by investors — has widened to more than 2.2 percentage points, an increase of about 0.67 percentage point since late December, according to data compiled by Bloomberg. That gap for Georgia project bonds averaged 1.35 percentage points Thursday, up from 0.96 percentage point two months ago.

A Westinghouse bankruptcy could make prices on the bonds more volatile, particularly because the debt issued by Santee Cooper has traditionally been held by risk-averse investors, Fitterer said.

“We think the whole complex is at risk of downgrade because of this, but ultimately it’s not something that will put any one of those entities out of business or cause their ratings to go to non-investment grade,” he said.

Santee Cooper is committed to finishing the project, said Mollie Gore, a spokeswoman for the agency. She declined to comment on Moody’s decision to change the outlook on its rating.

“We’ve got about 5,000 contract workers on site today at V.C. Summer and they’re all working hard and continue to make progress building these new units,” said Gore.

Santee Cooper, created by the South Carolina legislature in 1934, serves 2 million residents, and its board has the power to set rates. On March 20, the utility’s board voted to study whether customers need to pay more to fund construction of the new reactors, the Post and Courier of Charleston reported.

The Georgia electric authority was created by the state legislature in 1975 to provide wholesale electric power to 49 cities in the state. Moody’s action was “more related to the concern with Westinghouse that it is with MEAG power,” said Edward Easterlin, the agency’s chief financial officer.

In addition to Toshiba’s guarantee, and $2.1 billion of unspent construction proceeds, the authority has $920 million letters of credit issued by Japanese banks that would be available if Westinghouse files for bankruptcy, said Pete Degnan, the Georgia agency’s general counsel. Toshiba has guaranteed as much as 40 percent of the contract price if Westinghouse abandons the project, Degnan said.

“We don’t see that the Westinghouse bankruptcy would impact our ability to access the letters of credit or the parent guarantee of Toshiba,” Degnan said.

Westinghouse has been building the power plants since 2013. The projects have been plagued by litigation, design changes and the need to get approvals from the Nuclear Regulatory Commission. Labor productivity has suffered because of a lack of supervisors on the site, said Degnan.

Bloomberg Markets

by Martin Z Braun

March 23, 2017, 12:20 PM PDT

What happens to communities when local schools close?

When schools close for good in Chicago or Baltimore or Detroit, it makes headlines. People stage protests, go on hunger strikes, file lawsuits.

When a school closes for good in Joiner, Arkansas, the national media barely notices—but the community certainly does.

“The impact is felt more quickly in rural areas,” said Tequilla Banks, an executive vice president with TNTP who grew up in Joiner and has worked in nearby districts. “There aren’t other wraparound services, right? There aren’t other venues. Even extracurricular activities—it’s harder to get kids to those if the school isn’t right there.”

Research has shown that although changing schools can negatively affect students, the impact of moving to a better school after a school closure can be positive. Similarly, research in New York City found that closing low-performing high schools benefitted future students, who instead attended other, higher-performing schools. But none of this research accounts for what happens to the community.

“The decisions that we make, when they affect the communities our kids live in, they also affect the kids,” Banks said. “We make these decisions to close schools in isolation, but they have unintended consequences that very well may undermine our efforts.”

To begin to understand those unintended consequences, we must first understand which communities and students school closures affect.

Continue reading.

The Urban Institute

by Alexandra Tilsley

March 23, 2017

Fitch Ratings-New York-20 March 2017: The Trump Administration’s proposed 2018 budget cuts to the US Department of Agriculture’s (USDA) rural water and wastewater grant program would likely result in a partial diversion of funds from the US Environmental Protection Agency’s (EPA) State Revolving Fund (SRF) Programs, Fitch Ratings says.

The recommended budget essentially calls the USDA program redundant and eliminates its nearly $500 million budget. Without any offsetting increases in SRF grant funding, SRF project funding, which is frequently used, would likely be strained.

SRF programs provide valuable financing options for municipalities’ water- and sewer-related infrastructure needs. SRFs combine a pool of loan repayments with additional forms of credit enhancement, such as reserve funds, to protect bondholders from losses caused by the default of pool participants.

The combined 2018 budget proposal for clean and drinking water SRFs is approximately $2.3 billion, which is similar to last year. Therefore, increases in funding needs, or similarly, funding reductions, could eventually lead to further leveraging of the SRF programs.

We do not expect any ratings impact in the near term, as the SRF programs rated by Fitch have substantial reserves and equity positions. However, ratings could be pressured over the long term if there are any substantial increases in program leverage to meet the demands from utilities historically served by the USDA.

Most SRFs are rated ‘AAA’ by Fitch. Associated costs of financing are passed to SRF program borrowers, many of which may not have affordable access to the capital markets.

Fitch’s program asset strength ratio (PASR) is a measure to help market participants distinguish the relative financial strength of Fitch-rated SRFs. The PASR, an asset-to-liability ratio, is calculated by dividing the amount of aggregate pledged assets, including scheduled loan repayments, reserve funds, and account earnings, by aggregate outstanding debt service. The overall median PASR for the sector in 2016 was 1.9x, equivalent to 2015 and up slightly from 1.7x and 1.8x in 2013 and 2014, respectively. The high PASR levels reflect SRF’s robust enhancement.

Contact:

Doug Scott
Managing Director, U.S. Public Finance
+1 512 215-3725
Fitch Ratings, Inc.
111 Congress Avenue Suite 2010, Austin, TX

Major Parkhurst
Director, U.S. Public Finance
+1 512 215-3724

Robert Rowan
Senior Analyst, Fitch Wire
+1 212 908-9159

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com.

Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Oppenheimer, Franklin Templeton, others see market value plunge

Another downturn in Puerto Rico bonds is rippling through mutual funds on the mainland.

A new fiscal plan that leaves the troubled island commonwealth with less money to cover its debts pushed the value of certain bonds down as much as 9% last week through Thursday, according to Municipal Securities Rulemaking Board data.

That means tens of millions of dollars in paper losses for U.S. mutual funds that are some of the largest holders of Puerto Rico’s $70 billion in debt. That includes OppenheimerFunds, said a person familiar with the matter.

Oppenheimer and Franklin Templeton Investments are among more than 50 U.S. fund companies that own $14 billion in bonds issued by the commonwealth, according to research firm Morningstar Inc.
The market value of that $14 billion has dropped to $8 billion as Puerto Rico’s financial condition worsened over time, according to the most recent information available from Morningstar.

The lower value doesn’t necessarily equate to $6 billion in losses because the funds could have purchased the bonds at any time over the past several years as the value dropped. The date of the mutual funds’ bond purchases aren’t public.

Oppenheimer’s $6.6 billion investment now has a market value of $3.5 billion, according to Morningstar. Franklin Templeton’s $2.7 billion holding has a value of $1.4 billion, according to Morningstar. About 7% of Franklin’s debt is insured, according to a person familiar with the matter.

Puerto Rico Gov. Ricardo Rossello had initially proposed earmarking about $1.2 billion a year for debt repayment over the next decade. But the fiscal control board that Congress created to oversee a debt restructuring required him to revise his economic forecasts downward. That left about $800 million for annual debt service.

The move affected various Puerto Rico bonds in different ways. One considered a benchmark—a $3.5 billion general- obligation bond maturing in 2035—fell about 9% for the week through Thursday, according to trading data from the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access website. That is a big move in the normally sleepy municipal-bond world. The bond price, which had been climbing since Mr. Rossello took office in January, is now a few cents above its one-year low.

Paper losses on that bond for mutual funds were about $10 million, based on trading data. Mutual-fund holdings of that particular bond could have sold for about $98 million as of Thursday, compared with $108 million at the end of the prior week, based on trading data Thursday tracked by MSRB.

Other commonwealth bonds also dropped in value during that period. Prices on four sales-tax bonds and two other general-obligation bonds fell between 2% and 10%, according to an analysis by ICE Data Services. Those bond groups together make up much of U.S. mutual funds’ holdings.

More declines are likely, said Matt Fabian, a partner with the research firm Municipal Market Analytics. “Even if the fiscal plan is the start of a negotiating process, bondholder losses are probably larger than current market prices imply,” Mr. Fabian said.

One big U.S. mutual fund company isn’t worried: MFS Investment Management’s Puerto Rico bonds have a market value of $508 million, according to Morningstar, but the mutual fund said the “vast majority” is insured, making it far less vulnerable to changes in the island’s financial condition.

A total of about $12 billion of the island’s outstanding debt is insured, according to filings by the island’s five biggest bond insurers

“Our direct exposure to the credit of Puerto Rico is limited,” a MFS spokesman said.

THE WALL STREET JOURNAL

By HEATHER GILLERS

March 19, 2017 9:52 p.m. ET

Write to Heather Gillers at heather.gillers@wsj.com

(Reuters) – Uncertainty surrounding the Republican plan to replace Obamacare is forcing some U.S. hospitals to delay expansion plans, cut costs, or take on added risk to borrow money for capital investment projects, dealing an economic blow to these facilities and the towns they call home.

Hospitals typically lay out multi-year operating plans that prioritize investments, such as new clinics, medical wings, technology or other projects that help draw in more patients and increase revenue. In addition to enhancing patient care, these projects are vital to the local economy as a driver of jobs ranging from construction and maintenance to restaurants and transportation.

Denver Health Medical Center, for example, opened a new $26.9 million clinic in the city’s southwest in 2016 to provide care to an area lacking in health services and saw more patients within six months than it had expected over two years. The health system planned to build or remodel five more facilities based on the new clinic’s success.

But since November’s election, when Republicans swept the White House and Congress, Denver Health has deferred $73.7 million-worth of construction projects that had been planned to serve more low-income residents, many of whom were newly insured under Obamacare.

“We want to know what will happen with the Medicaid expansion population, and what will be the timeline for that,” said Peg Burnette, Denver Health’s chief financial officer. “Due to the uncertainty, we’re not going to issue new debt. We have no plans for that in the near future.”

Denver Health is not alone. Across the country, hospitals are shifting to a more conservative stance as they await sweeping changes to the nation’s healthcare law that for the first time in U.S. history would reverse a government healthcare entitlement program. The Affordable Care Act, commonly known as Obamacare, provided coverage to 20 million Americans and brought higher revenues to many hospitals.

The law’s likely overhaul puts many hospitals in a uniquely daunting position of being unable to predict how many of their patients will be insured and what type of coverage they will have in the future. As a result, many are more wary than in years past to invest in expensive capital projects, issue debt, or expand into new regions, said healthcare experts and hospital executives.

This is playing out in Arizona, where Kingman Regional Medical Center is taking cost-cutting measures by renegotiating medical supply and service contracts. The University of Alabama at Birmingham Health System, which includes six hospitals, is largely holding off hiring non-clinical staff, a trend also evident in national data.

Across the industry, hospital jobs so far in 2017 grew by 8,775 monthly on average, compared to 11,413 jobs for the same period last year, Bureau of Labor Statistics data shows.

The Republican-proposed bill, set to come before the U.S. House of Representatives on Thursday for a vote, would unwind the Medicaid expansion, cap federal payments to states and replace Obamacare’s income-based tax credits with flat age-based credits. The bill would still need approval in the Senate if it clears the House this week.

When asked about the early signs of hospitals putting spending on hold, a White House spokesperson expressed confidence that “the disastrous Obamacare law will be replaced with the American Health Care Act — the vehicle which will reform our broken healthcare system.”

The nonpartisan Congressional Budget Office estimates the new proposal would cause 14 million people to lose health insurance next year and 24 million by 2026. The bill has divided House and Senate Republicans and sparked fierce criticism from Democrats and leading medical and hospital groups, including the American Medical Association and American Hospital Association.

“It’s very challenging to plan for your future in an environment like this,” said Beth Feldpush, senior vice president of policy and advocacy at America’s Essential Hospitals, a group that represents safety-net hospitals nationally.

Not all hospitals are on hold. Some healthcare groups in areas with growing populations, such as Atlanta and Houston, are pushing ahead with capital expansion projects. Others, such as Maryland’s Prince George’s County, are still planning to move forward with construction plans, thanks in part to a partnership with the University of Maryland Medical System.

With the new medical center, Prince George’s County hopes to end its long-time reliance on $30 million annually from public subsidies to help cover operations. But that goal assumed Obamacare would remain intact, said Thomas Himler, Prince George’s deputy chief administrative officer.

“It could be that three years out we are no longer making money, we are losing money,” said Himler.

The uncertainty has seeped into the municipal bond market, where nonprofit hospitals access capital. The sector sold 36 percent less debt for new projects so far in 2017, compared to the same period last year, while the rest of the municipal market increased the amount of new money issued by 23 percent, Thomson Reuters data shows. While municipal analysts say it’s too early to draw conclusions, the uncertainty surrounding Obamacare is a likely cause for the decline.

“There’s a wait-and-see feeling,” said Kevin Holloran, a senior director at S&P Global Ratings. “Hospitals are saying, we’ll revisit this in six months or more.”

REVENUES AND RESTRAINT

Since enrollment started in 2014, the Affordable Care Act brought significant changes to Denver Health Medical Center, a safety-net hospital with the busiest trauma center in Colorado. Historically, nearly two-thirds of patients were either uninsured or covered by Medicaid, the government health insurance program for the poor.

Almost immediately after Obamacare went into effect, rates of uninsured dropped and Medicaid coverage jumped to over half of all patients.

With so many more patients covered, hospital margins grew and days of cash-on-hand climbed. Such financial improvements enabled the hospital to invest in new projects, including the Pena Family Health Center in southwest Denver. The hospital planned to construct three more clinics, to expand two existing clinics, and to build a new parking garage to drive new revenues and expand its coverage.

But since November’s elections, much of those plans have been deferred, including a $24 million expansion of a second clinic, largely financed through bonds. The health system still plans to move forward with the construction of one clinic and the remodeling of another. But those plans could be bigger.

“There’s great demand that we’re concerned about not being able to meet in the future,” said Burnette.

By REUTERS

MARCH 23, 2017, 8:15 A.M. E.D.T.

(Reporting by Robin Respaut in San Francisco and Yasmeen Abutaleb in Washington; editing by Edward Tobin)

In late 2006, Aaron Krowne, a computer scientist and mathematician, started a website that documented the real-time destruction of the subprime mortgage lending industry. The Mortgage Lender Implode-O-Meter caught on like wildfire with financial market voyeurs, regularly reaching 100,000 visitors. West Coast lenders, some may recall, were the first to fall in what eventually totaled 388 casualties.

A year earlier, to much less fanfare, Jack Dean launched another website in anticipation of the different kind of wave washing up on the California coastline. Called the Pension Tsunami, the website was originally conceived to provide Golden State taxpayers with a one-stop resource to track news stories on the state’s mammoth and numerous underfunded public pensions.

Dean came about his inspiration honestly: “I started tracking this issue in 2004 after the Orange County Board of Supervisors gave a retroactive pension formula increase of 62 percent to county employees,” he said. “I was stunned. It’s the main reason Orange County has a $4.5 billion underfunded liability today.”

As the years have passed, though, the site has become a font of information for states and municipalities nationwide as well as corporate pensions. In all, over 40,000 headlines have been posted to the website to date. On a recent Friday, Dean posted multiple stories on the California Public Employees’ Retirement System, the country’s largest pension program, as well as a budget cliff facing San Francisco, six Los Angeles public safety officers who collected over $1 million apiece last year in pensions, and eight cities that could face bankruptcy when the next recession hits. But the day’s headlines also included the latest on the fiasco unfolding in Dallas, an update on Houston’s less awful situation and features on states that have become the site’s other usual suspects — Connecticut, Illinois and New Jersey. And that was a slow news day.

The question is why haven’t the headlines presaged pension implosions? As was the case with the subprime crisis, the writing appears to be on the wall. And yet calamity has yet to strike. How so? Call it the triumvirate of conspirators – the actuaries, accountants and their accomplices in office. Throw in the law of big numbers, very big numbers, and you get to a disaster in a seemingly permanent state of making. Unfunded pension obligations have risen to $1.9 trillion from $292 billion since 2007.

Credit rating firms have begun downgrading states and municipalities whose pensions risk overwhelming their budgets. New Jersey and the cities of Chicago, Houston and Dallas are some of the issuers in the crosshairs. Morgan Stanley says municipal bond issuance is down this year in part because of borrowers are wary of running up new debts to effectively service pensions.

Federal Reserve data show that in 1952, the average public pension had 96 percent of its portfolio invested in bonds and cash equivalents. Assets matched future liabilities. But a loosening of state laws in the 1980s opened the door to riskier investments. In 1992, fixed income and cash had fallen to an average of 47 percent of holdings. By 2016, these safe investments had declined to 27 percent.

It’s no coincidence that pensions’ flight from safety has coincided with the drop in interest rates. That said, unlike their private peers, public pensions discount their liabilities using the rate of returns they assume their overall portfolio will generate. In fiscal 2016, which ended June 30th, the average return for public pensions was somewhere in the neighborhood of 1.5 percent.

Corporations’ accounting rules dictate the use of more realistic bond yields to discount their pensions’ future liabilities. Put differently, companies have been forced to set aside something closer to what it will really cost to service their obligations as opposed to the fantasy figures allowed among public pensions.

So why not just flip the switch and require truth and honesty in public pension math? Too many cities and potentially states would buckle under the weight of more realistic assumed rates of return. By some estimates, unfunded liabilities would triple to upwards of $6 trillion if the prevailing yields on Treasuries were used. That would translate into much steeper funding requirements at a time when budgets are already severely constrained. Pockets of the country would face essential public service budgets being slashed to dangerous levels.

What’s a pension to do? Increasingly, the answer is swing for the fences. Forget the fact that just under half of pension assets are in the second-most overvalued stock market in history. Even as Fed officials publicly fret about commercial real estate valuations, pensions have socked away eight percent of their portfolios into this less than liquid asset class. Even further out on the risk and liquidity spectrum is the 10 percent that pensions have allocated to private equity and limited partnerships. For the better part of a decade, New Albion Partners Chief Market Strategist Brian Reynolds has tracked pensions’ allocations to these so-called alternative investments, and the total is approaching $350 billion.

The working assumption is that the Pension Tsunami will never make land fall, but the next time you take comfort in the sanctity of pensions given they have yet to self-destruct, ask yourself instead how they are hedged in the event of a correction. Will it be their bond, stock, real estate or private equity holdings that shield their portfolios? Or will it be none of the above?

Bloomberg Prophets

By Danielle DiMartino Booth

MARCH 24, 2017 8:45 AM EDT

Professionals offering actionable insights on markets, the economy and monetary policy. Contributors may have a stake in the areas they write about.

Danielle DiMartino Booth, a former adviser to the president of the Dallas Fed, is the author of “Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America,” and founder of Money Strong LLC.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Danielle DiMartino Booth at Danielle@dimartinobooth.com

To contact the editor responsible for this story:
Robert Burgess at bburgess@bloomberg.net

• Muni market sees low new money issuance compared to mid-2000s
• Government credit not facing ‘imminent deterioration’

A drop in the sale of state and local government debt this year may have a culprit other than rising interest rates.

Analysts at Morgan Stanley, led by Michael Zezas, said the rising retirement-system costs has made government more leery of running up new debts. State and local revenues have not kept pace with growth in total liabilities that now amount to $4.97 trillion, the analysts say.

Despite January seeing a year-over-year rebound in tax revenues, the unfunded pension liabilities pressures “would make this a hollow victory if they aren’t sustained,” the analysts added. Unfunded pension obligations have risen to $1.9 trillion from $292 billion since 2007, according to data compiled by Bloomberg.

The drop-off in muni new money issuance comes as unfunded pension liabilities continue to pressure many municipalities’ budgets, ranging from Chicago Public Schools to the Dallas Police and Fire Pension.

Escalating pension bills for the city of Chicago triggered Moody’s Investors Service to downgrade its credit to junk. S&P Global Ratings has warned Dallas and Houston could have their ratings lowered if they don’t shore up their pension funds while New Jersey’s rating has been cut repeatedly due to underfunded pension obligations.

As state tax collection growth is slowly decelerating, the analysts say investors should limit their exposure. Investors should note that this trend won’t add more pressure to the municipalities than they’re already facing.

“None of this is to suggest a crisis or imminent deterioration in general government credit,” the analysts said in a note.

Blooomberg

by Jordyn Holman

March 21, 2017, 9:28 AM PDT

A new paper from the University of California at Berkeley contends that concerns about the declining health of public retirement systems in the modern era are largely overblown. The author, Tom Sgouros, argues that maintaining a fully funded pension is not necessary for governments because they’ll always be around to pay the bill.

Sgouros also argues that the accounting standards used to evaluate pension plans are partly to blame for the current pension crisis narrative. Be it city council members or “analysts at Moody’s determined to justify a downgrade,” these players often misuse the data to blame pension plans for municipal woes. “Debt due in the distant future is not a crisis today,” he writes, “even if it is a cause for concern.”

The Takeaway: Sgouros makes several good (and interesting) points. But he doesn’t really acknowledge that pension funds are essentially money set aside to invest and help pay for retirement benefits and are thus designed to defray the ultimate cost of those benefits to the government. In other words, pay less today rather than a lot more down the road. The accounting and numbers may be twisted in seven different kinds of ways, depending on who’s doing the talking, but it’s not a reason say the entire process doesn’t matter.

GOVERNING.COM

BY LIZ FARMER | MARCH 24, 2017

A roundup of money (and other) news governments can use.

GOVERNING.COM

BY LIZ FARMER | MARCH 24, 2017

The Trump Administration has the admirable goal of encouraging infrastructure investment. One policy it may want to consider is promoting the recycling of existing municipal infrastructure assets. This policy was developed in Australia and has been successful there.

Recycling infrastructure assets does not refer to re-using concrete blocks. Rather, it is a vernacular term that refers to the sale by a municipality of existing infrastructure assets to private investors to raise cash that the municipality can then use to construct new infrastructure assets.

Existing infrastructure assets with revenue histories are perceived as a safer investments for investors than investing in the construction of a new asset that is unknown whether or not it will be able to be operated successfully. This perception means that private investors will pay a higher price for an infrastructure asset with a revenue history than for an infrastructure asset that has yet to be constructed. Further, new infrastructure projects require years to design, approve and construct.

Under a policy of recycling infrastructure assets, municipalities are encouraged by the federal government to sell existing assets that have revenue streams. An example could be a tunnel or a port. The proceeds of the sale are required to be held in a account that can only be used to fund new infrastructure projects.

The federal government encourages the sales by providing a financial incentive to the municipality that is a percentage of the sales price, for instance 15%. So if an operating toll bridge is sold for $100 million to private investors, the federal government provides an additional $15 million. Now, the municipality has $115 million that it can use immediately to construct a new infrastructure project that either might not be suitable for private investment (e.g., improvements to public school buildings) or that private investors may be reluctant to underwrite without a revenue history.

The federal subsidy serves three purposes. First, it motivates the municipality to undertake a complicated legal and financial process, which it might otherwise opt to avoid. Second, when constituents assert that the municipality should not sell a much loved asset (e.g., a stadium), the municipal officials can respond that they care about the stadium too; however, the federal government is providing a cash subsidy for doing this. Third, it provides much needed funding for infrastructure.

Another nuance is that in Australia title in fee simple to the infrastructure asset in question is not usually sold to the private investor. Rather, the municipality enters into a long-term lease or concession contract for the asset with the private investors. Therefore, constituents who are concerned about a prized asset being in private hands can be assured that eventually (e.g., 50 years) that possession of the asset will eventually revert to the municipality. That is, the politicians can state we did not sell the beautiful toll bridge, we merely leased it to an investor.

Even more infrastructure funding could be raised if the tax-exempt bond rules in the United States were modified to permit private investors to issue tax-exempt bonds to fund a portion of the payment for the long-term lease or concession contract. The tax exemption on the bonds would enable the private investors to issue debt at lower interest rates than they could using traditional taxable debt and, thus, pay more for their interest in the infrastructure assets while earning a comparable equity return.

If the Trump Administration wants to improve America’s infrastructure in an expedited manner with minimal involvement of the federal bureaucracy, then it should urge Congress to enact legislation that provides municipalities a subsidy based on the sale proceeds of assets and enables private investors to issue tax-exempt debt to fund their investment in municipal infrastructure assets.

Mayer Brown

By David K. Burton on March 22, 2017

President Trump issued an executive order and four presidential memoranda (the “Executive Actions”) intended to streamline the regulatory process, dismantle burdensome regulations and promote domestic job growth within the energy sector. The Executive Actions direct specified Cabinet members and agencies to remove regulatory barriers to infrastructure investments, and order the use of American-made materials to construct pipelines within the United States.

In a memorandum, Cadwalader attorneys Mark Haskell, Brett Snyder and Mary Treanor review the Executive Actions, as well as the ongoing challenges faced by natural gas and oil projects in light of those actions.

Commentary

The Executive Actions do not clarify whether these requirements apply to offshore or cross-border pipelines, nor how the administration will effectuate the directive without violating existing international trade agreements. Key language in the memoranda, requiring American-made materials “to the maximum extent possible and to the extent permitted by law,” may provide a loophole. Commenters suggest that this phrase avoids running afoul of existing trade treaties.

Last Updated: March 20 2017

Article by Brett Snyder

Cadwalader, Wickersham & Taft LLP

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.