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Dec. 9, 2016

A new type of debt for the Chicago Public Schools (CPS) earned an investment-grade rating of A from Fitch Ratings on Thursday, based on the bonds’ ability to withstand a potential bankruptcy filing by the financially struggling district.

The A rating on $500 million of capital improvement tax bonds is eight steps above the junk rating of B-plus with a negative outlook Fitch has assigned the school system’s $6.8 billion of outstanding general obligation bonds.

Fitch attributed the difference to its assessment “that the pledged revenues meet the definition of ‘special revenues’ under the U.S. Bankruptcy Code and therefore, bondholders are legally insulated from any operating risk of the board.”

The United States’ third-largest public school system is struggling with pension payments that will jump to about $720 million this fiscal year from $676 million in fiscal 2016, as well as drained reserves and debt dependency. The fiscal woes have pushed its GO credit ratings deep into the junk category and led investors to demand fat yields for its debt.

The $500 million of bonds will be secured solely by a capital improvement property tax approved by the Chicago City Council last year and not by the district’s GO pledge. The property tax revenue, initially totaling $45 million, can only be used to fund capital projects and not operations, and is subject to an intercept mechanism that will send the funds directly to the bond trustee.

CPS cannot currently file for municipal bankruptcy in Illinois, although there have been proposals to change state law to allow such a move.

Fitch said legal opinions for the new bonds “provide a reasonable basis for concluding that the tax revenues levied to repay the bonds would be considered ‘pledged special revenues.'” The opinions on a “hypothetical bankruptcy” by CPS concluded that payments on the new bonds would not be automatically stopped by a federal bankruptcy court and that bondholders would retain a lien on the tax revenue.

Reuters

Thu Dec 8, 2016 | 12:44pm EST

(Reporting By Karen Pierog; Editing by Jonathan Oatis)

The recent advisory discusses a recent Third Circuit Court of Appeals ruling that held a “make-whole” optional redemption premium to be due upon a refinancing of corporate debt following its automatic acceleration upon bankruptcy. As noted in the linked advisory, the Second Circuit Court of Appeals also is considering this issue; whether it will come to the same conclusion remains to be seen. One way or another, these decisions will have spillover effect on judicial interpretation of optional redemption provisions in municipal bond transactions, and shine a spotlight upon the discrepancies between optional redemption provisions and other early payment provisions in most municipal bond indentures.

The Third Circuit case involved a debtor, Energy Future Holdings, that filed for bankruptcy for the explicit purpose of refinancing the debt at favorable interest rates while avoiding the hefty make-whole premiums payable upon an optional redemption of the refinanced notes. The bankruptcy court and the federal district court found nothing in the applicable corporate indenture requiring payment of a make-whole following an acceleration. The Third Circuit reversed, interpreting the applicable corporate indenture’s “optional redemption” provisions to be applicable to the bankruptcy-triggered acceleration followed by repayment of the accelerated debt via a refinancing.

The Third Circuit’s ruling that the repayment following acceleration was an “optional redemption” may have been driven by the factual context of what could be characterized as an “optional bankruptcy” filed solely or primarily to jettison the make-whole payments and lock in lower rate replacement financing. The indenture’s acceleration provision was, as is usual, a remedial provision entirely separate from the indenture’s optional redemption provisions, and, as is typical but not universal, did not specify a premium to be due upon payment of the accelerated debt. Although once the accelerated payment was due there was nothing “optional” about paying it, the appellate panel opined that the payment on the applicable date was “optional” because the issuer chose to file for bankruptcy and chose not to deaccelerate the debt after the bankruptcy triggered the automatic acceleration. The fact that the bondholders objected to repayment without a make-whole premium also seems to have factored into the court’s determination that the payment by the issuer was “optional.”

The federal appellate court also concluded that under New York law a “redemption” may occur at or before maturity of bonds, and that therefore a “redemption” is not synonymous with a prepayment. (Indeed, the court suggested that if the make-whole premium had been labeled a “prepayment” premium rather than an “optional redemption” premium, it may have held the make-whole inapplicable, a curious distinction that leads back to the question of under what circumstances payment of an amount that has become due can be deemed optional.) The court disregarded indenture provisions that were technically inconsistent with its determination that the payment was an “optional redemption”, such as the optional redemption requirement of prior notice from the issuer to the bondholders. According to the court: “[The issuer] offers no reason why it could not have complied with [the redemption] notice procedures. In any event, it cannot use its own failure to notify to absolve its duty to pay the make-whole.”

By interpreting the indenture’s optional redemption provisions as applicable to the payment of the accelerated debt, the Third Circuit panel mooted and declined to address the noteholders’ alternate argument that the bankruptcy court should have granted relief from the bankruptcy stay to permit the bondholders to deaccelerate the accelerated debt. Whether that would have provided a more straightforward means of getting to the same result is debatable, as debt generally is deemed accelerated upon a bankruptcy whether or not it is contractually accelerated by the terms of the indenture.

The optional redemption provisions that are typical in municipal bond indentures refute the equivalence found by the Third Circuit between an optional redemption and a payment after acceleration. In contrast to the permissibility in corporate transactions of optional redemption at any time at a make-whole premium, the norm in municipal bond transactions is a lockout period (often 10 years) during which optional redemption is impermissible, followed by a declining fixed optional redemption premium. The fact that municipal indentures permit acceleration whenever there is an event of default, including upon bankruptcy, while imposing a lockout period for optional redemption, suggests that in the municipal bond context there may be less receptiveness by courts to the notion of deemed equivalence between an optional redemption and a payment following acceleration. Accordingly, a court may be less likely to deem an optional redemption premium applicable to a post-acceleration payment on a municipal bond absent express language requiring a premium in a post-acceleration context.

Whether corporate or municipal bonds are at issue, the best way to ensure the intended result is to draft clearly and specifically. Municipal bond indentures often permit or require bonds to be paid ahead of schedule not only upon acceleration but upon a so-called extraordinary redemption. These provisions, which typically permit payment ahead of schedule at par, are infrequently deployed relative to optional redemption provisions. Use of bankruptcy as a means of avoiding a prepayment premium is less likely in the municipal context, where the prepayment premium is typically 3% or less versus the often substantially larger make-whole premium, but “default refundings” of municipal bonds have been attempted to circumvent the optional redemption lockout period. There is no difference in the economic impact to a bondholder of early payment, no matter the degree of optionality or lack of optionality from the issuer’s perspective, and whether an early payment premium is expressly provided by the indenture in cases other than “optional redemption” is primarily a risk allocation question.

Drafting acceleration provisions and/or extraordinary redemption provisions in a manner that applies an equivalent premium to the optional redemption premium upon their exercise during the post-lockout period, and a make-whole or other premium during the optional redemption lockout period, provides better protection against any perceived risk of abuse of those provisions than reliance on the courts to figure out what the parties intended and/or is equitable in borderline scenarios.

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

Tuesday, December 6, 2016

by Leonard Weiser-Varon

Len is active in both municipal finance and corporate finance, with an emphasis on financings for 501(c)(3) institutions, project finance, secured lending, structured finance transactions, workouts and restructurings, corporate debt, and Section 529 college savings programs.

His practice includes service as bond counsel, issuer’s counsel, underwriters’ counsel, and counsel to institutional purchasers and borrowers in connection with public offerings and private placements of, and defaults and bankruptcies involving, tax-exempt and taxable debt for public, nonprofit, and corporate…

LWeiser-Varon@mintz.com
617-348-1758
www.mintz.com
www.publicfinancematters.com

©1994-2016 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

No government can be fully prepared for every economic twist and turn. Still, some are trying.

The Great Recession was uniquely devastating for states and localities because it hit all three major tax revenue sources: income, sales and property. It was a scenario that few, if any governments, were really prepared to absorb. As a result, governments were forced to make massive budget cuts.

Now, as the recovery trudges on longer than most, a growing number of states are making sure they aren’t blindsided by the next downturn.

Enter stress testing. The idea, which was borrowed from the U.S. Federal Reserve, essentially throws different economic scenarios at a state budget to see how revenues would be impacted.

“We’re in an environment where everyone is starting to think about the next downturn and what that’s going to look like,” said Emily Raimes, a Moody’s Investors Service analyst. “A stress test is a tool for states to think about what types of programs they should commit to and how much to save now.”

Credit rating agencies, in fact, are among the practice’s biggest fans. Earlier this year, Moody’s stress-tested budgets of the 20 most populous states and found that Missouri, Texas and Washington are in the best position to handle a recession because of their strong reserves, spending flexibility and lower revenue volatility. (Low revenue volatility means a state’s income doesn’t change too drastically from one year to the next. In other words, it’s more predictable.)

California and Illinois, however, found themselves at the other end of the spectrum in Moody’s stress test. California is endangered by its high revenue volatility and lower reserves, according to the report. And Illinois is vulnerable because of its extremely low reserves and inflexible governance.

S&P Global Ratings also stress-tests state budgets. In August, the agency performed a stress test on the top 10 borrowing states’ fiscal 2017 budgets. The scenario focused on what would happen if global economies like the United Kingdom or China slowed down more than anticipated.

The results — some of which overlap with Moody’s — show that Connecticut, Illinois, New Jersey and Pennsylvania are most likely to feel significant fiscal stress, while Florida, New York and Washington are best positioned for a downturn.

A few states are forging the way with their own stress-testing systems, while even more are looking into the idea.

Utah has the most robust practice, and it’s something credit rating agencies have held up as an example. Last year, the state tested its budgets against a moderate and severe recession — think 2001 versus 2008. The results told policymakers that Utah has enough in reserves to weather a moderate downturn, but a severe one would likely require cutting nearly $1 billion in spending over two to three years in addition to using most of the state’s reserves.

The process was so informative that Utah Office of Management and Budget Director Kristin Cox and her colleagues are developing additional scenarios to test. For instance, what happens to specific revenue streams if the state’s biomedical industry slows down? Or if oil prices shoot back up? (Utah’s stress testing is one of the reasons Governing recently awarded Cox with a Public Official of the Year award).

Minnesota also uses a form of stress testing to evaluate its revenue volatility and inform its rainy day fund policy. It’s one of just four states that requires periodic evaluations to make sure its savings targets actually reflect the state’s revenue volatility. It’s also the only state to determine its risk tolerance — that is, the tolerance policymakers have for not fully covering a potential shortfall. Its current savings target is the amount deemed necessary to cover 90 percent of all possible downturn scenarios.

California, which saw its revenues drop 20 percent during the Great Recession, recently started using stress tests. The state Legislative Analyst’s Office now includes estimates of what would happen to the state’s budget under an economic growth scenario and a mild recession scenario. The most recent analysis concludes that, in the event of a mild recession in 2018, the state would have enough reserves to cover most of its operating deficits through the 2020–2021 fiscal year.

Of course, no government can be fully prepared for every economic twist and turn.

“We’re trying to create certainty in an environment that is inherently uncertain,” said Cox. “Instead our approach should be, how prepared are we to respond to different scenarios?”

The unusual recession and equally unusual recovery period has sent the message to budget officials that they can’t afford to be caught unprepared. Since presenting Utah’s stress-testing methods at a National Conference of State Legislatures meeting, Legislative Fiscal Analyst Jonathan Ball said he’s gotten calls from Colorado, Nevada and Vermont, among others.

“It’s gotten a lot of traction,” he said. “We didn’t know if it was going to work at first. We’re kind of learning as we go and sharing our experience with other states.”

GOVERNING.COM

BY LIZ FARMER | DECEMBER 12, 2016

New York, December 07, 2016 — The outlook for US local governments will remain stable as the majority of the sector is underpinned by solid property tax revenues and healthy reserves, Moody’s Investors Service says. The outlook indicates fundamental business conditions over the next 12 -18 months.

Property taxes, the bedrock of local governments, remain healthy and will continue growing in 2017 owing to broader local tax base growth returns to pre-recession levels.

“A combination of property value growth and tax rate increases drove revenues 5.1% higher in the first half of 2016. We expect these factors will continue to support revenue growth of 3%-5% in 2017,” according to Moody’s Analyst Sarah Jensen.

Moody’s says reserve levels remain healthy for most local governments and provide budget flexibility. Most local governments will continue to actively raise revenues or cut spending as needed to maintain these reserves through 2017. Reserves provide flexibility for local governments in times of unexpected economic stress and unpredictable expenditures.

While manageable for most, overall fixed costs and growing balance sheet liabilities are a long-term drag on the sector. Fixed costs such as pension liabilities, debt service and other post-employment benefit (OPEBs) contributions could, if unaddressed, begin to crowd out essential services.

Infrastructure needs are becoming more pressing, and rising fixed costs could hamper the ability to issue debt to address this issue.

Despite general stability across the sector, there is a growing portion, roughly 5% -10% of issuers, facing numerous challenges pressuring their credit profiles. These local governments face revenue stagnation combined with growth in fixed costs, leading to a trend of credit deterioration.

Moody’s would change the outlook on the sector to positive if strong property tax revenue growth continues at 4%-5% and is accompanied by a stabilization of fixed costs and maintenance of healthy reserves. The sector outlook could change to negative if property tax revenue growth weakens to 1-2% or growth is outpaced by the increase in long-term liabilities and fixed costs.

“Financial challenges at the state level, particularly in states hit by low energy prices or budget imbalances, could impact some municipalities and school districts as states could either cut aid or shift fiscal responsibilities to local governments,” said Jensen.

“Local Governments — US: 2017 Outlook – Strong Tax Revenues, Healthy Reserves Drive Stability for Most.” Is available to Moody’s subscribers at

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1045982.

This report is part of a series of 2017 Credit Outlooks that provide insight into next year’s credit conditions across all sectors. See more at www.moodys.com/2017outlooks

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

The Week in Public Finance.

GOVERNING.COM

BY LIZ FARMER | DECEMBER 9, 2016

Los Angeles is spending billions to revamp its airport. The move is spurring other cities to make similar investments.

Twenty miles from downtown Los Angeles, squeezed between the Pacific Ocean and one of Southern California’s busiest freeways, sits 3,400 acres of bare pavement and neglected jet-age architecture that make up Los Angeles International Airport. These features are the first glimpse travelers get of a city with lofty aspirations. It’s not a pretty sight.

For decades, LAX has been known for crowded gates, drab terminals, scarce amenities and ungodly traffic. It’s a place that international visitors and lifelong Angelenos alike avoid if at all possible. That’s a troubling prospect for a region that thrives on tourism, international trade with Asia and Latin America, and industries such as defense and aerospace manufacturing that are heavily intertwined with global travel.

“There is no calling card like it to people who will invest, who will travel, who will study in your city than an airport,” says Los Angeles Mayor Eric Garcetti. “It is the first taste, the last taste, the first view, the last view. If you’re greeted with traffic, cigarette smoke, honking cars, people giving tickets and gridlock, you’ll say, ‘Oh, I guess this is what L.A. is like.’” That’s not the impression the mayor wishes to leave. Garcetti wants to refashion the airport around enhanced customer experiences that could put LAX in the top tier of airports globally, right next to Hong Kong, Munich, Seoul, Singapore and Tokyo. It is an incredibly ambitious goal, considering LAX ranks near the bottom of the world’s 100 biggest airports in passenger satisfaction. Nevertheless, Garcetti is undertaking a near-total transformation of the much-maligned but vital facility.

The first step in the process was a complete overhaul of LAX’s Tom Bradley International Terminal, a job which was finished three years ago. The revamped terminal includes 18 gates, half of which can handle the massive double-decker Airbus A380 jets, and a great hall the size of three football fields. The jagged roof, meant to evoke the waves of the Pacific Ocean, reaches heights of up to 110 feet. That allows arriving passengers to look out onto the light-bathed space from glass-enclosed passageways below as they travel to customs. In the great hall, huge LED screens project images of California scenery and digital art, as well as the usual advertisements and flight information. Passengers can while away their time at upscale shops including Armani and Porsche, or eat at one of 20 restaurants that run the gamut from KFC to a steakhouse with $51 ribeyes.

The last time LAX updated its international terminal was when the city hosted the 1984 Summer Olympic Games. By the time the torch is lit for the 2024 Olympics, which L.A. hopes to host, almost every corner of the airport is expected to be upgraded. The ongoing $14 billion plan includes expanding the international terminal, remodeling all the other terminals, potentially adding new domestic concourses, finishing up runway work, introducing more efficient security checkpoints, installing new baggage carousels, consolidating rental car facilities, building new parking structures and finally, after decades of promises, connecting LAX to L.A. Metro’s growing light rail network.

Los Angeles will have plenty of competition as it tries to build the best airport in the United States. After years of coping with cost-conscious airlines and accommodating ever-changing security processes, U.S. airports are turning their focus back to improving their product. Overall spending on airport capital improvements is expected to reach $13 billion a year by 2019, a 30 percent increase compared to the previous five-year period.

From LAX and San Francisco to New York and Atlanta, airport authorities hope better facilities can attract new customers, provide for bigger aircraft and shore up their bottom lines. And, if all goes according to plan, perhaps the remade airports will even boost the fortunes of the regions they serve.

Unlike other major airports, LAX is not dominated by any single airline. Each of the four major U.S. carriers claims at least one terminal there, but none has more than a fifth of the airport’s traffic. Still, LAX is being buffeted by the forces of consolidation that have reshaped the airline industry over the last two decades. Until recently, those forces have pushed terminal modernization and other airport improvements far down on the list of airline priorities.

The carriers shoulder the bulk of the cost of running airports, by renting terminal space and by paying weight-based landing fees for incoming flights. But the carriers also have a lot of say over infrastructure improvements. If they choose to, they can block new construction. Or they can cooperate and, as with many of the LAX improvements, even provide the initial money to pay for big projects (which the airport will pay back over time).

Since the turn of this century, airlines have had to contend with two recessions and sky-high oil prices. Bankruptcies and mergers have left four dominant domestic airlines: American, Delta, United and Southwest. As the airlines have tried to climb back to solvency, they’ve focused on becoming more efficient. One result of that has been further concentration of flights to major hubs such as Atlanta, Chicago, Dallas and Los Angeles.

But it’s not flight destinations that have forced airlines and airports to take a new look at their facilities: It’s the way flights are operated. To save money on their two biggest expenses — labor and fuel — airlines are flying bigger, fuller planes, but fewer of them. So a city that once had three flights a day to its hub airport, served by 50-seat regional jets, might now have only two flights a day on larger aircraft. The arrangement helps the airline save money on jet fuel, pilots and baggage handlers. In many cases, though, the airlines have also trimmed the excess capacity that they once provided in hopes of gaining a competitive advantage. With so much consolidation in the industry, they face less competition from one another. There’s no sense losing money on empty seats, so the airlines are basically scheduling only flights they can fill.

Airlines might have been expected to increase the number of flights with the steep drop in oil prices over the last couple of years, but this has not happened. One reason, says Earl Heffintrayer, lead airport analyst for Moody’s Investors Service, is a worsening pilot shortage caused by increased training requirements for new co-pilots and the mandatory retirement of baby boomer pilots at age 65. “If you have a limited supply of pilots, you want to fly them on larger planes. Smaller planes are the ones that are falling out, because you can make more money on the bigger ones,” Heffintrayer says.

What all this means is that many larger airports, including LAX, are handling more passengers than ever, even though they have fewer flights going in and out than they did before the Great Recession or even before the 2001 terrorist attacks.

As a result, many of their existing gates are now inadequate. If a waiting room that was designed to accommodate 50-seat shuttles now suddenly starts handling 70- or 110-seat jets, there aren’t enough places for people to sit with their carry-on baggage. Boarding lines spill beyond the gate area. Waiting times increase for nearby bathrooms and restaurants. The consequence is that many airports are having to remodel their terminals to handle the more concentrated bunches of passengers.

They are also adding new gates. “The capital improvements we saw over the last four to five years have been fixing existing facilities, making them look more modern and having a better passenger experience,” Heffintrayer says. “The next wave of capital, which is really looking to take off next year, is going to start with gate expansions. We’re seeing a real change in what airports are spending their money on going into the next year.”

Although many of the improvements were in the works for years, the recent financial strength of the airline industry is also fueling the building spree, says Khalid Usman, a vice president with the consulting firm Oliver Wyman who has worked on airport renovations. “In 2015, the U.S. airline industry’s combined profitability was $25 billion. That’s historically the highest number we’ve ever seen in the entire history of U.S. aviation,” says Usman. “That kind of profit is unknown in this type of industry. If you look at the prior 17 years [combined], that was actually negative $32 billion. It’s an industry that is very cyclical.”

With the return of airline profitability, San Francisco International Airport, which has seen more than a 50 percent annual traffic increase over the last nine years, has launched a five-year, $5.7 billion plan for adding and refurbishing gates, consolidating rental car facilities and extending its AirTrain. Atlanta’s Hartsfield-Jackson International, the busiest passenger airport in the world, is planning for more growth with a $6 billion effort that will add 15 gates, renovate parking garages and remodel its concourses to bring more sunlight into the buildings. Charlotte Douglas International Airport in North Carolina, which is also benefiting from surging traffic, is building nine new gates along with an expanded pre-security lobby, a new runway and a new traffic control tower.

For Los Angeles, the catalyst for the recent wave of upgrades was the arrival of the Airbus A380 in 2007. Nearly 100 Southern California suppliers contributed to the construction of the world’s largest jumbo jet, which is as tall as an eight-story building and has wings 260 feet across. Despite an early commitment to LAX, Airbus later said the A380 would make its U.S. debut at John F. Kennedy International Airport in New York City. Los Angeles protested, and Airbus settled on a compromise: Two A380s touched down simultaneously at JFK and at LAX.

But LAX didn’t have any good place to put the A380s once they landed. LAX crews were able to widen taxiways and make other improvements to the airfield to handle the jet’s size, but there was nowhere to park them at the terminals. Because the double-decker planes are so big, they require three jet bridges for passengers to board or disembark. The large wingspans also require a lot of space between gates. So the new jets had to park at remote gates at a far corner of the airfield. “A passenger is getting on an A380 in Dubai or Abu Dhabi in what could be a ‘gold-plated’ boarding bridge,” says Roger Johnson, the LAX official overseeing the physical improvements to the airport. “Then at LAX, they arrive in a concrete bunker, walk onto a concrete ramp and get onto a bus to get to a tunnel. That was one of the driving forces behind the Tom Bradley International Terminal.”

The stakes were high. Los Angeles’ economic development agency concluded in 2007 that the A380 and Boeing’s Dreamliner 787 were “competitive threats” to the entire region. Airlines operating the 550-seat A380s would send the jets to airports that could handle them. Meanwhile, the fuel efficiency of Boeing’s new long-haul jet, which carries half the passengers of the A380, could make it easier for overseas flights to skip over LAX completely. That was especially bad news, because overseas flights are highly lucrative. The economic development agency estimated that scheduling one daily transoceanic flight to LAX in 2006 generated $156 million in wages and added $623 million a year to the region’s economic output. “Southern California,” the agency concluded, “can ill afford to lose the competition for overseas routes.”

Luckily for Los Angeles, the A380 arrived at about the same time the airport settled long-disputed lawsuits over its master plan. Finally, the airport could start building. The first task was replacing most of the international terminal.

Garcetti now uses the new international terminal as a selling point to lure even more international flights to LAX. “We would fall all over ourselves to bring a company that would produce $300 million a year here. It’d be all over the news,” Garcetti says. “But people forget that one flight is worth about $1 billion a year.” Airlines seem to like L.A.’s pitch. LAX now handles more A380 flights (14 a day) than any other airport in this country. It is the only U.S. airport with three daily nonstop flights to and from China. And LAX has surpassed its rival JFK in connections to Asia, with 207 flights a week as of last year, compared to 121 for the New York airport.

Many of the flashy features in the Tom Bradley International Terminal are being included in renovations to the airport’s other terminals. They aren’t just designed to show off. Most of them have practical purposes as well.

As part of United Airlines’ renovation of its terminal at LAX, it is including “smart lanes” at its TSA security checkpoint. United is taking a page out of the playbook of Delta, which first tested the idea in Atlanta. With smart lanes, passengers each get their own counter space, side-by-side with those of other passengers, to load their items into bins. The system allows people to go at their own pace, because they’re not stuck in line behind someone who might be slower. United officials say the smart lanes will reduce security wait times by 25 percent.

LAX is also one of a few dozen airports currently working with U.S. Customs and Border Protection to use technology to speed up the process of clearing customs. The automated passport control system lets arriving passengers use kiosks for their initial screening.

Airport managers hope better use of technology, among many other things, will help boost the customer experience. Last year, LAX trailed only LaGuardia and Newark airports in J.D. Power’s rankings for lowest customer satisfaction among U.S. airports. Mike Taylor, a J.D. Power airport analyst, says technology is one way to make customers happier. “The highest-rated portion of the airport experience is check-in,” he says, “because it’s become more and more automated over the years.”

But terminal improvements can only go so far in making customers happier. Only 30 percent of passengers’ satisfaction is associated with the structure itself. “A new building will not solve all of your problems,” Taylor says. “It won’t solve all your problems because the same traffic pattern is present when you step outside the building, the same congestion.” The frustration with getting in and out of airports is only getting worse as airports become more crowded.

That’s what the next phase of LAX’s improvements is meant to address.

LAX is the third-busiest airport for passengers in the country, but that doesn’t tell the whole story. Atlanta and Chicago’s O’Hare airports handle more people, but many of them simply pass through as they transfer to other flights. LAX, on the other hand, is the top airport in the country for starting and ending trips. In other words, it has to get more passengers in and out than any comparable facility in the country.

The traffic problems at LAX are made worse by the fact that just about the only way to get to the terminals is with a car, bus or van, and all of those vehicles follow the same double-decker road in a U-shape past all nine terminals. Forty percent of the vehicles are commercial shuttles for hotels, rental car agencies or parking lot operators. One trip around the loop can easily take more than half an hour.

The growing popularity of air travel is making the traffic worse. Vehicles made more than 90,000 trips a day through LAX’s main terminal loop this summer, and that number grew to nearly 95,000 on holiday weekends. “It’s reached a state where it’s untenable,” says Deborah Flint, the CEO of Los Angeles World Airports, the agency that runs LAX. “The only real, effective option is to bring the mass transit connections to the airport.”

So Los Angeles is joining a growing list of cities building new rail connections to their airports. Denver; Oakland, Calif.; Phoenix; and Washington, D.C.’s Dulles Airport all either completed rail connections recently or are building them now. Garcetti says one reason he pushed to bring in Flint, who previously led the Oakland Airport, and L.A. Metro CEO Phillip Washington, who headed Denver’s transit system, is that both had experience creating rail connections to their respective airports.

LAX’s rail connection will be especially ambitious, because it depends on both the construction of an automated “people-mover” train at the airport and the completion of a new north-south light rail route by L.A. Metro.

The 2.25-mile people-mover route would run down the center of the U-shaped terminal area, so passengers from both sides would be able to cross over pedestrian bridges to get on at one of three stations. The free trains would arrive every two minutes.

The automated people-mover trains would stop at an intermodal center, which would have parking and shuttle services. It would be convenient to reach by car. But drivers could turn around or park before they get trapped in traffic near the terminals. Once they’re at the facility, passengers would be able to check in, print their boarding passes and get information before they catch the people-mover to the terminals. From the intermodal center, the people-mover would then go to the Metro station, which would also offer several bus connections. Work is already halfway completed on the 8.5-mile rail line, which is part of a much larger Metro expansion effort that began in 2008. The first trains are scheduled to start running along the Crenshaw/LAX line in 2019.

Finally, nine minutes after leaving the first station, the people-mover would stop at a consolidated rental car facility, which would bring some two dozen of LAX’s far-flung rental car lots under one roof. Both the automated people-mover and the rental car facility would be operated as public-private partnerships.

The overarching idea of the $5 billion project is to move as much traffic as possible away from the central terminal area. Just relocating the commercial shuttles to one of the intermodal facilities could have a huge impact, since they make up so much of the traffic that circles the terminals now. Rental car companies alone currently account for 3,200 shuttle trips a day around the loop, which would be eliminated.

Giving passengers transportation options is key to attracting the most desirable customers, especially those coming from overseas. “International passengers — there were over 20 million of them [at LAX] last year — expect an international city gateway that is connected to many different transportation options,” says Flint. “It’s par for the course for a major city like Los Angeles.”

For Garcetti, who has made infrastructure projects big and small a major focus of his administration, there is also an element of pride at stake in connecting LAX to a rail line, something that’s been promised for generations. “When I was campaigning and saying I would, after 50 years of talk, finally bring public transportation to the airport, it was an applause line from the furthest point away from the airport in the city to the next-door neighbors,” he says. “It’s not only an amenity, it’s a symbol of what we couldn’t do and we wondered if we ever would do. Are we capable of big projects? Are we capable of building again? That was a core part of our identity, but it was slipping through our fingers. I think this is a way of solidifying that.”

GOVERNING.COM

BY DANIEL C. VOCK | DECEMBER 2016

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December 6, 2016

Advocate Health Care Network v. Stapleton pits financially strained organizations against their own workers, who fear their promised pensions may not be there when they retire.

A new case on the U.S. Supreme Court’s docket could potentially involve millions of American employees and lead to billions of dollars’ worth of litigation. The justices’ decision could affect the viability of religiously affiliated orphanages, hospitals, schools, and nursing homes, and it could also threaten the financial security of a generation of their workers, fast heading toward retirement.

On its face, Advocate Health Care Network v. Stapleton and the two other cases it’s consolidated with may seem boring—after all, they’re about federal regulations on pension plans for church-affiliated hospitals. But these cases are actually the culmination of a new, vicious fight over the rights of employers that are loosely affiliated with religious institutions, and how they should have to pay retirement benefits to their employees in accordance with federal law.

The three consolidated cases in question seem likely to turn on something deceptively simple: the single word “established.” In 1974, Congress passed a law called the Employee Retirement Income Security Act, or ERISA, which, among other things, created guidelines for defined-benefit retirement plans, otherwise known as pensions. The two most relevant requirements in these cases have to do with good planning and risk mitigation: Employers have to put money into their employees’ retirement plans in a responsible way, so that they can afford to pay out big sums of money once those employees get old. But, if a company is in financial trouble when it comes time to pay out the promised benefits, there’s a safety net: ERISA established the Pension Benefit Guaranty Corporation, or PBGC, which is effectively a government insurance agency for underfunded pension plans.

These rules do not apply to houses of worship. Benefit plans “established and maintained” by these groups are exempt. The reasons for this are a bit opaque, said Norman Stein, a professor at Drexel University’s Kline School of Law, but an early draft of the law suggests Congress “didn’t want churches to have to open their books to the government.” Legislators also figured religious groups weren’t the problem: “People felt that it’s the church—it’s not going to let its plan fail and screw its employees,” he said. “Some of the writing about the statute has speculated that this was a reason, too—churches are moral institutions that are going to stand behind their promise [to pay for people’s pensions], because that’s what religions do.”

When ERISA first passed, it wasn’t clear whether this exception would apply long-term to religious organizations that weren’t houses of worship, like Jewish day schools or Catholic hospitals. In 1980, Congress amended the law to clarify that religiously affiliated groups can also maintain what’s called a “church plan,” so long as they satisfy certain requirements. For years, the IRS allowed religiously affiliated groups to offer these “church plans” without much controversy. Since 1982, according the hospitals’ Supreme Court petition, it has sent over 500 letters granting ERISA exemptions to organizations as diverse as the Princeton Theological Seminary and the Little Sisters of the Poor, an order of nuns.

Three years ago, employees across the country began filing lawsuits claiming that these organizations shouldn’t be exempt, after all. Current and former employees of three health-care systems filed suit against their employers: Dignity Health in California and Saint Peter’s Healthcare System in New Jersey, which are both associated with the Roman Catholic Church; and Advocate Health Care Network in Illinois, which is jointly associated with the the Evangelical Lutheran Church in America and the United Church of Christ. This is where everything comes back to “established”: Because these pension plans weren’t “established” by actual churches, the employees argue, they shouldn’t be exempt from ERISA.

The conflict matters for a few reasons. First, both sides arguably stand to lose incredible amounts of money. The Pension Rights Center, which supports the hospital employees, has identified at least three cases of allegedly failed church plans. When the owners of St. Anthony Medical Center in Illinois terminated one of its pension plans in 2012, the president and CEO told employees she was “very sorry for this surprising and disappointing news.” In 2013, the president and CEO of St. Mary’s Hospital in New Jersey wrote a letter to employees stating that “there simply are no funds remaining in the retirement plan’s trust.” And something similar happened last month at the now-closed St. James Hospital in New Jersey—the liability in that case is still murky.

Because these plans were not insured by the PBGC, they have left or may leave huge numbers of workers with less retirement money than they were promised. Hospital employees and their allies argue that church plans are a way for large employers to avoid complying with federal regulations—ones that were explicitly put in place to protect workers. Under church plans, a “[pension] promise is only as good as the word of the hospital,” Stein said. “If the hospital gets into financial trouble and the plan is not well-funded, you’re not going to get paid your benefits.”

But if these hospitals lose, they will also face intense financial consequences—and so will other religiously affiliated organizations across the country. Two appellate courts, the Third and Seventh Circuits, recently ruled against them, and “it is hard to overstate the burden and havoc these two decisions have created,” the hospitals wrote in their petition to the Supreme Court. If the lower-court rulings are affirmed, “this will mean renegotiating contracts with employees whose benefits are covered by collective-bargaining agreements, revamping benefit structures, redesigning pension-funding policies, and overhauling budget plans.”

There will also be future consequences: Under ERISA, employers are required to pay premiums to the PBGC and fund their pension plans at certain levels. When the law was created, “There was … a feeling that these kinds of church groups could not afford the cost of an ERISA plan,” said Howard Shapiro, a lawyer at Proskauer Rose in New Orleans, who has defended a number of hospitals that are being sued over their church plans. If these organizations are retroactively forced to comply with ERISA, they could face significant, and potentially ruinous, financial hardships.

The irony is that both religious groups and their employees could end up suffering if these hospitals lose at the Supreme Court. The church plans at issue “are still the old style of defined-benefit plans which everyone wishes they still had but don’t have anymore,” said Colleen Medill, a law professor at the University of Nebraska and counsel at the Koley Jessen law firm. “If [the hospitals] lose, and they pay whatever they have to pay in damages, they will probably, as a pure financial decision, freeze or terminate these plans and move over to a defined-contribution kind of plan.”

Defined-contribution plans typically include options like 401 (k) features, which have become much more popular in recent years—if you look at graphs of the number of organizations that have switched over to these plans, “they kind of look like the Nike swoosh,” said Medill. The reason behind this rise is straightforward: Defined-contribution plans shift the burden of bad economic times from employers to employees. A 401 (k) plan is great when the stock market is doing well, but “when the market goes down, maybe you don’t love that 401(k) plan so much because you bear the risk of market volatility,” Medill said. “In terms of retirement-income security, is it better to have an account that goes up and down every day with the market? Or is, it better to know that when I retire, I’ll get $3000 a month for life?”

In some ways, it’s surprising that all these issues are coming out now—ERISA has been around for 42 years, and Congress clarified the nature of church plans in 1980. In part, the delay is due the nature of retirement plans: People pay in over a long period of time, and they might not realize the consequences of being part of an uninsured pension plan until they’re about to hit 65 and realizing they don’t have the money they need to live.

But the delay also has to do with the way the IRS has dealt with religiously affiliated groups, Stein argued. “This went on for as long as it did [because] there was no regulation, no formal rule-making,” he said. During the 1990s and into the 2000s, a large number of religiously affiliated organizations won permission from the IRS to convert their pension plans into church plans. There were big incentives to do so: If they won church-plan status, the PBGC would refund a portion of the premiums they had paid in the past, which meant anything from a few thousand dollars to millions. Groups would get a private-letter ruling from the IRS, a form of guidance that does not set precedents for other taxpayers. But until 2011, when the agency began facing media scrutiny for what one amicus brief called “church-plan conversions,” organizations weren’t required to tell employees about the changes to their benefits plans. “By and large, employees didn’t even know it was happening—churches didn’t write a letter saying, ‘By the way, we just decided to screw you,’” said Stein.

Around the time a handful of plans began failing, a wave of lawsuits began—dozens have been filed since 2013, according to court documents. “There’s a whole movement among class-action lawyers where they see the potential to sue a very large plan and collect a lot of money in attorney’s fees and have some benefits for the employees,” said Medill. If the hospital employees win, “these employers are going to have to come up with a lot of money to fund these plans to come into compliance with ERISA.”

Not all churches and religious organizations dislike ERISA—in fact, any house of worship or religiously affiliated group can voluntarily choose to be subject to the law. “There are reasons to do that—namely to take advantage of federal preemption of state laws,” said Medill. ERISA limits the scope of what plaintiffs can win in a lawsuit, for example—if they operate in states that are more permissive, employers might find ERISA’s limited legal liability attractive. But that’s not what’s happening in these cases. “The real issue here is the funding requirement for the pension plans. If the plans were subject to ERISA, the employers would have to pay a lot more to fund these plans,” Medill said.

It’s hard to know how extensive the consequences of this Supreme Court decision could be. But they may not just be financial—Shapiro also sees the potential for religious-freedom conflicts. Under their church plans, religiously affiliated organizations can choose how they invest their money—pacifists can avoid putting money behind ammunitions companies, for example, or pro-life faiths can steer clear of investments related to abortion. Because ERISA imposes specific investment responsibilities on employers, Shapiro said, compliance “[could] actually conflict with some religious principles that are very important to these entities.”

These cases don’t break down along clear lines of good vs. evil. Various sides are trying to protect people who have compelling, conflicting needs, including employees who want to be able to survive retirement and hospitals with missions to follow their teachings and serve the poor. Everyone involved likely has some religious stake—many people who spend their lives working for religious hospitals are probably just as faithful as the organizations that employ them. There’s only one group that will really walk away victorious: As Medill put it, “This will be good for employment for ERISA lawyers.”

THE ATLANTIC

BY EMMA GREEN

• For municipal bond investors, the private sector’s increasing role in financing public transportation projects may provide an opportunity.
• Also known as P3s, these partnerships are increasingly using muni bonds as a cornerstone of their capital structures.
• Here’s a primer on how P3s work and how the muni bonds used to finance these projects could potentially offer yield and diversification opportunities.

The increasing role of the private sector in financing public transportation projects may provide an investment opportunity for municipal bond investors. In fact, President-elect Donald Trump has called for $1 trillion investment in infrastructure, much of which will depend on public-private investment for funding. Below is a review of these types of infrastructure projects, known as private-public partnerships (P3s), which have been a response to chronic funding shortages at the governmental level, and which are increasingly using municipal bonds as a cornerstone of their capital structures. These types of municipal bonds may offer incremental yield and portfolio diversification for municipal bond portfolios.

Continue reading.

Wells Fargo Asset Management

By Lyle Fitterer, CFA, CPA

Dec. 4, 2016 3:57 PM ET

Fitch Ratings-New York-08 December 2016: Fitch Ratings has assigned an ‘A’ rating to the following Chicago Board of Education, IL bonds:

–$500 million dedicated capital improvement tax bonds, series 2016.

The bonds are expected to price the week of Dec. 12. Proceeds will finance specific capital projects listed in the authorizing resolution.

The Rating Outlook is Stable.

The Board of Education’s Issuer Default Rating (IDR) is ‘B+’ with a Negative Rating Outlook. The distinction between the ‘A’ rating on the series 2016 bonds and the ‘B+’ IDR reflects Fitch’s assessment that the pledged revenues meet the definition of “special revenues” under the U.S. Bankruptcy Code and therefore, bondholders are legally insulated from any operating risk of the board.

SECURITY
The bonds are secured by a first priority lien on revenues from the capital improvement tax (CIT), a district-wide property tax.

KEY RATING DRIVERS

SPECIAL REVENUE ANALYSIS: The ‘A’ rating on the dedicated CIT bonds is based on a dedicated tax analysis without regard to the board’s financial operations. Fitch has been provided with legal opinions by board counsel that provide a reasonable basis for concluding that the tax revenues levied to repay the bonds would be considered ‘pledged special revenues’ under Section 902(2)(e) of the U.S. Bankruptcy Code in the event of a board bankruptcy.

PREDICTABLE REVENUES: Growth in the levy (currently $47.9 million) is set by state statute at the rate of inflation; however, the levy jumps up in 2033 by $142.5 million, then resumes inflation-based growth. Debt service schedules are sized to the minimum levy, without assuming inflationary increases.

STRONG RESILIENCE OF PLEDGED TAX SECURITY: A multi-year levy with pre-determined minimum amounts combined with limited volatility in historical property tax collection rates support strong financial resilience for debt service coverage throughout economic declines.

RATING SENSITIVITIES

PROPERTY TAX COLLECTION RATES: The rating is sensitive to declines in property tax collection rates of a scale that would materially erode the protection inherent in the expected coverage ratios, given the fixed-dollar levy, 1.1x additional bonds test and moderate historical delinquency experience.

CREDIT PROFILE
The Chicago Board of Education provides preK-12 education to over 390,000 students within the city of Chicago. Its taxing jurisdiction is coterminous with the city of Chicago. The Chicago Public Schools (CPS) manages the school system, which is composed of 673 school facilities.

CIT VIEWED AS SPECIAL REVENUES
The specific features of the bonds meet Fitch’s criteria for rating special revenue obligation debt without consideration of the board’s general credit quality. Fitch believes bondholders are effectively insulated from the operating risk of the board as expressed in its IDR.

Fitch sets a high bar for considering local government tax-supported debt to be secured by special revenues, which provide security that survives the filing of a municipal bankruptcy (in preservation of the lien) and benefit from relief from the automatic stay provision of the bankruptcy code. We give credit to special revenue status only if, in our view, the overall legal framework renders remote a successful challenge to the status of the debt as secured by special revenues under Section 902 (2) (e) of the U.S. Bankruptcy Code.

Fitch has identified a number of elements we consider sufficient to reduce the incentive to challenge the special revenue status given the definitions outlined in the bankruptcy code. These include clear restrictions on the use of pledged revenues for identified projects and clear separation from the entity’s operations. Fitch has undertaken an extensive review of the statutory provisions that govern the use of the CIT. Those provisions, along with the legal documents governing the bond issuance, provide sufficient strength for Fitch to rate the CIT bonds higher than the IDR.

The bonds are secured by a first priority lien on CIT revenues. The board is authorized under the Illinois School Code to levy the CIT on all taxable property within the district, which is coterminous with the city of Chicago. State statute limits the permitted uses of CIT revenues to include construction, acquisition and equipping of school and administrative buildings, and site improvements. The board has identified specific capital projects in the bond resolution that may be funded either by bond proceeds or by residual CIT revenues. Any amendments to the project list must be passed by board resolution. The revenues legally cannot be used for general operations of the board.

STRONG RESILIENCE OF PLEDGED CIT SECURITY
The multi-year levy supporting debt service on the bonds required and received approval by the Chicago city council; however, no further approvals are necessary for the levy to be extended and collected for the life of the bonds. The multi-year levy is set by resolution at the time of bond issuance and no policy action is required to offset potential declines in assessed value. Importantly, the minimum amount of the levy is knowable in advance and the debt service schedule is sized to that, allowing for a minimum of 1.1x coverage. This leaves only the risk of diminishing collection rates, which historically have been well within the norm for U.S. municipalities.

To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using a 1% decline in national GDP scenario) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Since the CIT revenue history is insufficient to conduct this analysis, Fitch uses a proxy of overall property tax collection rates, which it believes approximates future risk to CIT revenue sufficiency.
Based on historical property tax collection rates, Fitch’s Analytical Sensitivity Tool (FAST) generates a fairly modest 1.7% scenario decline in pledged revenues. The largest cumulative decline was a 2.7% decline during the recession between 2008 and 2009.

Given the 1.1x coverage, pledged revenues could withstand a 9% decline before they were insufficient to fully cover debt service. This is 3.3x the largest actual cumulative decline, or 5.3x the recessionary impact estimated in Fitch’s FAST scenario. Recent tax increases by Chicago-area governments could contribute to delinquencies beyond historical experience in a recession, but even so, Fitch believes collection rates would continue to support financial resilience consistent with an ‘A’ rating.

Chicago acts as the economic engine for the Midwestern region of the United States. The city’s residents are afforded abundant employment opportunities within this deep and diverse regional economy. The city also benefits from an extensive infrastructure network, including a vast rail system, which supports continued growth. The employment base is represented by all major sectors with concentrations in the wholesale trade, professional and business services and financial sectors. The city’s economic indicators are mixed with elevated individual poverty rates and average per capita income levels, but strong educational attainment levels. Recovery from the recession has been slow but steady. The unemployment rate is almost half of its recessionary peak but remains elevated relative to the state and nation. Population losses appear to have reversed.

ADEQUATE STRUCTURAL PROVISIONS
The additional bonds test dictates that projected CIT revenues must provide at least 1.1x coverage of annual debt service in each bond year. Projections may not include assumptions for inflationary increases prospectively. Fitch’s analysis assumes the pledged revenues would be leveraged to the full extent allowable under the additional bonds test.

Under the flow of funds, the CIT revenues are collected by the county collectors of Cook and DuPage Counties. The board has directed the collectors to transmit the CIT revenues directly to an escrow agent. The escrow agent transfers revenues needed for payment of debt service to the bond trustee daily. Revenues in excess of those required to meet annual debt service may be available to reimburse CPS for authorized capital expenditures.

The board covenants not to revoke the direction to the county collectors as long as the bonds are outstanding. Based upon review of bond counsel opinions Fitch believes that any future attempt to revoke the direction to the county collectors would be contrary to state statute.

The debt service reserve requirement of 14% of maximum annual debt service (MADS) will be funded with bond proceeds.

The board’s ‘B+’ IDR with a Negative Outlook reflects CPS’s chronic structural imbalance, slim reserves and weak liquidity position which are exacerbated by rising long-term liability costs, an historically acrimonious labor relationship and the lack of an independent ability to raise revenues. For more information on the board’s IDR, please see ‘Fitch Rates $426MM Chicago Board of Education (IL) ULTGOs ‘B+’; Outlook Negative’ dated Nov. 7, 2016.

Contact:

Primary Analyst
Arlene Bohner
Senior Director
+1-212-908-0554
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

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

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

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

Additional information is available at ‘www.fitchratings.com’.

Beginning in January 2017, the Electronic Municipal Market Access (EMMA®) website will provide free, convenient access to a new issue calendar enabling individual investors, issuers and other market participants to see new bond issues coming to market as well as final pricing scales for bond issues sold through competitive and negotiated sales.

Individual investors can use the calendar to locate upcoming bond offerings of interest. The new issue calendar provides issuers that may be planning on issuing a new security the ability to identify, monitor and compare prices of similar issues that are coming to market or have been recently sold. The Municipal Securities Rulemaking Board (MSRB) is providing the calendar to help all market participants make decisions that are right for them.

Learn more about other tools and resources on EMMA.

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

Watch video.

December 9, 2016

Bloomberg News

CHICAGO — Chicago’s public school (CPS) system plans to sell a new type of bond issue in an attempt to separate the debt from the district’s severe financial woes and protect it in a potential bankruptcy filing, according to a document released by the district on Tuesday.

The preliminary prospectus for the debt indicates the Chicago Board of Education will issue $500 million of bonds secured solely by a capital improvement property tax and not by the district’s general obligation pledge.

That pledge currently covers about $6.8 billion of existing bonds that are rated junk by Moody’s Investors Service, S&P, and Fitch Ratings.

CPS, the nation’s third-largest public school system, is struggling with pension payments that will jump to about $720 million this fiscal year from $676 million in fiscal 2016, as well as drained reserves and debt dependency – factors that have pushed its GO credit ratings deep into the junk category and led investors to demand fat yields for its debt.

Illinois Governor Bruce Rauner last week vetoed a bill to give CPS a one-time $215 million state payment to help cover pension costs.

Ratings for the new bonds, backed by a $45 million a year property tax levy approved by the Chicago City Council in 2015, were not available. Because that tax revenue can only be used to fund capital projects and not operations, CPS is hoping bondholders will consider the debt a safer bet than the district’s GO bonds.

A CPS spokeswoman could not immediately be reached for comment.

CPS cannot currently file for municipal bankruptcy in Illinois, although there have been attempts to change state law to allow such a move. The prospectus includes legal opinions on a “hypothetical bankruptcy” by CPS that conclude payments on the new bonds would not be automatically stopped by a federal bankruptcy court and that bondholders would retain a lien on the tax revenue.

The prospectus was released a day before the schools’ governing board, appointed by Chicago Mayor Rahm Emanuel, votes on an amended fiscal 2017 budget to account for a new contract with teachers. The bond issue is tied to a bigger capital plan CPS announced last week.

The bonds, to be priced through Barclays and J.P. Morgan, carry term maturities in 2036 and 2046.

By REUTERS

DEC. 6, 2016, 6:36 P.M. E.S.T.

(Reporting by Karen Pierog; Editing by Matthew Lewis)

NEW YORK — The past year has meant a wild ride for investors in municipal bond funds.

Between September 2015 and this past October, municipal bond funds had 54 straight weeks of inflows, with investors pouring some $68 billion into them. Muni fund owners were rewarded handsomely: In the first six months of 2016, the BlackRock Strategic Municipal Opportunities fund returned 4.7 percent, for example. The 10-year yield on the AP Municipal Bond index, which moves inversely to bond prices, hit a low of 1.69 percent in July.

Then the bear came out roaring.

In early October, the flow of dollars into muni funds stalled as bets increased that the Federal Reserve would raise interest rates late this year. Selling accelerated after Donald Trump’s surprise victory on expectations that his plans to boost economic growth would hurt the price of bonds. In November alone, investors yanked over $10 billion from muni funds, according to the Investment Company Institute. BlackRock’s Strategic Municipal Opportunities fund fell 4.4 percent.

Peter Hayes, co-manager of the $4.7 billion BlackRock Strategic Municipal Opportunities fund, recently talked about the about-face for munis, and how investors can best navigate the current uncertainties. Answers have been edited for length and clarity.

Q: Muni bonds have just undergone an intense sell-off. Do you think it has gone too far?

A: Well, every big sell-off winds up being a good long-term buying opportunity, at some point. It’s a question of finding the right entry point.

This sell-off has been so dramatic that it created value in a short amount of time. Municipal bonds are yielding more than Treasurys right now, and last week we began to see some stabilization of the market.

But given the headwinds, I’m not sure we are completely out of the woods yet.

Q: Which headwinds worry you the most?

A: Interest rates continue to be a concern. If rates go higher, that will scare investors from long-term assets.

Q: What about tax rates? Some believe that the Trump administration will slash tax rates for higher earners, which would diminish the value of muni bonds’ tax-free income.

A: That’s a potential headwind as well, but it’s much longer term. I think we need to get past the inauguration and see what the new administration is really most concerned with.

Q: With all the talk of tax reform, some have wondered if the municipal tax exception could be at risk.

A: We emphatically don’t believe that we will lose the muni tax exemption. Taxes are a bit of an overhang to the market, but a lot of that’s already been factored into the price of the bonds today.

Q: Sounds like taxes are a wildcard. But it does seem likely that President-elect Trump will try to boost infrastructure spending. How do you think that will impact the muni market?

A: The initial reaction to the infrastructure proposals was that it would be negative, because it would mean more issuance in the muni market. That is usually a headwind for performance, given that we don’t know what the demand is going to be.

But if you really look at the Republican proposals, they’re talking about an infrastructure bank and private tax credits. That doesn’t translate into increased muni issuances.

It’s also important to keep in mind that this year, about 60 percent of new issuance was related to issuers that were refinancing their debt.

If rates move higher, refunding will be less attractive. So I don’t see the current proposal as we know it today translating into higher issuance in the muni market in 2017, especially if the first half of the year is driven by all this insecurity around tax policy. Altogether, I don’t see infrastructure as a big headwind.

Q: So what’s the best strategy for investors right now?

If you already own munis, don’t sell. The market has already sold off significantly.

If you need a bit of income and want to take a position, shorter-term bonds look cheap. For the most part, stay in the three- to five-year range, where you will be less exposed to a change in tax policy and a potential rise in longer-term interest rates. Because the correction has been so large, those looking for more income might want to put a portion of their money in the 10- to 15-year part of the curve.

Otherwise, I suggest waiting on the sidelines. The severity and size of the move is likely to have scared investors. The next several weeks are very important. If the fund flows continue to be very negative, we have to be cautious. If they stabilize, then I think we can be more confident that the worst is over.

By THE ASSOCIATED PRESS

DEC. 8, 2016, 1:22 P.M. E.S.T.

The GFOA Executive Board approved two new best practices in addition to updates to four other existing best practices at the September 2016 meeting. These documents provide recommendations to government finance officers in the areas of treasury and investment management, and retirement administration and benefits administration.

Cash-Flow Analysis.  This new best practice recommends six essential elements of a cash flow analysis, an important tool to inform management decision making. GFOA recommends that state and local governments perform ongoing cash-flow analysis to ensure sufficient cash liquidity to meet disbursement requirements while also limiting idle cash.

Investment Policy.  This new best practice recommends reviewing and, if necessary, updating the investment policy annually. The document includes statements on eight key points, including the fact that an investment policy enhances the quality of decision making and demonstrates a commitment to the fiduciary care of public funds. As a result, a public fund’s investment policy is the most important element in a public funds investment program. GFOA recommends that all public entities establish a comprehensive written investment policy, adopted by the governing body.

Hybrid Retirement Plan Design.  This best practice was revised to reflect the continuing evolution of hybrid plan designs. GFOA recommends design elements for hybrid plans or plans that combine hybrid features with defined benefit or defined contribution plans.

Establishing and Administering an OPEB Trust.  This best practice was revised to align with language related to the January 2016 best practice, Sustainable Funding Practices for Defined Benefit Pensions and Other Postemployment Benefits. It includes a new recommendation that governments commit to funding promised benefits based on regular actuarial valuations, with a target funded ratio of 100 percent or more. GFOA also recommends creating a qualified trust fund to prefund OPEB obligations.

OPEB Governance and Administration.  This revision aligns the best practice with the Sustainable Funding Practices for Defined Benefit Pensions and Other Postemployment Benefits. That best practice, from January 2016, recommends conducting an audit of actuarial valuations to review the appropriateness of the actuarial methods, assumptions, and their application. The updated language addresses employers that issue periodic studies, experience studies, and periodic actuarial audits. GFOA recommends that sponsoring entities provide a clear, well-documented governance structure to guide governing bodies and plan administrators.

Educating Employees About the Adequacy of Retirement Benefits.  As part of GFOA’s effort to consolidate and develop more comprehensive best practices, this updated document addresses elements of a sound educational program as well as guidance for employers and retirement systems that procure external providers of financial education and advice. GFOA recommends that public-sector employers and plan administrators inform and educate employees about future retirement income and the variables that may affect future retirement income, depending on the income source.

Government Finance Officers of America

December 1, 2016

Huge tax breaks for private investors; Neglects vital public road, bridge, school, and water projects

President-elect Trump’s infrastructure plan, which claims that it would deliver up to $1 trillion in new infrastructure investment, almost surely would deliver far less — and it would not deliver many of the most important needed projects for roads and bridges, public transit, schools and public housing, water facilities, and so on, nor deliver them in the struggling communities in which they’re most needed.TRUMP’S PLAN WOULD MAINLY BE A TAX-CUT WINDFALL TO PRIVATE DEVELOPERS TO BANKROLL FOR-PROFIT PROJECTS THEY LIKELY WOULD HAVE UNDERTAKEN ANYWAY. That’s because Trump’s plan would mainly be a tax-cut windfall to private developers to bankroll for-profit projects they likely would have undertaken anyway.

Download the full brief.

CENTER ON BUDGET AND POLICY PROPOSALS

BY CHYE-CHING HUANG, PAUL N. VAN DE WATER, RICHARD KOGAN, AND DAVID KAMIN

DECEMBER 2, 2016

Fitch Ratings-New York-01 December 2016: Low commodity prices will keep fiscal pressure on energy states in 2017, Fitch Ratings says. We expect severance taxes and related revenue sources to remain low, while personal income and sales tax collections will remain suppressed, prolonging fiscal pressure.

This year, price and production shifts among energy states contributed to some Issuer Default Rating (IDR) downgrades: Alaska to ‘AA+’ from ‘AAA’; Louisiana to ‘AA-‘ from ‘AA’; and West Virginia to ‘AA’ from ‘AA+’. Alaska and West Virginia carry Negative Rating Outlooks, in addition to Oklahoma (IDR of ‘AA+’).

The anticipated loosening of federal environmental oversight to promote increased energy development and the recently positive crude oil price trend will not overcome the global market forces that are restraining crude oil and natural gas prices. The glut of crude oil, an international commitment to reduce coal use to combat climate change and increasing use of renewables for energy needs will keep demand for coal weak.

Contact:

Marcy Block
Senior Director
US Public Finance
+1 212 908-0239

Rob 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.

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

Read the report.

GOVERNING.COM

BY LIZ FARMER | DECEMBER 2, 2016

Sales of municipal bonds and notes slowed to $23.7 billion in November, the slowest month this year and less than half of October’s record high, according to Thomson Reuters data.

The slump in new issuance came during a month peppered by holidays and the U.S. presidential election. In October, $51.6 billion of new sales came to market, the biggest month of issuance since records began in the 1980s.

Bond issuers also canceled some deals in November as market volatility spiked and yields surged after the surprise Nov. 8 election of Donald Trump as president.

“The combination of a selloff in Treasuries affecting fixed income in general and a less active primary market caused much of the activity to go elsewhere,” Janney Fixed Income Strategy reported on Wednesday.

Municipal supply had been surging in recent months as state, city and other public agencies eagerly sold bonds and notes at low interest rates.

Reuters

Wed Nov 30, 2016 | 1:48pm EST

(Reporting by Robin Respaut; Editing by James Dalgleish)

David Kotok, chairman and chief investment officer at Cumberland Advisors, and Bloomberg’s Michael McKee examine higher bond yields and the impact of infrastructure spending on municipal bonds. He speaks on “Bloomberg Daybreak: Americas.”

Watch video.

Bloomberg

December 5, 2016

President-elect Donald Trump and a Republican-controlled Congress may take steps to make municipal bonds less attractive to investors, potentially undermining a popular tool to finance bridges, roads and other public projects.

Trump is calling for $1 trillion worth of infrastructure spending that would be financed in part through tax credits to investors and construction companies, Frank Shafroth, director of George Mason University’s Center for State and Local Government Leadership, told Bloomberg BNA Nov. 29.

“Tax credits to investors insert federal, instead of state/local authority, guidance,” Shafroth said. “It risks undercutting the planning of a state or local government.”

A further concern for states and local governments is that Trump and Congress may move to tax municipal bonds to pay for credits or tax cuts in other areas. If that happens, expect states and cities to jump into the fray.

“Stated simply, state and local governments will want to preserve the existing rule for tax exemption of municipal bond interest because to eliminate it would increase the cost of borrowing,” Charles S. Henck, a Ballard Spahr LLP partner who practices in public finance and tax law, told Bloomberg BNA Nov. 28.

The president-elect’s transition team didn’t respond to repeated requests for comment.

Trump Advisers

Trump economic advisers question whether state and local governments should be able to issue debt on which the interest is exempt from federal taxes.

Those advisers—private-equity investor Wilbur Ross and University of California at Irvine business professor Peter Navarro—argue that municipal bonds aren’t an efficient way to pay for public projects. For one, a percentage of the money goes to the bondholder.

Navarro declined to comment for this story, and Ross, the billionaire who Trump is expected to nominate as commerce secretary, couldn’t be reached.

Navarro and Ross, however, authored a paper during the general election campaign explaining problems with tax-exempt bonds and outlining alternative methods Trump is considering.

Private investment and federal tax credits could serve as a “critical” supplement to existing financial programs, public-private partnerships and Build America Bonds, the paper said.

Shafroth, however, said that a federal plan of private investment and tax credits may fail to take into account that states and local governments—unlike the federal government—have capital-planning processes and capital budgets that could be disrupted.

Cowboys, ‘Big Dig.’

When investors buy municipal bonds, they are lending a local or state government money for a fixed period of time, often to pay for roads, schools and other construction projects.Arlington, Texas, for example, is paying off $300 million in bonds used to finance AT&T Stadium, home of the Dallas Cowboys. In Massachusetts, the governmental entity known as MassPort continues to pay for the “Big Dig,” a $24 billion project that placed Interstate 93 under the city of Boston.

In exchange for an investment, the local or state governments pay the investor interest throughout the term of the bond. Currently, interest isn’t taxable.

The investor is also entitled to the principal of the bond.

Spurred to Act

Generally, states don’t involve themselves in Washington tax debates when Congress moves to repeal tax breaks or lower tax rates, because a broader tax base for the federal government means a broader tax base for states, Joe Henchman, vice president of legal and state projects at the Tax Foundation, told Bloomberg BNA Nov. 22.

But eliminating the bond interest exemption could make bonds—a favorite method of paying for large, expensive projects—less attractive to investors.

If the exemption is “on the table, states may get directly involved in the debate,” Henchman said.

Bloomberg BNA

By Che Odom

November 30, 2016

To contact the reporter on this story: Che Odom at COdom@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

President-elect Donald Trump’s ambitious plan to raise $1 trillion for infrastructure is a boondoggle that would line the pockets of wealthy investors while not meeting the need for infrastructure repair or improvement in much of the country, according to an analysis released Thursday by a progressive think tank.

Trump’s plan “shovels money at wealthy investors instead of solving real infrastructure challenges,” according to a white paper from the Center for American Progress.

The paper figures to be the first salvo in a lively debate if Trump follows through on his promise to make refurbishing the nation’s roads, bridges and transit systems a centerpiece of his administration, coupling it with his vow to put unemployed middle-class Americans back to work.

“It’s really a huge failure because it just doesn’t deliver on what the actual needs are out there,” said Kevin DeGood, the report’s author. “These really complicated deals for which contracts [with private investors] can be beneficial only apply to one-half of 1 percent of the need that is out there.”

Trump’s transition team did not respond when forwarded a copy of DeGood’s report for comment.

DeGood is director of infrastructure policy at the center, which was founded and led by John Podesta until he resigned to become chairman of Hillary Clinton’s presidential campaign.

The challenge is a simple one: Investors want a return on their money, and very few transportation projects provide one. Tolls can be imposed on selected roads and bridges, but the vast majority of them offer no opportunity to recoup investment.

“That would be a very rude shock to a lot of people who voted for Donald Trump if they suddenly found that the rural roads in Nebraska or Indiana — the interstate highway, which they paid for and they’re still paying gas taxes — now they have to pay a toll on top of that?” said Rep. Peter A. DeFazio (Ore.), the ranking Democrat on the House Transportation Committee. “They probably wouldn’t be happy.”

The Congressional Budget Office said last year that just 26 private-investment projects were completed or underway nationwide.

The Trump plan would give private investors an 82 percent tax credit to put money into projects. Trump said his plan would lead to up to $1 trillion worth of new projects, but simply lowering the cost of money with tax credits to investors is unlikely to unleash a new round of big-ticket projects, because states already have access to the municipal bond market.

According to Trump, his proposal would play a central role in funding $1 trillion in projects without draining taxpayer dollars lost by offering the tax credit incentives. That’s because, he said, the tax revenue would be recouped by taxing the wages of people put to work on the projects and from taxes paid by contractors hired to do the work.

DeGood’s paper says: “The Trump plan calls for spending as much as $137 billion from the federal treasury in the form of tax credits to wealthy Wall Street investors. This massive subsidy would lower the cost of equity capital to a level roughly equivalent to municipal bonds.”

In an interview as his analysis was released, DeGood said the lack of sufficient tax dollars, not a need for financing, was the cause of the failure to address infrastructure needs.

“If just having access to debt at 3 percent were all that project sponsors needed to kick off big projects, then that would have happened already,” he said. “We’re in the lowest cost financing universe that we’ve been in since World War II, and yet we don’t see explosive growth in construction activity because it’s a lack of tax revenue, not a lack of access to debt.”

The second part of the Trump plan involves repatriation, a much-talked about idea to lure home $2.5 trillion in cash held overseas by U.S. corporations. Trump has proposed reducing the rate companies would pay to bring the money home to 10 percent from 35 percent. Those companies then could invest slightly more money in infrastructure projects, gain the 82 percent tax credit and effectively erase that 10 percent tax.

The Washington Post

By Ashley Halsey III

December 1

Washington, D.C. —(ENEWSPF)–December 1, 2016. President-elect Donald Trump’s fatally flawed infrastructure proposal enriches Wall Street investors while passing the bill to middle-class Americans in the form of high tolls and other user fees, a new issue brief from the Center for American Progress explains. In the place of actual federal spending on critical projects, President-elect Trump has pushed the idea of authorizing a pool of tax credits that would flow to equity investors in large public-private partnership, or P3, deals. These project debts would be repaid by tolls and other fees levied on the people and businesses that use the new facilities.

“Trump’s infrastructure plan, which is built on tax credits for Wall Street, is not a plan for America because it would do nothing for the vast majority of Americans,” said Kevin DeGood, Director of Infrastructure Policy at CAP.

As CAP’s brief explains, Trump’s plan suffers from a number of major flaws:

The plan would push state and local governments to use equity capital that can cost 300 percent to 500 percent more than capital raised through traditional municipal bonds. The primary challenge facing state and local governments with regard to infrastructure financing is not access to credit but a lack of tax revenues to repay project debts. The Trump plan calls for spending as much as $137 billion in the form of tax credits designed to lower the cost of equity capital to a level roughly equivalent to municipal bonds. As the massive $3.7 trillion municipal bond market already provides project sponsors with access to low-cost financing, these credits only enrich elite investors rather than helping build needed projects.

The plan would provide no support for thousands of critical maintenance and reconstruction projects. The Trump infrastructure plan does nothing for repair and incremental expansion, which make up the vast majority of critical infrastructure projects. Many of these projects, while necessary for the communities in which they are located, would not be attractive to the elite Wall Street investors toward whom Trump’s plan is geared. This includes projects in rural communities and smaller cities and towns.

The plan would raise taxes on middle-class Americans in the form of high-cost tolls and other user fees necessary to satisfy the 10 percent to 14 percent annual returns demanded by equity investors. By using expensive equity capital and a concession model based on tolling and revenue risk transference, Trump’s plan would raise the total cost of major projects by more than 30 percent—money that must come from the American taxpayer.

The plan would not meaningfully increase total economic activity, employment, or real wages. The most likely outcome of Trump’s infrastructure plan is little to no net increase in overall construction activity. Assuming the plan is passed in its current form, state and local leaders—who are responsible for planning and building infrastructure projects—would receive zero additional funding from Washington, while Wall Street would receive considerable tax breaks.

In contrast, CAP proposed an infrastructure plan that lays out a comprehensive approach to repairing and expanding the country’s infrastructure. CAP’s plan not only calls for increasing investment across sectors but also for substantial policy reforms to ensure that federal funds flow to the projects that would generate the greatest economic, social, and environmental return on investment—an approach that would pay dividends for generations to come.

If you rummage through the records of the Smithsonian Institution, you’ll find that at the dawn of the 1900s, the City of Dayton, Ohio had the most patents per capita for a city its size than any other in America. Not a surprise, really; in its day, Dayton was the epicenter of transformational industry. Along with innovative manufacturing of everything from cash registers to sewing machines, there were several bicycle building businesses. It was from one of those shops where what is undoubtedly one of mankind’s greatest inventions took flight.

Fast-forward to these days of transformational technology. The hub that comes to mind is California’s Silicon Valley, filled with apps and chips. Mentioning ‘transformational technology’ in the same sentence as the municipal bond market, the state of Ohio and tax-exempt variable rate debt seems wildly incongruous.

That would be a serious error. With the state of Ohio’s recent issue of $32.3 million Series C Capital Facilities Lease-Appropriation Variable Rate Bonds (Aa2-VMIG1/AA-A-1+/AA-F1+) using ClarityBidRate’s e-trading platform to reset the rates, this financing uses e-technology in a way that may well completely transform the variable rate securities market.

Variable Rate Bonds In A Nutshell

Given how many investors hold tax-exempt money market funds in their portfolios—the Investment Company Institute (ICI) reports there are nearly 270 retail funds/share-classes with nearly $130 billion in assets—it’s surprising how little most investors know about the securities held in those funds. In fact, variable rate debt (VRDO is the abbreviated professional nomenclature) comprises a majority of the investments held in those funds.

Issuers like the state of Ohio borrow using VRDOs for a variety of reasons, such as taking advantage of short-term rates or as part of a larger debt management program. While VRDOs are structured with long maturities, 20 or 30 years, the rates are reset regularly. Customarily, the reset is done weekly, but there are some financings that reset as frequently as daily or as long as semi-annually. When the rate resets, the borrower—in this case, the State of Ohio—is obligated to pay on whatever is the new rate.

Traditionally, the VRDO market revolves around the remarketing agent, who determines what the reset rate is. Almost invariably, the agent is also the underwriter who brought the financing. The reset rate comes from those traders who buy and sell VRDOs off of the firm’s short-term debt trading desk.

Utilizing ClarityBidRate’s platform, the reset rate is set based on real trades between buyers and sellers directly. The highest bid clearing the last trade sets the rate. There is no remarketing agent.

In effect, the e-trading platform creates a VRDO exchange. ClarityBidRate takes the invisible hand of the market and makes it visible. No longer are VRDO rates dependent on an opaque over-the-counter market, controlled by the vagaries of a few short-term trading desks. On an e-trading platform, orders and trades are clear to everyone. For investors, this transparency translates into efficiency—better pricing, better executions, better liquidity.

Ohio Leads The Transformation

Why would the state of Ohio choose to lead the way for VDROs into the vanguard of an electronic trading platform? Mr. Seth Metcalf, the deputy treasurer for the State of Ohio, explained his rationale for his “faith in innovation.” With $492 million of VRDO debt outstanding, Ohio has more than a passing interest in how the rates are set. He outlined the problems in the VRDO market since the Credit Crisis of 2008: banks are not readily extending credit, auction-rate securities are gone and bond insurance is gone—all three previously critical factors in the short-term market. With the numbers to back it up, he demonstrated that, at least for Ohio short-term paper, the market as it currently exists isn’t functioning efficiently.

Mr. Metcalf’s observations of the positive impact of an e-trading platform for the borrower are spot on: using ClarityBidRate’s platform means more competition for the highly rated Ohio paper. For the good citizens of the state of Ohio, this means lower interest costs and fees—something always on the fore of the mind of the Treasurer’s office. Mr. Metcalf shrewdly observed that leveraging this technology “democratizes the process.” He hoped that others would have the courage to follow suit. Given the solid reputation of the Buckeye State and the billions in tax-exempt VRDOs being issued by municipalities and public authorities, it will undoubtedly garner attention.

The Impact Of Electronic Trading Platforms

Ohio and ClarityBidRate may be leaders in the VRDO e-trading space, but fixed income e-trading platforms are coming into the broader bond market—and with increasing frequency. The 2016 SIFMA Electronic Bond Trading Report details 19 electronic trading platforms, 15 of which entered the space in the past two years alone. However, the report notes, “more platforms support corporate securities than municipals securities.” In fact, of all those new platforms, 13 were in corporate bonds. Only two were in municipals—including one platform that entered both markets.

The increase in electronic trading platforms in fixed income is being driven by fundamental market changes. With hundreds of bond funds fighting for performance in a low interest rate environment, every basis point is precious. Correspondingly, portfolio managers are demanding the best execution on their trades from their counter-parties. As never before has market transparency and price discovery been so important.

For the investment banks, this low-rate environment means that short-term desks can’t find spread or charge fees sufficient to cover costs, much less create meaningful margin. They are becoming a concierge service rather than a profit center. Then there is the intense regulatory pressure on the market. On one side, the Federal Reserve Bank and Dodd-Frank placed limits on how much capital trading desks can commit. The short-term desks can no longer provide the liquidity for the VRDO market that they had in the past.

On the other regulatory side, the Securities and Exchange Commission issued its own set of money market regulations in October 2016. These came in response to the severe dislocation—and for a time the near complete breakdown—in the tax-exempt variable rate market during the credit crisis.

Among other things, the new SEC regulations permit floating net asset values in money market funds. Gone is the sacrosanct “$1 NAV” and with it the near religious admonition to “never break the buck.” Additionally, the new regs allow funds to impose ‘redemption gates’—meaning a fund manager can restrict a shareholder’s ability to sell shares. The presumed ready liquidity a money market fund traditionally offered an investor is also gone.

Between low rates and regulator changes, some fund managers exited the business altogether. The ICI reports that for Q3-2016 alone, $58 billion left the retail side of these funds, a 31% decline. Even more dramatic is the near elimination of institutional tax exempt money market funds. That asset class had an exit of $38.6 billion—a stunning 89% decline. Barely $4 billion remain in those funds.

With diminished demand for VRDOs from traditional tax exempt money market funds, the municipalities, authorities and nonprofits (who still need to sell this paper), will have to attract investors from outside the municipal bond market—corporate treasurers, sovereign funds, non-domestic banks. These investors, more familiar with the more visible, structured and liquid taxable short term markets, will demand that the short-term municipal bond market offer the same efficiency, transparency and liquidity they are accustomed to in the taxable market. The tax-exempt VRDO market will have to compete with taxable short-term instruments on all of those.

For e-trading platform firms like ClarityBidRate, MarketAxess and others, it couldn’t be better timing. E-trading offers standardization, transparency and liquidity — all of which result in the more efficient markets taxable short-term buyers have come to expect. For the municipal borrower, a more efficient market with more participants should translate into tighter spreads and lower interest rates.

Another benefit of electronic trading for municipal bonds will be the ability to capture significant amounts of trading data. Until recently, munis lacked the ‘big data’ capture other more trade-transparent markets offer. More and better market analysis will help both market participants garner trading efficiencies and regulators craft more effective policy.

Even so, as with any newly emergent technology and market, there are some aspects that need tweaking. Platforms may offer standardization, but there are still some 42 electronic trading and execution protocols across various vendors. There are also differing processes in place on book management and counter-party visibility. However, the market will evolve, and fairly rapidly, to ultimately create uniform best practices.

There are some detractors who prefer having a human element to counter-party with. What will happen if—and when—the market experiences another period of dislocation? How will all these e-trading platforms perform then? It’s a reasonable question and concern. However, keep in mind that during the credit crisis of 2008, having people on the desks did nothing to make the market more liquid or efficient. If anything, it did exactly the reverse.

So how did Ohio do with the ClarityBidRate managed rate resets? Everything went off smooth as silk. The fourth reset was completed on November 30, 2016. Ohio is paying .565% (annualized)—a mere 1 basis point off of the bellwether SIFMA Municipal Swap Index rate for the week. The folks in Ohio’s state Treasurer’s office have got to be smiling.

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 porfolios.

Forbes

by Barnet Sherman

Dec 2, 2016

Long-term municipal bond volume remains poised to set an annual record.

Volume dipped 9% in November to $23.87 billion, from $25.39 billion in November of 2015, mostly due to post election shockwaves that hit munis hard, causing yields to balloon. Still, with 11 months down and one to go, year-to-date volume reached $416 billion, meaning $18 billion in December would be enough to surpass 2010’s record $433 billion. At this point last year, volume sat at $375.5 billion.

“It will be close, but I would bet that a new record is set,” said Alan Schankel, a managing director at Janney Capital Markets. “I did not anticipate [we would see a] record until the middle of our exceptionally busy October, so although I am not surprised now, I would not have projected record volume at mid-year.”

After a yearlong series of inflows of investor money into muni funds ended in October, weekly outflows accelerated to a record $3 billion in the week of Nov. 16, according to Lipper FMI. As of Nov. 29, muni yields had climbed as many as 123 basis points from the record lows earlier in the year. Analysts attributed the change to uncertainty over tax policy and the economy after Donald Trump’s unexpected victory in the presidential race on Nov. 9.

“The election has driven the market. We have seen the decline in refundings as the curve has steepened,” said Scott Andreson, director of municipal research for Seix Investment Advisors. “Issuance is down because of the volatility, and what we have seen post-election is a glimpse at what we will see in 2017.”

Refundings, which have been strong for most of the year due to persistent low interest rates, dropped 7.2% to $7.29 billion in 295 transactions, from $7.85 billion in 371 transactions during the same period last year, according to data from Thomson Reuters.

“There will be roughly $40 billion less of bonds that are eligible for refunding next year,” Andreson said. “That plus impending interest rate hikes will put a damper on refunding activity.”

New money sales decreased 20.7% to $10.17 billion in 447 deals from $12.83 billion in 497 deals, while combined new-money and refunding issuance climbed 36.2% to $6.41 billion from $4.71 billion.

Andreson, who is the secretary of the National Federation of Municipal Analysts, said that although new money was down this month due to continuing rising yields, it won’t be down for long.

“New-money issuance is going to increase next year. 2017 will be the year of new issuance rather than refunding, which has been the major story line the past two years,” he said.

Negotiated deals, at $18.07 billion, were higher by 2.9%, while competitive sales decreased by 1.5% to $5.61 billion from $5.70 billion.

Issuance of revenue bonds decreased 7.3% to $15.59 billion, while general obligation bond sales dropped 3.3% to $8.29 billion.

Taxable bond volume was 14% higher at $2.07 billion, while tax-exempt issuance declined by 5.2% to $21.28 billion.

Minimum tax bond issuance slipped to $524 million from $1.12 billion, while private placements sank to $192 million from $2.13 billion. Zero coupon bonds increased to $122 million from $66 million.

Bond insurance dropped 10.7% for the month, as the volume of deals wrapped with insurance dipped to $1.84 billion in 138 deals from $2.06 billion in 126 deals.

Six out of the 10 sectors saw year-over-year gains. Utilities increased 23.7% to $3.41 billion from $2.75 billion, development gained 35.4% to $862 million from $637 million, health care rose 17% to $1.86 billion from $1.59 billion and education and electric power saw modest gains of 0.2% and 4.2%, respectively.

The four sectors in the red all saw at least a 6.8% decrease, with housing suffering the biggest drop to $654 million from $1.72 billion.

As for the different types of entities that issue bonds, only three were in the green: districts, colleges and universities, and local authorities. Districts improved 24.9% to $7.08 billion, colleges and universities more than tripled to $897 million from $253 million and local authorities’ borrowing was up 1.1% to $4.38 billion from $4.33 billion. On the other end of the spectrum, the other six saw at least a 2.2% decrease, led by state governments, which declined 50.7% to $1.03 billion from $2.09 billion.

California remains the top issuer among states for the year to date, followed by Texas, New York, Pennsylvania and Illinois.

Issuance from the Golden State so far this year has totaled $60.81 billion, with the Lone Star State next at $50.41 billion. The Empire State follows with $41.12 billion. The Keystone State is in fourth with $18.94 billion and The Prairie State rounds out the top five with $17.52 billion.

“Tax reform is front and center, as it has been said that we need a lower and simpler tax code,” said Andreson. “Whether that impacts munis it remains to be seen. We would be surprised if there is anything that is passed that takes away issuers’ ability to issue tax exempt bonds, we think that corporate tax reform is more likely but nothing is off the table as of now.”

The Bond Buyer

By Aaron Weitzman

November 30, 2016

Trade and immigration restrictions won’t bring back the Rust Belt. What might? Consider the transformation of the Sun Belt.

The South used to be the nation’s Rust Belt. The devastation of the Civil War rightly gets the headlines, but the devastation didn’t end when Sherman marched out of Atlanta. Industrial agriculture had the same impact on the Southern economy that automation and outsourcing have had on the manufacturing economy of the Midwest. In the late 19th century, much of the South consisted of an increasingly uncompetitive agricultural economy and woefully inadequate infrastructure. Those who could leave for other parts of the country, like factory jobs in what we now call the Rust Belt, did.

Many parts of the South continue to struggle to this day, but those that are thriving embraced two things — infrastructure and recruitment. Much of the infrastructure was courtesy of the federal government — programs like the Tennessee Valley Authority during the Great Depression, military bases during World War II and interstate highways later on. But the recruitment was an attitude the New South adopted on its own. By seeking out talent and businesses from the rest of the country and the world, the major metro areas of today’s South generated some of the strongest economic growth and most promising labor trends in the country.

The Rust Belt has two main challenges to address — poor demographics and legacy obligations in the form of pension costs and physical infrastructure that needs maintaining. The demographic component is the part it most needs to solve on its own.

One type of institution has figured this out: the region’s universities. Last week, in college football, the University of Michigan played Ohio State University in their annual rivalry game. But in some ways it wasn’t a clash between Rust Belt foes. Michigan’s coach, Jim Harbaugh, was hired from the West Coast. Ohio State’s coach, Urban Meyer, was hired from Florida. Both teams have rosters full of increasing numbers of players from regions other than the Midwest. The reason is simple. Youth populations are shrinking in the Midwest, and increasingly the best high school football players are in other parts of the country like the South and the West that still have growing populations. Both universities hired coaches from elsewhere, and both coaches are using the prestige of their universities to recruit the best players in the country, no matter where they’re from.

This recruitment isn’t just happening on the football field. To address enrollment shortfalls due to dwindling numbers of home-grown students, Midwest universities are recruiting students from all over the world. Two of the eight universities in the U.S. with more than 10,000 international students are in the Midwest — Purdue University and the University of Illinois at Urbana-Champaign.

As a recruitment pitch, the Midwest needs to figure out its message and sell it to the world. As Midwest urbanist and blogger Pete Saunders noted in a tweetstorm this week, the resurgence of coastal cities began with assets that the cities had all along. Wall Street and media for New York, higher educational institutions for Boston, the federal government for Washington, a unique topography and culture in San Francisco. Similarly, the Midwest has great educational and medical institutions, an incredibly affordable lifestyle that becomes more compelling as housing costs rise on the coasts and in the Sun Belt, plentiful water that could become a competitive advantage because of climate change, and a sense of “rootedness” that many find compelling.

The most influential policy change the federal government could employ to “save” the Midwest is one that would have been unthinkable when Congressional Republicans were battling President Obama — a huge bailout of the Rust Belt’s legacy obligations. Pension costs are eating a higher and higher share of tax revenue in cities like Chicago and states like Illinois. That leaves municipalities less money to spend on ongoing operations and maintenance, let alone infrastructure improvements. Eroding public services not only keep people from moving to the area, but also encourage young people to leave for places with better public services. If President-Elect Donald Trump could persuade Congress to bail out the region, that could the fiscal slate clean and give the Midwest the breathing room to invest in its future.

It took a Nixon to go to China, perhaps it takes a Trump to save the Rust Belt.

Bloomberg View

By Conor Sen

Dec 2, 2016

Conor Sen is a Bloomberg View columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.

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:
Conor Sen at csen9@bloomberg.net

To contact the editor responsible for this story:
Philip Gray at philipgray@bloomberg.net

• Mutual fund selling creates bargains for pre-refunded bonds
• Bloomberg Barclays Muni Prerefunded Index hits 1.53%

The more than $5 billion exodus from municipal-bond funds in November is creating bargains in an often overlooked corner of the tax-exempt debt market.

An index of municipal bonds that are pre-refunded — or paid off as they come due with the proceeds of Treasuries that are held in escrow — yields 1.53 percent, the highest since July 2009. To meet redemptions, mutual-fund mangers are selling the bonds, which are rated AAA because they’re secured by the income from the federal-government debt.

The selloff triggered by Donald Trump’s presidential victory drove state and local-government securities to a 3.46 percent loss in November, the worst month since September 2008, when financial markets seized up after the collapse of Lehman Brothers, according to the S&P Municipal Bond Index.

The Republican’s pledge to cut income taxes and boost spending on infrastructure stoked speculation that the Federal Reserve will need to increase interest rates more aggressively to keep inflation from picking up. Tax cuts could also lessen demand for municipal bonds, whose interest payments are exempt from the federal income tax.

Bloomberg Markets

by Martin Z Braun

December 1, 2016 — 2:35 PM EST December 1, 2016 — 2:35 PM EST

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

Watch the video.

Bloomberg

December 1, 2016

Construction stocks soar, but the proposed funding proposal has glaring flaws

“Build it and they will come” worked like a charm in Hollywood. Washington is a different story.

Donald Trump’s trillion-dollar infrastructure plan has sent investors piling prematurely into stocks that could benefit. The share prices of building materials companies Vulcan Materials and Martin Marietta Materials both hit all-time highs days after the election while construction-related companies Aecom, Tutor Perini and United Rentals did even better, appreciating between 30% and 40% since Nov. 7.

The reason for skepticism certainly isn’t a lack of demand. The American Society of Civil Engineers estimates that simply repairing existing infrastructure in the coming decade would cost more than three times as much as the president-elect’s proposed expenditure. The problem is paying for it. The cornerstone of the Trump plan, outlined by proposed Commerce Secretary Wilbur Ross and economist Peter Navarro, is to use tax credits to spur public-private partnerships. This would, in theory at least, be revenue neutral for the federal budget.

Such projects have fared poorly in the past. A 2015 Congressional Budget Office report counted 14 completed highway projects that relied on some form of private financing. Of the eight that have been open for more than five years, half, including projects in Texas, California, and South Carolina, have either declared bankruptcy or experienced a public buyout of the private partners. All relied on toll revenue. They built it, but not enough came.

Equity investors under the Ross-Navarro proposal might still like those odds given the sweeteners it contains, though that confidence might not extend to lenders on the projects. The proposal assumes that $1 trillion of spending would require about $167 billion of private-equity investment that would then receive an 82% tax credit. That would, they calculate, reduce the total cost of financing by 18% to 20%.

On top of that, the authors assume that projects would be cheaper simply because private-sector contractors are more efficient than government builders, even though private contractors already oversee many road and bridge projects today. The authors then calculate that the proposals would be revenue neutral because taxes on the additional wage income plus profits, even at Mr. Trump’s proposed 15% corporate tax rate, would roughly equal the outlay. This ignores the impact that the tolls would have on spending by drivers on other goods and services.

Even if their math holds up, toll roads require state or local approval and are typically contentious. Those governments receive about $45 billion in federal highway funding annually and won’t take kindly to it being replaced overnight. What is more, the lion’s share of highway spending already benefits from indirect federal subsidies.

In 2014, for example, three-quarters of highway spending came from state and local governments that can issue tax-free bonds and have benefited from ultralow interest rates recently. Muni bonds must be attractive to buyers. The required payout has risen since yields on 10-year Treasury notes have risen by half a percentage point since the election.

Muni bonds’ tax advantages would be eroded if Mr. Trump lowers the top federal income tax bracket from 39.6% to 33%. Combining the two, all else being equal, required yields on municipal bonds and the cost of debt financing will have risen by about 40%.

Meanwhile, all isn’t well with the federal portion of that spending either. The CBO reported in February that the Highway Trust Fund, which is funded by motor fuel taxes, hasn’t been able to make promised payments to states since 2008. In order to keep it from running dry, Congress had by that point transferred $143 billion to it from other sources. Bringing the fund back into balance might require a politically toxic 10 cent a gallon increase in gas taxes.

If the rubber on Mr. Trump’s infrastructure proposals is slow to hit the road then a reversal of some or all of the gains in construction-related stocks is likely. While fundamentals already were improving for some of them, spending pledges from both presidential candidates created froth. A basket of eight companies that fetched 14.5 times projected earnings for the next 12 months on average at the beginning of 2016 now trades at 18.2 times.

Public-private partnerships seem like an easy way to build infrastructure without borrowing too much. History shows that such plans are harder than they appear.

THE WALL STREET JOURNAL

By SPENCER JAKAB

Updated Nov. 30, 2016 10:34 p.m. ET

Write to Spencer Jakab at spencer.jakab@wsj.com

Rise in yields since July has pushed the 10-year Treasury note up by more than 1 percentage point

The worst bond rout in three years deepened Thursday, hammering debt issued in emerging markets and many U.S. states and cities, while sparing large companies the brunt of the impact.

The yield on the 10-year Treasury note rose to a 17-month high, at 2.444%, up from 2.365% Wednesday. Yields rise as bond prices fall.

The surge since July has pushed the 10-year yield up by more than 1 percentage point, only the fourth time it has risen so much so fast since 2009. Rising rates can reflect optimism about economic prospects, yet over time they can also slow growth by making borrowing more expensive for consumers and businesses.

Bonds issued by emerging-market countries like Mexico and Turkey have been hit hard in recent weeks, reflecting fears that a strong dollar and the prospect of slower global trade under a Donald Trump administration will hurt companies there. U.S. municipal bond prices also have declined amid concerns that tax cuts could erode the value of the debt’s tax breaks.

American companies are emerging as relative winners in the selloff. Yields are rising off such a low base that few economists or traders are concerned for now about ripple effects through the economy.

The cross currents are the latest sign that Wall Street is placing a broad-ranging bet on an accelerating U.S. recovery. Expectations of higher growth and inflation have sent the Dow Jones Industrial Average to repeated records since Mr. Trump’s election Nov. 8, while fueling gains in the U.S. dollar. On Thursday, the Dow industrials rose 68.35 points, or 0.4%, to 19191.93, its 18th record close this year.

Still, higher rates could eventually start weighing on stocks and the economy as companies begin to borrow less for expansion and consumers spend less on homes and other purchases.

“If rates were to move up dramatically higher, it will start to influence risk assets and growth and certainly housing demand,” said Rick Rieder, chief investment officer of global fixed income at BlackRock Inc., the world’s largest money manager by assets. But “we certainly are not at that level today.”

One sign of that optimism: Yields on investment-grade and low-rated corporate debt have risen less than Treasurys. That means the prices of corporate bonds have dropped less than government bonds, in a bet that economic conditions will continue to improve and help ensure firms can pay off debt.

The average spread—or the premium investors demand to buy riskier debt—of investment-grade corporate bond yields to Treasury yields has edged down to 1.34 percentage points on Wednesday from 1.37 percentage points on Nov. 8. Junk-rated corporate bonds have performed even better, with their average yield premium shrinking to 4.93 percentage points from 5.17 percentage points in that time, according to Bloomberg Barclays data.

Though they largely took a break during the week of the election, U.S. companies have continued to sell bonds at roughly the same pace as before the election. Over a two-week period starting Nov. 14, investment-grade bond sales totaled $31.4 billion, compared with $33.3 billion over the two-week period between Oct. 24 and Nov. 4—the Friday before Election Day—according to data provider Dealogic.

Issuance has been especially robust from financial companies, including Wells Fargo & Co., which sold $7 billion of bonds Thursday. But nonfinancial companies, including junk-rated borrowers, have also joined the fray, with recent issuers including plane and train maker Bombardier Inc. and timeshare business Hilton Grand Vacations Co.

Mr. Rieder said rising yields will likely be a positive for the economy as long as the increases remain modest, because higher long-term rates boost bank profits and tend to be associated with higher levels of lending, which often feeds through to stronger economic growth.

That process is “helping a tremendous amount of the financial system,” he said.

The selloff in Treasurys has hit emerging markets hardest. Those bonds had only recently began rebounding from a slump spanning more than a year, caused by a decline in commodity markets.

The J.P. Morgan Emerging Markets Bond Global Index Diversified had gained about 14% through September but lost 1.2% in October and 4.1% in November. Investors pulled $1.4 billion out of emerging-market bond mutual funds in November, the first material outflow since February, according to data from Thomson Reuters Corp.’s Lipper unit.

“Emerging markets have been decimated,” said Peter Carril, founder of Patton Hall LLC, an investment adviser to high net worth individuals. “No one wants to touch it.”

Marco Santamaria, a portfolio manager at AllianceBernstein Holding LP, which invests $23 billion in emerging-market bonds, said the firm started selling some of its riskier emerging-market bonds ahead of the U.S. election and is still waiting to dip back in.

The election also sparked a rout in debt sold by U.S. state and local governments, pushing total returns for November in the S&P Municipal Bond Index to its worst month since September 2008, according to S&P Dow Jones Indices. The iShares National Muni Bond exchange-traded fund has lost 4.3% since Election Day.

The selling reflects concerns that a Republican-led Congress and White House will cut taxes, reducing the appeal of the tax-free interest payments that make municipal debt attractive to individual investors, some analysts said. Other concerns include the possibility that Mr. Trump’s proposed increase in infrastructure spending will flood the market with new bonds, pressuring prices.

Several investors said those concerns were overblown, and they viewed the decline as a chance to buy municipal bonds after yields hit record lows earlier this year.

“This panic selling in the municipal bond market seems overdone,” said Phil Blancato, chief executive at Ladenburg Thalmann Asset Management. “This is the first opportunity in a while to buy them cheap.”

The sharp rise in yields reminds some investors of 2013, when worries that the Federal Reserve would end its bond-buying program rattled the bond market. But so far, the outflows that characterized the “taper tantrum” have yet to materialize. U.S. bond mutual funds that target Treasury securities have had 11 consecutive weeks of outflows through Nov. 23. But investors pulled just $175 million over that span, according to Lipper. In one week in November 2013, outflows exceeded $300 million.

“The average retail investor will be slow to change direction in their mutual fund portfolios,” said Tom Roseen, head of research services at Lipper.

THE WALL STREET JOURNAL

By SAM GOLDFARB, MATT WIRZ and AARON KURILOFF

Updated Dec. 2, 2016 7:37 a.m. ET

—Min Zeng contributed to this article.

Write to Sam Goldfarb at sam.goldfarb@wsj.com, Matt Wirz at matthieu.wirz@wsj.com and Aaron Kuriloff at aaron.kuriloff@wsj.com

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NCPPP

November 21, 2016

WASHINGTON – Most state and local governments and their authorities took longer to complete their financial audits in 2015 than they did the year before, likely because of new pension reporting requirements, Merritt Research Services found.

Merritt published its report on audit timing on Monday. The report was written by Richard Ciccarone, president and chief executive officer of Merritt. It compared more than 84,000 audits that encompassed the period between 2007 and 2015 and based its analysis on the time it takes an issuer or borrower to finish and sign its audit after the close of its fiscal year.

The report focused on the audited financials in 16 primary muni credit sectors: local school districts, cities, counties, water and sewer districts, airports, community colleges, dedicated tax entities, hospitals, private higher education, public higher education, retail public power, wholesale public power, special districts, states and territories, tollways, and other revenue supported borrowers.

The median number of days that it took all of the Merritt-tracked muni credit sectors to complete their audits rose to 151 days in 2015, nine more than the 142 median in fiscal year 2014, and the first time since 2008 that the median rose above 150 days. Thirteen of the 16 muni sectors that merit tracks took longer to complete financial audits in 2015 than they did in 2014.

Retail electric and the miscellaneous category of “other revenues” were the only two sectors to improve their median reporting times while hospitals stayed the same from 2014.

“Audit timeliness remains an essential requisite to taxpayers as well as market accountability and transparency,” Ciccarone wrote in the report. “For municipal bondholders, late or stale audits inhibit accurate bond pricing and cloud assessments of risk.”

Of the sectors, states and territories took the longest to report with a median of 182 days and counties were a close second with a median reporting time of 180 days, which follows a trend Merritt has been seeing since 2008 where states and counties have been “running at the back of the pack.” Dedicated tax obligors and cities had median completion times of 173 and 172 days, respectively.

“Governmental type municipal borrowers were more than likely affected and slowed down in 2015 by the new experiences of reporting pension information under the newly effective” Governmental Accounting Standards Board 67 and 68 rules, Ciccarone said in the report.

GASB 67 and 68 revised existing GASB guidance for the financial reports of most pension plans for state and local governments. GASB 67 took effect for pension plans in fiscal years beginning after June 15, 2013 and GASB 68 took effect for governments in fiscal years beginning after June 15, 2014. He said that despite the delays, the rules are welcome because they lead to more detailed and descriptive pension information.

The implementation of the new accounting rules also affected some revenue bond issuers and borrowers, according to Ciccarone. He gave an example of an airport that reports its audits in its city’s comprehensive annual financial report and is therefore “tied into the city” that could be delayed because it is working with the new GASB rules.

Additionally, he noted that not every issuer or borrower suffered a slowdown after the new GASB rules. He used New York State and New York City as examples of complex credits that still managed to sign off on their 2015 reports in 115 and 121 days, respectively.

The only state to have a faster reporting time than New York in fiscal year 2015 was Michigan, which only took 92 days to file its audit. Michigan has had the fastest audit filing of all states and territories since fiscal year 2013 when it improved its time to 82 days from 151 days in fiscal year 2012. Michigan’s 2015 timing almost meets the SEC standard for corporations, which requires companies to complete audited financials in 60 to 90 days, depending on the company’s size.

Financially troubled entities took longer on their audits than others, the report found. San Bernardino, Calif., which was still in bankruptcy in 2015, took 456 days to file. Puerto Rico, which has been struggling with roughly $70 billion in debt that its governor has deemed unpayable, still hasn’t filed its 2015 audit and took 731 days to file its information for 2014.

Alabama and the Northern Mariana Islands join Puerto Rico as the only other states or territories that the report found did not file their audited financials for 2015.

Alabama consistently filed its audits within about 180 days since fiscal year 2008, according to the report data.

The Bond Buyer

By Jack Casey

November 21, 2016

On Nov. 18, 2016, the U.S. Department of Energy (DOE) released Best Practice Guidelines for Residential PACE Financing Programs.

Since 2009, more than 100,000 homeowners have made energy efficiency and renewable energy improvements to their homes through residential Property Assessed Clean Energy (PACE) programs. By 2016, residential PACE programs had allowed homeowners to invest nearly $2 billion in energy efficiency, solar, and other upgrades to their homes.

Homeowners have made these energy upgrades with no upfront costs by electing to repay their loan through a special assessment along with their property taxes. With PACE, homeowners are installing high-efficiency equipment and products, including ENERGY STAR-qualified heating and cooling systems, and other clean energy technologies that can help reduce their energy consumption and lower costs, while improving their homes’ comfort, health, safety, and resiliency.

The DOE guidelines outline best practices that can help state and local governments, PACE program administrators, contractors, and other partners develop and implement programs and improvements that effectively deliver home energy and related upgrades. The updated best practices reflect input gained from over 200 comments on a draft of the guidelines that was released for public review earlier this summer.

In the guidelines, special emphasis is placed on recommended protections that PACE programs should put in place for consumers who voluntarily opt into the service, as well as for lenders that hold mortgages on properties with PACE assessments. DOE also provides additional program design recommendations that address the unique needs and potential vulnerabilities of low-income and elderly households, to help ensure that PACE financing is used appropriately and at the least cost for low-income households that otherwise meet program eligibility criteria.

Specific topics addressed in the updated guidelines include:

• Enhanced PACE eligibility criteria, including requirements for review of income, existing debt obligations and credit score; clear and understandable consumer disclosures of all PACE terms, including interest rates and fees, repayment procedures, and lien requirements;
• Additional consumer protections for low-income households, including enhanced screening procedures (e.g., verbal confirmation of PACE terms with the homeowner), written disclosures, and recommendations to structure PACE financing to be cost-effective for low-income participants
• Recommendations for quality assurance, contractor management, and enforcement procedures; and
• Recommendations for access to dispute resolution procedures or other mechanisms if work is performed improperly.

In combination with guidance for lenders from the Federal Housing Administration and the U.S. Department of Veterans Affairs, these best practices enable more states and communities to develop and implement residential PACE programs As the PACE market continues to grow, the Energy Department recommends that state and local governments incorporate these guidelines into existing or planned residential PACE programs, engaging local stakeholders to ensure PACE programs remain a sustainable model for financing energy upgrades and meeting community goals.

DOE will continue to work with state and local governments by providing information, technical assistance, and peer exchange opportunities to support incorporation of the best practices outlined in the guidelines into residential PACE programs. Upcoming next steps include:

• The National Association of State Energy Officials (NASEO) and DOE have partnered to establish a new residential PACE Task Force to support policy maker education and learning. Core members of the Task Force will include interested state energy office directors and staff, NASEO, and DOE.
• DOE and Lawrence Berkeley National Laboratory (LBNL) will conduct an impact evaluation to quantify energy savings from residential PACE projects in California, which will inform future program design recommendations.
• DOE will support state and local governments in incorporating the guidelines into PACE statutes and regulations as they are developed and modified.

For more information, continue to visit the State and Local Solution Center to learn more about residential PACE financing and state and local best practices in clean energy.

 

Municipalities spend more than a billion dollars a year on settlements and claims from citizens. Some are trying hard to rein in those costs.

There’s a big silver dome in the corner of Union Square Park in New York City. Kids love to scramble up the six-foot-high stainless steel structure, called the Mountain, and then slide back down. The only problem is, the thing gets hot in the sun. Really hot. One afternoon in 2012, the metal surface was so warm that a young girl climbing on it suffered severe burns to her hand from the scorching hot steel. Her father filed a claim against the city, which was later settled for $24,500. (The city has since added a shade structure to shield the dome from the sun.) But that wasn’t the only injury in Union Square Park that year. City records show three other families also filed claims in 2012 holding the government liable for injuries on the playground — one of the highest tallies in the city’s parks system.

The next year, a falling tree struck a man in the park, resulting in a $15,000 payout from the city. A few months after that, a police tow truck allegedly hit a teenage boy crossing an intersection near the north end of the park, prompting another filing.

Claims and lawsuits are an everyday occurrence in the Big Apple, where about 9,500 cases were filed against the city last fiscal year. In all, New York paid out $720 million in judgments and claims in fiscal 2016, which amounts to about $84 per resident. That’s only about 1 percent of the city’s total expenditures, but it represents much-needed funding that could be directed elsewhere. For instance, it’s more than the combined budgets of the Parks and Recreation Department and the Department of Buildings.

Continue reading.

GOVERNING.COM

BY MIKE MACIAG | NOVEMBER 2016

As delays and safety issues continue on privatized transit systems, that arrangement is getting new scrutiny.

How do commuter railroads make sure their trains run on time? Many hand operations over to private companies, giving them financial incentives for on-time performance. It’s a well-established practice that works most of the time.

But it hasn’t been working in Boston and Denver lately, where the private companies running both regions’ commuter rail lines have faced hefty fines for structural problems.

In Denver, one of the biggest challenges right now is taking place on the region’s brand new line connecting downtown Denver to the airport. The problem is with the crossing gates — they stay down too long. Flaggers have been hired at crossings to make sure impatient drivers and pedestrians obey the gates and don’t go around them.

The problems with the gates follow a number of other early disruptions to the much-anticipated airport rail service. At first, the gaps between power sources on the rails were too big, which could leave unpowered trains stranded. Lightning strikes also caused damage to overhead wires and, in one case, caused the line to shut down for seven hours and forced firefighters to help passengers evacuate a stranded train on an overhead pass.

While most of those issues have been resolved, Denver Transit Partners, the private company that oversees the rail, has paid at least $78,000 for missing their marks for on-time performance. On top of that, the company has had to pay $250,000 a month for signaling issues, or about $1.25 million so far.

“We’re in a bit of a world of hurt,” said John Thompson, the executive project director of Denver Transit Partners. “There’s no question about that, because we didn’t see that we’d be faced with these deductions when we bid these contracts six years ago.”

In Boston, the company Keolis has paid more than $12 million in fines in its first two years of running commuter rail for the Massachusetts Bay Transportation Authority (MBTA). Now, just two months into the third year of its contract, Keolis has already paid another $1 million in fines.

While the fines may not seem like much in the context of a 12-year deal worth roughly $4.2 billion, Keolis has said that it is losing money on its Boston-area service.

Of late, the biggest controversy has been about the fines the company hasn’t paid. The Boston Globe recently reported that MBTA waived $839,000 in fees incurred for widespread problems on Keolis’ commuter rail service during the winter of 2015. A series of storms dumped 100 inches of snow on Boston in a month, which snarled the city’s transportation networks, including passenger rail. MBTA charged Keolis the maximum allowable fine during that time for poor on-time performance, but it rescinded fees for items like dirty trains and uncollected garbage.

“During this recovery period, we prioritized our resources toward activities that would enable us to return the fleet back to full operations, an approach which the MBTA fully supported. Under the terms of our contract, when there are extreme circumstances such as what was experienced in 2015, it is permissible for the MBTA to grant us relief from certain penalties and we are grateful for this support,” said Keolis spokeswoman Leslie Aun.

MBTA’s forgiveness of the fines have angered several legislators. Fourteen lawmakers signed a letter to the state’s transportation secretary calling the decision “indefensible.” Labor unions, which have fought the transit agency over the privatization of some jobs, also criticized the decision.

But Massachusetts Gov. Charlie Baker has backed the waivers. Keolis’ contract allows waivers in the case of unforeseen circumstances, often characterized as force majeure or an act of God.

“It’s pretty hard to argue that the winter of 2015 wasn’t an act of God,” Baker told the Globe last month.

Whatever the immediate fallout, the contractors and transit agencies in Denver and Boston have a lot at stake in getting things right.

Keolis, for one, is only in the third year of an eight- to 12-year contract with MBTA. And Denver Transit Partners, which actually designed and built the commuter rail to the airport, is opening two other lines this year and is slated to oversee all three lines for 28 years.

Thompson, the executive from the consortium, is optimistic despite the first-year hiccups.

“We’ve had 20-odd days where we were really disappointed with our service, out of over 200 days of services so far,” he said. “Ridership continues to increase, so some people think we’re doing a good job and are telling others about it.”

GOVERNING.COM

BY DANIEL C. VOCK | NOVEMBER 22, 2016

Despite opposition on these pages (Chris Edwards, DownsizingGovernment.org, “Bonds Are Taxes” Nov. 2, 2016), Fairfax County, Va., voters last week overwhelmingly approved three referenda authorizing the issuance of $312 million in municipal bonds.

By definition, these referenda forced voters to consider the details of, and costs for, each project to be financed. Voters were provided with extensive information on these issues: The ballot questions were detailed, and supplemental guides available in print and online provided page after page of information about the parks and park facilities, Metro improvements, senior center, community center and emergency homeless shelters that will be built and the cost for building them.

Fairfax County will begin paying for these projects almost immediately upon issuance of the bonds, forcing real budget choices: a dollar spent on debt service (and so on long-term infrastructure investments) cannot be spent on some other program. These payments are spread over time – and often over the useful life of the project – meaning those who use the parks (or Metro stations or community centers) are paying for them. It is simply sound finance to spread the cost of long-term capital improvements over their useful life so that the beneficiaries of those improvements pay for them, rather than just those who around during the construction period.

Data show communities like Fairfax County take these votes seriously and are budgeting for these expenses appropriately. Since the global financial meltdown, while the federal debt has sky-rocketed and non-bank business debt has risen, state and local debt (like household debt) has fallen. In fact, state and local borrowing is at its lowest point as a percentage of GDP since at least 2005 the means for estimating state and local debt changed in 2005, so it is not possible to make apples to apples comparisons for 2004 and before. If anything, state and local governments are underinvesting in their infrastructure and other capital needs.

Finally, while it is colorful to refer to “debt-fueled spending” burning fiscal houses down, the truth is that municipal defaults and bankruptcies – debt-fueled or otherwise – have been and remain rare. The nation’s roughly 39,000 municipalities have an annual municipal bankruptcy rate of about 0.0043% and a rate of 0.0044% in the seven years since the global financial meltdown.

So, again, I agree wholeheartedly that Fairfax County — and communities throughout the country — should transparently and conscientiously decide whether to build schools, repair roads, fix bridges, and make the other investments necessary to help our economy grow and keep our communities livable. And, that is exactly what happened last Tuesday in Fairfax County.

Dan Marsh, President-Elect, National Development Council (NDC). NDC is a national non-profit dedicated to bringing capital to underserved communities by providing technical assistance in economic development and housing finance and development and small business lending. Mike Nicholas, CEO, Bond Dealers of America (BDA) is the Washington, DC-based trade association that exclusively represents securities dealers and banks whose primary focus is the U.S. fixed income markets. BDA and NDC are members of the MUNICIPAL BONDS FOR AMERICA (MBFA) coalition, a non-partisan coalition of municipal bond issuers and State and local government officials along with other municipal market professionals working together to explain the benefits of the tax-exempt municipal bond market which provides the financing needed to build vital infrastructure throughout the United States.

THE HILL

BY DAN MARSH AND MIKE NICHOLAS – 11/21/16 03:15 PM EST

The views expressed by authors are their own and not the views of The Hill

Trump’s pro-growth fiscal-stimulus plans, such as lower tax rates and higher infrastructure spending, are particularly worrisome for munis.

Municipal-bond investors face a conundrum. The spike in interest rates since the election has made long-term tax-exempt bonds more attractive than they’ve been in years. You can now buy highly rated 10-year munis yielding near 3%—more than Treasuries and high-quality corporate bonds. That’s equivalent to a 4% taxable yield for investors in a high tax bracket.

Yet higher interest rates are a two-edged sword. At the same time, muni prices are falling. As of Friday, the benchmark-tracking iShares National Muni Bond exchange-traded fund (ticker: MUB) had a negative 1% year-to-date return. (At the end of October, it had been up 2.3%.) For investors who bought muni funds this year, harvesting tax losses makes sense. Bond-fund outflows, which began in the past two weeks, are likely to pick up into December.

The pro-growth fiscal-stimulus plans of President-elect Donald J. Trump, such as lower tax rates (which could crimp demand for munis) and higher infrastructure spending (which could increase supply), are particularly worrisome for munis. With the Federal Reserve poised to hike rates in mid-December, the near-term outlook is bearish—even though many observers believe “the selloff in munis has gotten too extreme,” as Dan Heckman, fixed-income strategist at U.S. Bank Wealth Management, puts it.

His solution: Implement a barbell strategy—that is, invest in both very short-term and longer-term munis. The long end (think 10-year, not 30-year) boosts the portfolio’s income, while the short end provides stability if rates keep rising. Conversely, if the economy slows and rates fall, the longer-term bonds will outperform shorter-term bonds and provide a buffer from declines in riskier assets, such as stocks and high-yield bonds.

Rumblings from the Federal Reserve make this strategy more compelling. “A December hike is almost a foregone conclusion,” says Paamco senior credit strategist Putri Pascualy. “The path of rate hikes after that is highly uncertain.” Economic growth is picking up at the same time Trump’s stimulus plans are taking shape, which could mean a more-aggressive rate-hike path next year. That would likely cause the yield curve to flatten, with long-term bonds rising in price, as inflation expectations fall, while short-term bonds dip.

INVESTORS WHO HAVEN’T looked at ultrashort-term muni rates may find them surprisingly attractive. Yields of ultrashort-muni and tax-exempt money-market funds have already climbed from nothing to something this summer due to the impact of money-market reform, which triggered massive outflows, says Colleen Meehan, who directs muni-money-market-fund strategies at BNY Mellon. These funds mostly own seven-day floating-rate tax-exempt securities whose yield this year has jumped to 0.55% from 0.01%. The expected Fed December rate hike of 0.25 percentage points should increase these yields, she says.

Peter Hayes, BlackRock’s head of municipal-bond investing, suggests investors put new money in ultrashort muni funds or keep a cash cushion. He also likes 15-year munis, which have 87% of the yield of the longest-term bonds. For investors who want to be tactical, Thomas Byrne of Wealth Strategies & Management recommends keeping maturities very short for now and moving to longer-duration bonds as fund outflows pick up.

Munis in the two-year maturity range will get hit hardest by Fed tightening, says Jim Grabovac, senior portfolio manager at McDonnell Investment Management. He recommends that long-term investors extend maturities now. He isn’t too worried about Trump’s proposals. Even if they come to fruition, he says, the muni market has weathered marginal tax-rate reductions and increases in supply just fine in the past.

“Some of this reaction is overdone, and near term, it provides an opportunity to do some portfolio restructuring and curve extension,” Grabovac says.

Barron’s

By Amey Stone

November 26, 2016

–  “Sloppy” market provides buying opportunities, firm says

–  Flow of cash from municipal mutual funds expected to persist

The selloff in the $3.8 trillion state and local-government bond market, which has sent yields on 10-year AAA benchmark bonds up by more than half a percentage point since the U.S. election, should continue for another two to three weeks, the Bank of America Merrill Lynch municipal research team led by Philip Fischer wrote in a report.

Mutual-fund redemptions should continue for the next few weeks, but the worst outflows have either happened or are about to “very soon,” the Friday report said. Last week, investors yanked $3.1 billion from municipal-bond funds, the biggest outflow since 2013, according to Lipper US Fund Flows data.

“We think the market sell off in munis is likely to continue to the end of November and into the first full week of December in a slow and negotiating fashion in order to reach an exhaustion point,” the report said. “This sloppy market provides buying opportunities, in our view.”

Bank of America Merrill Lynch projects that the bull market in bonds that began in 1981 should run for another two years given the current and expected health of the global economy.

Bloomberg

by Martin Z Braun

November 21, 2016 — 12:15 PM EST

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

Watch the video.

Bloomberg

November 23, 2016

The worst municipal-bond rout in three years may have gone too far too fast.

Speculation that President-elect Donald Trump and a Republican-led Congress will slash taxes and ramp up spending sent bond prices tumbling globally since the Nov. 8 election, driving municipal yields to the highest in more than a year. The selling blitz has pushed the relative strength index, which uses past trends to gauge whether the market has moved beyond typical ranges, to the highest since at least 2009, signaling the securities are oversold and may be in for a rebound.

Investors may be overlooking another important indicator: the record-setting pace of bond sales will likely slow as higher interest rates give local governments less incentive to refinance outstanding debt.

“The market is actually putting the cart before the horse,” said Vikram Rai, head of municipal strategy at Citigroup Inc. “We are worried about a drop in issuance because refundings are going to be down, and the increase in new-money issuance will not be enough to offset the decline.”

The amount of bonds eligible for refinancing in 2017 is set to shrink because municipalities slowed their issuance of new debt after 2007, according to Citigroup.

While longer-maturity state and local government bonds often have a “call option” that allows them to be bought back after 10 years, much of the debt issued a decade ago has already been refinanced through so-called advanced refundings, said Rai. That’s when a government sells bonds and uses the proceeds to purchase U.S. Treasury or agency securities, which are kept in an account that pays off the previously issued debt as it comes due or is called back.

Besides, with the Federal Reserve set to raise interest rates for the first time in a year, there will be fewer opportunities to refinance, according to Barclays Plc. Advanced refunding, which makes up almost half of refinancings, will “decline meaningfully” next year, Mikhail Foux, head of municipal strategy at Barclays, said in a note last week.

As the municipal market has its worst month since June 2013 — sending Bank of America Merrill Lynch’s index down 2.8 percent — some investors are wary of wading back in yet. This week, BlackRock Inc., the world’s largest asset manager, advised remaining on the sidelines, given that the exodus of cash may continue.

Further out, an expected drop in new bond sales may ease some pressure on the market. After hitting $250 billion already this year, total refundings will drop to $200 billion next year, according to Citigroup, while Barclays predicts an even deeper decline to about $185 billion.

The new-issue calendar has already started to dwindle as issuers brace for volatility stemming from an expected Fed hike next month. Municipal issuers plan to sell about $10 billion of bonds over the next 30 days, down from as much as $25 billion in mid-October, according to data compiled by Bloomberg. The actual number of sales may wind up being higher because some deals are announced only days ahead of time.

A buying opportunity may be at hand because the rout could exhaust itself in a few weeks, the Bank of America Merrill Lynch municipal research team led by Philip Fischer wrote in a report. Tax-exempt bonds are also becoming more attractive relative to their federal counterparts, with both 10- and 30-year municipals yielding more than Treasuries.

That could lure so-called crossover buyers, investors who typically prefer taxable securities but may purchase tax-free debt at discounted valuations, according to Barclays’ Foux.

Bloomberg

by Tatiana Darie

November 23, 2016 — 5:00 AM EST November 23, 2016 — 9:49 AM EST

Fitch Ratings-New York-22 November 2016: While the vast majority of state and local governments are able to maintain high credit quality with no risk of missing debt service commitments during economic stress, there is a growing divide from a minority of issuers who face fundamental credit weaknesses, according to a new Fitch Ratings report.

“There is growing divergence between the vast majority of state and local governments which are stable and strong, and a small number that continue to struggle deep into the economic expansion. The struggling governments have been unable to address the credit issues they face because of fundamental credit weakness,” said Eric Kim, Director.

U.S. tax-supported credits do face significant credit issues that could threaten credit quality if left unaddressed, including rapid fixed cost growth, rising healthcare spending, weakening demographic trends, and infrastructure.

Some state and local governments continue to face significant difficulty maintaining structural balance. Challenges like rising pension burdens are particularly acute for certain credits.

These governments remain isolated cases and not reflective of the overall condition of U.S. state and local government credit quality. Most governments have strong ability to address budget challenges through reasonable revenue and cost measures.

Fitch’s average annual rating default rate for U.S. subnational governments between 1999 and 2015 was just 0.02%. This reflects an average general government rating in the ‘AA’ rating category; by contrast, the average corporate rating is in the ‘BBB’ rating category.

The full report titled ‘Looking Beyond the Headlines: State and Local Credits Maintain Underlying Strength and Stability’ is available at www.fitchratings.com.

Contact:

Primary Analyst
Eric Kim
Director
+1-212-908-0241
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

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Children’s hospital ratios are generally rated higher on the rating spectrum than stand-alone hospitals and more in line with health care systems even though most are stand-alone providers.

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Sep. 21, 2016

The overall financial performance of U.S. not-for-profit acute health care organizations rated by S&P Global Ratings continued the improvement we saw last year when we returned the sector outlook to stable from negative, albeit at a more reserved pace.

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Sep. 21, 2016

S&P Global Ratings defines a small stand-alone acute care hospital, which is a subset of our stand-alone hospital universe, as one having net patient service revenue below $125 million.

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Sep. 21, 2016

Speculative grade ratings are defined as those rated ‘BB+’ or below. Within speculative grade, a majority of the health care organizations are rated in the ‘BB’ category with fewer in the ‘B’ and ‘CCC’ categories.

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Sep. 21, 2016

System medians, similar to the stand-alone medians, demonstrated operating margin improvement in 2015, which when combined with softer non-operating income produced modest coverage gains in the higher rating categories, with slight declines in the lower rating categories.

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Sep. 21, 2016

Similar to the overall medians for stand-alone hospitals and health care systems combined, we saw stronger operating margins for stand-alone hospitals in 2015 at each rating category, offset by consistently softer non-operating revenue compared to 2014.

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Sep. 21, 2016

Investors are slashing bond holdings and questioning whether tax changes will dull muni demand

Money is pouring out of municipal bond funds at the fastest pace since the 2013 “taper tantrum” as investors slash bond holdings and wonder about potential changes to the tax code.

Investors pulled $3 billion from muni bond mutual and exchange-traded funds the week after the presidential election, the largest such withdrawal since June 2013, according to EPFR Global and Bank of America Merrill Lynch. The $7.3 billion iShares National AMT-Free Muni Bond ETF, ticker MUB, has fallen 3.4% this month and is on pace for its sharpest monthly drop since Sept. 2008.

Municipal bonds are considered nearly as safe as Treasurys, since the debts are backed by the revenues of states, cities or services. Investors also like munis since interest payments are typically free from federal taxes. But in a stark reversal from earlier this year, when muni fund assets hit an all-time record, what were viewed as perks have turned into reasons to sell.

Municipal bond investors have taken cues from U.S. government bonds, which have been hit by heavy post-election selling. The yield on benchmark 10-year Treasury note rose to 2.411% on Wednesday from 1.867% on Election Day.

Meanwhile, investors are considering whether a package of tax cuts eventually passed by Congress could diminish the after-tax yield advantaged that munis hold over comparable Treasury bonds.

“The municipal market appears to have already priced in a significant cut in federal tax rates,” wrote Guy Davidson, chairman of the tax-exempt fixed income investment policy group at AB, the investment firm known until recently as AllianceBernstein.

The idea is that lower marginal tax rates could prompt the highest-earning investors to put their money elsewhere. At the same time, institutional buyers of muni bonds — banks and insurance companies — could find them less advantageous should corporate tax rates fall.

“Given the recent spike in yields and the murky policy picture, tax-exempt municipals may face continued near-term volatility,” said David Hammer, head of municipal bond portfolio management at Pimco.

Such volatility is evident in muni-bond closed-end funds that own municipal debt. Unlike mutual funds and ETFs, closed-end funds have a fixed number of shares and sentiment changes can swing prices of the securities to premiums or discounts to the value of the fund’s holdings. The discount of the $2.7 billion Nuveen Quality Municipal Income Fund, ticker NAD, has widened to 8.8% from 6.6% in September, according to Morningstar and Nuveen.

Market watchers caution that, historically, changes to taxes have had little impact on the municipal bond market. Vikram Rai, who heads municipal strategy at Citigroup, said that changes to the top marginal tax rate for municipal bonds since 1980 has fluctuated with “no correlation” to retail demand.

Still, Mr. Rai recently warned that muni bonds are likely to be under pressure as long as Treasury yields are on the rise.

“Municipal yields have been unsustainably rich for an extended period of time due to large inflows into this asset class driven by a reach-for-yield,” Mr. Rai wrote. “We are quite pessimistic that municipal funds can endure the size of backup which seems to be taking root in Treasuries.”

THE WALL STREET JOURNAL

By CHRIS DIETERICH

Nov 23, 2016 12:03 pm ET

Funds controlled by Franklin Advisers, OppenheimerFunds request to be entered as defendants in suit brought by hedge funds holding defaulted GO bonds

Puerto Rico’s largest mutual-fund bondholders have broken their silence in an ongoing $30 billion creditor standoff, underscoring tensions between the commonwealth’s traditional municipal investor base and the hedge funds now involved in its financial restructuring.

Funds controlled by fixed-income giants Franklin Advisers and OppenheimerFunds asked a federal judge last week to enter them as defendants in a lawsuit brought by hedge funds holding general obligation, or GO, bonds that have been in default since July.

The lawsuit pits those creditors against investors holding $17 billion in competing bonds known as Cofinas for their Spanish acronym and backed by sales tax revenues. If successful, the lawsuit could compromise the Cofina bondholders’ liens and free up a fresh source of repayment for the GO bondholders, which are guaranteed under the Puerto Rican constitution.

The courts, on the other hand, could affirm the commonwealth’s longstanding position that the sales-tax revenues are off-limits to the GO bondholders. U.S. District Court Judge Francisco Besosa could also freeze the dispute in the hopes that the warring investor groups will negotiate a settlement, as the Cofina investors have urged.

Congress installed a federal oversight board over the summer to take over Puerto Rico’s financial decision-making, but it has yet to announce the hiring of legal and financial advisors with whom creditors will negotiate. The legal status of the Cofina revenues has never been tested in the courts, and resolving it now would take a major question on creditors’ rights out of the board’s hands. For now, it wants the dispute paused under the automatic stay provisions of the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA.

Franklin and Oppenheimer, along with Santander Asset Management, are cross-holders with a combined $3.6 billion in Cofina claims and $1.1 billion in GO claims, according to a filing in Puerto Rico federal court.

With $2.8 billion of their exposure in subordinated Cofina debt, the mutual funds said they have the “greatest possible interest” in protecting the sales taxes from being diverted. Junior Cofina bonds would suffer the most if the revenue stream were interrupted, although they have continued to be paid even with the territorial government in default on its constitutional debt.

Hedge funds exclusively holding senior Cofina bonds have already asked to be heard in the lawsuit. Those bondholders, including GoldenTree Asset Management, Merced Capital and Taconic Capital Advisors, hold zero-coupon bonds that don’t come due for decades, according to people familiar with the matter. Their group has taken the position that diverting the sales taxes would cause their claims to come due immediately, leapfrogging over those of junior creditors.

As holders of both types of bonds, the mutual funds said they aren’t conflicted and have reason to guard the interests of all creditors within the $17 billion Cofina debt stack. Puerto Rican lawmakers first segregated sales-tax revenues from its general fund a decade ago to create an alternate borrowing mechanism.

“The interests of Cofina, its bondholders generally and its current-pay subordinate bonds in particular are served by maintaining the statutory transfer,” lawyers for Franklin, Oppenheimer and Santander wrote in court papers. “It is likely that the senior Cofina bondholders want Cofina to default.”

A spokesman for the mutual funds declined to comment beyond the filing. Representatives for the GO bondholder group and for Cofina bond trustee Bank of New York Mellon didn’t immediately respond to requests for comment.

James Doak of Miller Buckfire & Co., an adviser to the senior Cofina bondholder group, called the mutual funds’ appearance “a positive for Puerto Rico, the oversight board and the incoming administration.”

“Major, long-standing investors holding both GO and Cofina bonds are stepping forward to defend PROMESA’s stay provision and reject more litigious GO bondholders’ attempts to seize [sales tax] revenue,” he said.

The benchmark 8%-coupon GO bonds due in 2035 traded Friday at 69.5 cents on the dollar, according to FactSet, having cooled off from a post-election rally that pushed prices to 73 cents. Puerto Rico recently elected Dr. Ricardo Rossello, a statehood supporter perceived by investors as friendlier to creditor interests, to replace Gov. Alejandro García Padilla. The new governor takes office in January.

THE WALL STREET JOURNAL

By ANDREW SCURRIA

Updated Nov. 23, 2016 7:57 p.m. ET

Washington, DC – Following the recent steep rise in municipal bond yields, the Municipal Securities Rulemaking Board (MSRB), the national regulator for the municipal market, today issued a statement today cautioning investors about the potential risks to bond positions and bond portfolios of rising interest rates.

“Yields in the municipal bond market reached a one-year high last week,” said MSRB Executive Director Lynnette Kelly. “Given this trend, it is important that investors review their municipal bond holdings with their financial professionals, monitor market developments and educate themselves about the risks of rising interest rates.”

The MSRB provides multiple free investor education resources related to interest rate risk including the Impact of Market Interest Rate Movement on Municipal Bond Prices and Yields, Evaluating a Municipal Bond’s Interest Rate Risk and The Importance of Monitoring Municipal Bonds.

“Municipal bond investors can use the MSRB’s resources to learn about the risks of interest rate changes and considerations to discuss with their financial professional,” Kelly said. The MSRB also makes available an online course aimed at financial professionals called Rules and Risks: Applying MSRB Rules in Relation to Municipal Market Risks.

Earlier this month, the MSRB identified changes in the ownership profile of municipal bonds in recent years as having increased the risk that a rise in interest rates could lead to market dislocation and reduced liquidity in the municipal market. In a letter to the Securities and Exchange Commission Investor Advocate, the MSRB cited greater mutual fund ownership and reduced dealer inventories as factors in the risk for investors.

Date: November 14, 2016

Contact: Jennifer A. Galloway, Chief Communications Officer
(202) 838-1500
jgalloway@msrb.org

A key member of Donald Trump’s transition team said the incoming administration is exploring ways to fund fixing bridges and roads including by establishing an “infrastructure bank,” a concept Hillary Clinton promoted and the Republican’s campaign had previously derided.

Steven Mnuchin, a member of the team’s executive committee who was recommended for the position of Treasury secretary, said in brief comments to reporters Wednesday morning that a “very big focus is regulatory changes, looking at the creation of an infrastructure bank to fund infrastructure investments.”

Trump’s campaign had criticized Clinton’s proposed infrastructure bank as being “controlled by politicians and bureaucrats in Washington” and funded by a “$275 billion tax increase on American businesses.”

The billionaire’s economic advisers previously said infrastructure spending can be unleashed without creating a government entity. They released a plan in October advocating the provision of as much as $140 billion in tax credits to support $1 trillion in infrastructure investment, which would offset the credits through tax revenue from the projects’ labor wages and business profits.

Mnuchin and spokespeople for Trump didn’t respond to requests to elaborate. Peter Navarro, a Trump campaign adviser and co-author of last month’s infrastructure plan, also didn’t respond to a request for comment.

According to Clinton’s campaign website, her five-year plan would have allocated $250 billion to direct public investment in infrastructure and $25 billion to an infrastructure bank. The new institution would leverage the funds to support as much as an additional $225 billion in loans, loan guarantees and other “forms of credit enhancement.”

Outgoing President Barack Obama has also proposed a U.S. infrastructure bank to lend at maturities as long as 35 years to fund transportation, water and energy projects. Such an entity would potentially emulate organizations from China, which led the establishment of the Asian Infrastructure Investment Bank in 2015, and Canada, where Prime Minister Justin Trudeau’s government is creating a bank to provide low-cost financing for infrastructure projects.

“The economic priorities are clearly taxes, regulatory, trade, and infrastructure,” Mnuchin said at Trump Tower in New York. “Right now we’re just all in the planning stages, you can see. We want to be in a position where in the first hundred days we can execute the economic plan.”

Private Investors

The president-elect’s transition website says the new administration seeks “to invest $550 billion to ensure we can export our goods and move our people faster and safer.” The details on the structure of the plan are still to come.

Whether Trump’s ultimate proposal involves an infrastructure bank or tax credits, the plan’s success, if enacted, may depend partly on the extent to which private companies and investors find sufficient incentives to put up their own money for individual projects.

The length of time it takes such wagers to come to fruition could discourage investment, and easing business concern will require more of a plan from Trump’s administration, according to Jim McCaughan, who oversees about $400 billion at Principal Global Investors.

“When it’s big-scale macroeconomics or politics that drives the infrastructure, the private sector has to be very careful,” McCaughan, who runs Principal Financial Group Inc.’s asset manager, said Wednesday in an interview at the insurer’s investor day in New York. “Giving the private sector the confidence to do it will actually be quite a challenge.”

One Democrat, Representative John Delaney of Maryland, called the comments from Mnuchin about an infrastructure bank “encouraging” and said a bipartisan coalition in Congress is ready to work on rebuilding America, according to a statement from his office.

Bloomberg Politics

by Scott Lanman and Sho Chandra

November 16, 2016 — 2:10 PM PST

Any set of ideas can be separated into known knowns, known unknowns, and unknown unknowns. Leaving the last set aside, one known known that appears virtually certain: that state and local governments are going to have to fight hard for their share of the “policy pie” under the new Trump Administration. Let’s now take a look at some of the key “known unknowns”—factors that are likely to affect valuations and creditworthiness and functioning in the state and local finance sector as the new Administration and Congress sort them out.

1) ARE INTEREST RATES INEVITABLY HEADED HIGHER?

That is the first structural response to the Trump win. But is the inflation that would trigger that trend an inevitable outcome?

Certainly, a much more fiscally stimulative Federal Budget would likely lead to that, but isn’t inevitable—see below. In the meantime, there are a number of potential patterns that could offset the potential for higher inflation or higher long-term rates. These include energy policy that would drive energy costs lower, and more restrictive trade policies that could dampen global demand, and a push toward more rapid increases in Fed short-term rates that could actually slow growth.

Of course, some potential policies could be inflationary – e.g., gutting trade deals and increasing tariffs, and an aggressive push toward more infrastructure spending – but the outcome is far from clear. To assume that any new set of trade policies is inflationary, one also has to assume that they aren’t substantially damaging to global economic activity. We’ll see.

By the way, just as we finished this, the muni market was getting beat up pretty badly on Monday. Is that a response to Trump’s victory, or merely a response to recent heavy supply combined with a down Treasury market and a limited aggregate risk appetite? We vote for the latter.

2) IS A DRAMATICALLY MORE STIMULATIVE FISCAL POLICY INEVITABLE?

Well, maybe, maybe not. It seems that many observers are assuming that a Republican-led House and Senate will automatically accede to Trump’s campaign promises of a combination of lower taxes and aggressive infrastructure spending, and thus a sharply higher Federal deficit.

Color us dubious. Are Republicans all of a sudden ready to enact a combination of significantly lower tax revenues and new spending that isn’t paid for? Are they going to tell their base that all of a sudden, fiscally responsible budgets no longer matter? The answers to this question are, we think, key, because they will strongly help determine the extent to which Trump can spend more (military, infrastructure) and tax less (corporate and individual).

3) WILL THE JOINT COMMITTEE ON TAXATION BE MOVING TO DYNAMIC SCORING?

This is another key in terms of what Trump promises are possible to keep. Under dynamic scoring, the purported economic benefits of a tax law change in terms of stronger economic activity are included in estimating the net cost of any change in the tax code. It is not a given that the Joint Committee on Taxation will move to dynamic scoring, but with Republicans in both houses of Congress functioning as their “bosses,” it’s at least possibility. In terms of a large portion of what Trump has promised and what many Republicans want, this is a very big deal.

4) IS THE TAX EXEMPTION AT RISK?

Some observers seem to be very concerned that the tax exemption is at risk under a Trump Administration. We aren’t so sure.

For any infrastructure expansion program to be successful, it needs to be additive to what already exists, and a move toward tax credits for incremental infrastructure spending will fail if it simply replaces the strongly successful program that already exists through the tax-exempt market.

That said, with Joint Tax staff and other key players likely to have something of a free rein to affect policy over coming months, supporters of the tax exemption will have to be extremely vigilant and involved.

5) WHAT WILL THE STRATEGIES FOR ADDITIONAL INFRASTRUCTURE SPENDING BE?

We already have some idea of what this might look like based upon work by Wilbur Ross and Raymond Navarro, who are apparently advising Trump. Their plan calls for heavy use of public/private partnerships with heavy private sector equity, with a large portion of the cost of that equity offset by tax credits that would sharply reduce the equity exposure and the cost of that exposure.

Theirs is a dynamic scoring framework, which assumes that a large proportion of the cost of the tax credits is offset by increased income taxes resulting from the new economic activity. (Important note: Under fair dynamic scoring, the cost of the tax exemption would be netted this way as well, as would decreased market values if the tax exemption were to be gutted.)

We also note that these two advisors include a heavy dose of energy exploration and development in their definition of new infrastructure.

What will be left out? Probably environmentally-related projects, among others. The selection process for projects that “make the cut” is an issue, as it was under the prior Administration’s plan. The muni market—and Build America Bonds—allowed governments to self-select. The mechanism here isn’t clear. There is much, much more to consider, of course.

6) HOW WOULD SHARPLY LOWER CORPORATE TAX RATES AFFECT THE VALUE OF EXISTING MUNIS?

The format of any such tax cuts matters a lot, but there is the potential for a substantial cut in value. We note that from 2005-2015, according to Fed data, household sector direct holdings of munis are about unchanged, fund holdings are up $263 billion, and bank holdings are up $333 billion (plus direct bank purchases).

Property and casualty insurers’ holdings are only up $17 billion over the period but they would become net sellers at current yield relationships. In our view, a very large cut in corporate tax rates would cause yields relative to taxable to move higher. This is a real risk, we think, because support for lower corporate taxes crosses party lines.

7) HOW WOULD CUTS IN INDIVIDUAL TAX RATES AFFECT THE VALUE OF EXISTING MUNIS?

We are less concerned here, if the top rate were to move to 33%. A large number of current individual owners of munis would still find them attractive at a 33% rate, and the 33% rate, as proposed, kicks in fairly low – ($112,500 for an individual, $225,000 for a couple.) A key variable here is that if the lower corporate rate were not well insulated from use by so-called pass-through corporations, then large numbers of wealthy individuals might get the big cuts in rates.

This will likely be “fixed,” though, because if it isn’t the drop in income tax revenues would explode.

8) HOW WILL HOSPITALS FARE IF THE ACA IS GUTTED?

This could be the biggest near-term question for the muni market, of course, because many hospitals—and the states and cities they reside in—would face vast cuts in revenues from insured individuals if some fraction of 20 million individuals were removed from the rolls.

Alternatively, what would “repeal and replace” look like? We haven’t a clue, but we know we need to watch.

9) WHAT REGULATORY CHANGES COULD ACTUALLY SUPPORT THE FUNCTIONING OF THE MUNI MARKET?

It is very early for this, but changes to regulation, especially including Dodd-Frank, bear close watch.

10) COULD FEDERAL SUPPORT FOR STATE AND LOCAL GOVERNMENT PROGRAMS BE HIT?

It’s certainly possible, given the revenue erosion that would result from tax cuts and potentially more spending on the military and (ironically) infrastructure.

11) WHAT KINDS OF POLICY “GLITCHES” WILL THERE BE AND COULD A FIRED-UP POPULACE INCENTED TOWARD MORE ACTIVISM GENERATE ECONOMIC DISRUPTIONS?

As a the new Administration, a fiscally conservative Republican majority in Congress, and a fired-up Democratic minority wielding the filibuster struggle to assert themselves, we believe there is that possibility.

Of course, the above is only a start, but we believe that we have laid out a number of the very important issues that market participants and policymakers will need to track as the new Administration takes hold. Comments welcome.

The Bond Buyer

By George Friedlander

November 15, 2016

George Friedlander is a municipal market strategist with over 41 years of experience following market trends, credit trends and policy issues in the municipal sector.

President-elect Donald Trump’s proposed policies could partially change the landscape of the municipal bond market for investors in two primary ways.

First, his election could put Build America Bonds (BABs) — or a program like it — back on the table for government issuers. BABs were introduced in 2009 and 2010 by the Obama administration as a way to stimulate the economy and create jobs. Republicans on Capitol Hill killed the program, but Trump has spoken favorably about it. He’s interested in stimulating more investment in infrastructure.

Unlike regular municipal bonds, BABs aren’t tax exempt, making them more appealing to investors such as international bondholders or institutional investors who aren’t eligible to claim an exemption. Thus, they broaden the municipal bond market.

Second, an analysis by the Court Street Group Research (CSGR) says Trump’s income tax plan could affect the municipal market because it would eliminate or reduce the tax exemption for municipal bondholders. “The CSGR approaches the reality of a Trump administration with some trepidation as it applies to municipal bonds,” the analysis said.

The Takeaway: Taking all these proposals into account, and given that many are now expecting federal tax reform to roll forward in some form in 2017, these policies could reshape to some extent who buys municipal bonds.

Research by Brandeis University’s Daniel Bergstresser and MIT’s Randolph Cohen has shown that municipal debt is being increasingly held by America’s wealthiest households. If the tax exemption on income earned from that investment is eliminated for the wealthy, it provides little motivation for these bondholders to buy more municipal debt.

Who will take their place? The BAB experiment would seem to suggest that having more taxable debt in the municipal bond market will attract different kinds of investors. Stay tuned.

GOVERNING.COM

BY LIZ FARMER | NOVEMBER 18, 2016

U.S. municipal debt investors putting fresh capital to work should look to short duration bonds while President-elect Donald Trump’s new administration works out new tax and fiscal policies, UBS Wealth Management said on Tuesday.

“To the extent that you’re … placing more capital into this market, you probably want to stay shorter on the curve until we have more clarity by the end of 2017 as to exactly what the tax environment is going to be like,” said Thomas McLoughlin, head of municipal research at UBS Wealth Management.

Muni bonds, whose yields are exempt from federal income taxes, have long been attractive to wealthy Americans who fall into higher tax brackets.

However, Trump’s proposed lowering of tax rates could reduce the appeal of tax-exempt bonds, a major vehicle for states and cities to finance infrastructure, hospitals and schools.

Speaking at the Reuters Global Investment Outlook Summit, McLoughlin said tax reform would be the story for 2017, given how Trump and the Republican party control the White House and held onto majorities in the Senate and House of Representatives.

“The absence of specificity is something that I think the market is struggling with right now,” McLoughlin said.

“The municipal market is certainly trying to adjust to determine how real the threat may be to tax exemption and whether or not that threat is overblown; whether or not that threat constitutes complete elimination; or the third option, which is a curtailment in the limitation as to the value of that exemption,” he said.

McLoughlin, however, believes the threat to the municipal market’s tax exemption status is lower than before as public interest groups have actively lobbied to show the importance of state and local governments in providing infrastructure.

During the election campaign, both Trump and his Democratic opponent Hillary Clinton advocated spending to rebuild U.S. infrastructure.

U.S. voters on Tuesday also approved 562 of 698 state, school and local government bond measures on ballots, clearing the way for the issuance of $60.23 billion of municipal debt, data company Ipreo reported. The amount requested on ballots, $70.1 billion, was the largest par, or face amount, since 2006.

In part, the requested borrowing for big projects was spurred by growing competition for money within municipalities.

“Pay-as-you-go infrastructure is going to be more difficult as pension liabilities rise and occupy a larger share of the budget, and in the case of states, Medicaid funding as well,” McLoughlin said.

Reuters

By Daniel Bases and Hilary Russ

Tue Nov 15, 2016 | 4:47pm EST

Follow Reuters Summits on Twitter @Reuters_Summits

(Reporting by Daniel Bases and Hilary Russ; Editing by Richard Chang)

We are well aware that charter schools open and close, sometimes for academic reasons, sometimes for financial reasons. Unfortunately, some of these schools are financed with municipal bonds, which makes them a risky endeavor. The story below is behind a pay wall. I subscribed to The Bond Buyer so I could read it in full. It shows why the NAACP and other organizations are calling for charter school accountability and transparency. It is not good for either municipal finance or for children to have schools that close in the middle of the year without warning.

Recently, the National Federation of Municipal Analysts urged charter schools “to provide detailed financial, academic, and staffing information in primary and secondary disclosure documents.” This is the first time that the NFMA has made disclosure recommendations for charter schools.

“The charter school sector has been very active in the last … four to five years [and] it traditionally has not had a lot of public rating coverage,” said Gilbert Southwell, vice president at Wells Capital Management and co-chair of the NFMA disclosure subcommittee that drafted the paper. “[The RBP] is both educational for our membership but also helps to establish our disclosure expectations when we’re looking at these deals.”

Dean Lewallen, vice president and senior analyst at AllianceBernstein L.P. and co-chair of the subcommittee with Southwell, said the RBP is the product of a year-long vetting process with a variety of market participants and thus reflects “an industry consensus.”

The document’s recommendations begin with key information that should be included in a primary offering statement (POS). According to the RBP, a charter school’s POS should disclose all material financial agreements, including the proposed indenture, loan agreement, capital leases, management agreements, and tax regulatory agreements. It should also include information from twelve other broader topics, like descriptions of facilities and their financing, pledged revenues, and projected cash flows. NFMA also wants descriptions of debt service, repair and replacement, operating and deficit, as well as insurance and property tax reserve funds.

The RBP lists disclosures in a successful charter school POS related to academic performance as well as school management and operations.

“A charter school’s academic performance has been identified as an especially important factor in charter school long-term stability and success,” NFMA said in its RBP. “Consequently, the POS should disclose all relevant aspects of the charter school academic performance.”

Such disclosures should include information covering regulatory authorities that have jurisdiction over the charter school, along with the school’s curriculum and education programs at varying grade levels and how those programs satisfy applicable educational standards, the RBP says. Information on how the school tests students to measure academic growth as well as how recent school data stacks up against historic measurements should be presented in an easily accessible way for investors, NFMA said.

In terms of school staff and management, an effective POS should provide detailed information in eight key areas, according to NFMA, including: charter board membership, compensation, and tenure; information available on the school’s website; management qualification, experience, and compensation; third-party manager control, compensation, and replacement; and charter school teaching faculty, classroom ratios, and teachers’ union affiliation. Additionally, the POS should have information regarding teacher and staff compensation, including retirement benefits, any complaints and claims the school is facing, as well as operating and funding information related to extracurricular activities.

Another important area for disclosure has to do with the school’s facilities, NFMA said. A POS should contain information about the size, capacity, and condition of facilities, including equipment, along with descriptions of future capital improvement needs, insurance support, and transportation and parking capabilities for students and staff, respectively.

On the financial side, charter schools should be taking seven areas of potential funding into account when creating their primary disclosures. Any POS should include discussion of audited financial statements and interim financials, current budgetary processes, financial covenant compliance and projections, and existing banking relationships, according to the RBP. State aid and other governmental support should also be listed along with information about planned future debt and reliance on endowments, fund drives, contributions, and gifts.

Disclosures that describe a school’s location, enrollment, potential competition from other schools in the area, and future projections on such topics are also important, NFMA said.

The organization included separate but related suggestions to consider credit risks and continuing disclosure.

“Credit risks involved in charter school acquisition financing are numerous and often the source of significant concerns,” the group said in the RBP.

Several credit risk areas the group recommended a school disclose in a POS are the: suitability and condition of a new facility and equipment; facility acquisition price; and facility construction costs.

NFMA said in its RBP that until fairly recently, most continuing disclosure agreements (CDAs) for charter school financings did not provide much more investor disclosure than a year-end audit.

“The NFMA believes that charter school continuing disclosure needs to be far more complete, robust, and timely to reflect credit characteristics and risks specific to the sector,” the group said….

NFMA also recommended what schools should disclose in its quarterly reports, which it said should be filed between 45 and 60 days after the end of each quarter. The group listed examples of special events and information that may not be produced on a routine schedule but should be made known “promptly” when available, such as mid-year cuts in state or local funding.

NFMA urges charter schools to hold at least one live conference call per year to discuss data and the school’s current status. It also lists a number of instances, like a charter non-renewal, that may not be considered material events under the Securities and Exchange Commission’s Rule 15c2-12 on disclosure, but should be promptly reported to the Municipal Securities Rulemaking Board’s EMMA system anyway.

The RBP makes five additional recommendations, such as that charter schools be aware that borrowers need to be educated on the importance of continuing disclosure and that all disclosure should be posted to EMMA.

Diane Ravitch

Nov 16, 2016

U.S. municipal high-yield bond fund outflows set a record during the week ending Nov. 16, with
investors dumping the tax-exempt sector as U.S. Treasuries plummeted after the stunning victory by President-elect Donald Trump on Nov. 8, data on Thursday showed.

Investors pulled $1.59 billion out of high-yield muni bond funds, the most ever in a single week since Thomson Reuters’ Lipper service began reporting such data in 1992.

Overall, investors took $3 billion out of all muni bond funds, the largest outflows since late June 2013, the data showed.

Trump’s win in the U.S. presidential election has spurred a rally in U.S. stocks and a rout in fixed-income markets on the expectation of more fiscal stimulus leading to rising inflation, which undermines bond market investment returns.

The junk muni bond sector had been riding high this year as investors seeking yields in what is an otherwise low interest rate environment sought fatter returns in new places, even moving down the credit quality scale to get it.

With the supply of new muni bonds low and demand high all year, prices rose and provided a sweet spot in the global financial markets.

But U.S. states, cities and other issuers returned to the market en masse in the back half of 2016. They sold a record level of debt in October, which widened spreads, dampened munis and prompted small outflows even before the Nov. 8 presidential election.

High-yield munis were first to feel the strain, with tobacco bonds, the most liquid in the speculative arena, losing ground in heavy trading before Trump won the election.

Then, after Nov. 8, Treasury yields rocketed higher. Muni yields followed, gaining 50 basis points in the week since then on 10-year benchmark tax-exempt debt, according to Municipal Market Data, a Thomson Reuters unit. Yields move inversely to prices.

“When rates move that far that quickly, it does unnerve investors,” said Jim Colby, manager of VanEck Vectors High-Yield Municipal Index ETF.

Columbia Threadneedle Investments portfolio manager Chad Farrington said the firm’s high yield muni fund started to see outflows over the last three weeks.

Most of the price weakening was because munis tracked Treasuries. But some may have been due to concerns about whether Trump’s proposed income tax cuts and other policies might dampen
appetite for muni bonds or limit their tax exemption, Farrington said.

High-yield outflows “are also driven by sticker shock over the [net asset values] of the high yield funds, which have declined precipitously since early November,” said Chris Mauro of RBC Capital Markets.

“The concern is that we’re seeing a familiar pattern develop in which the high yield outflows are starting to bleed into the long investment grade funds,” Mauro said.

Nuveen’s High Yield Municipal Bond Fund topped all outflows this week. Since the beginning of the month its net asset value has dropped about 4.4 percent.

The biggest fund in its peer group, Nuveen’s high-yield muni fund “on an absolute basis… would expect to have the largest outflows,” said Nuveen’s head of tax-exempt fixed income John Miller.

“We have been through selloffs that involve outflows numerous times in the past, so we are using this period to benefit fund shareholders, given the higher yields and wider credit spreads available in the marketplace,” he said.

“Fundamentals have trended favorably over the course of the year as a whole, and nothing in this period changes these fundamentals.”

Reuters

By Hilary Russ

Nov 17, 2016 | 7:41pm EST

(Reporting by Hilary Russ; Editing by Daniel Bases and Diane Craft)

Powered by P3 INGENIUM, The most comprehensive source for P3 project updates in North America.

Read the Digest.

With the presidential election over, S&P Global Ratings offers a focus on the post-election landscape and what will be the key drivers related to credit across the broad and diverse U.S. municipal market.

Continue reading.

Nov. 14, 2016

Robin Prunty discusses our November 14th commentary outline the post-Presidential election outlook across all municipal sectors and David Hitchcock outlines the credit drivers to our recent rating actions on the states of New Mexico and New Jersey.

Listen to the podcast.

Nov. 16, 2016

Public policy and the water industry work like a two-way street. Yes, the former helps improve quality, funding, and infrastructure. But often distressed conditions in the industry are needed to affect policy change, which was proven at a “Financing In The U.S. Water Industry” conference panel on Sept. 8, 2016, in New York.

Continue reading.

Oct. 11, 2016

Although U.S. President-elect Donald Trump might alter the regulatory landscape governing power plant emissions that public power and electric cooperative utilities face, S&P Global Ratings does not see his administration affecting the ratings on public power and electric cooperative utilities.

Continue reading.

Nov. 14, 2016

Municipalities that protect undocumented immigrants from deportation stand to lose billions in federal aid if President-elect Donald Trump fulfills promises to starve them financially.

More than 200 U.S. ‘sanctuary cities’ won’t turn over people to federal officers seeking to deport them nor share information about them, saying that would rend the social fabric and impede policing. Since Trump’s election last week, mayors including San Francisco’s Ed Lee, New York’s Bill de Blasio and Chicago’s Rahm Emanuel have vowed not to back down.

“This city and so many cities around the country will do all we can to protect our residents and to make sure that families are not torn apart,” de Blasio said Wednesday after meeting with Trump at Trump Tower.

Many cities have calculated that dwindling populations and labor shortages can be ameliorated by immigrants, undocumented or not. The mayors must calculate the point at which resistance harms the communities they’re fighting to protect. The evolving confrontation exposes states’ and cities’ vulnerability to losing some of the $650 billion in federal funds they receive for everything from police to sidewalks as they confront pension obligations and shrinking budgets.

“There’s an economic benefit from being a sanctuary city, but it doesn’t appear to warrant giving up 5 to 10 percent of the city’s funding,” said Dan White, senior economist at Moody’s Analytics, in West Chester, Pennsylvania.

Congressional Republicans have been trying for years to use federal dollars as leverage.

A bill this year by Senator Pat Toomey of Pennsylvania defines a “sanctuary jurisdiction” as any that restricts local officials from exchanging information about an individual’s immigration status or complying with Homeland Security requests. The measure would cut off funds including Economic Development Administration Grants, which totaled $238 million last year, and Community Development Block Grants, which amounted to $3 billion last year. Ten of the largest sanctuary jurisdictions were awarded a collective $700 million in block grants in 2016.

Chicago, the nation’s third-largest city after New York and Los Angeles, is particularly vulnerable. Public-employee retirement funds face a $34 billion shortfall, and Emanuel last month proposed a $9.3 billion budget for 2017 that would increase spending to hire and train more police. The spending plan anticipates $1.3 billion in federal grants this year.

“If Chicago were to lose all of its federal funding, that’s a game-changer,” White said.

Deep-Sixing Documents

In Los Angeles, the police chief said that he would continue a policy of not aiding federal deportation efforts, according to the Los Angeles Times. In New York, de Blasio said last week that he would consider destroying a database of undocumented immigrants with city identification cards before handing such records over to the Trump administration.

“We are not going to sacrifice a half-million people who live amongst us,” de Blasio said. “We will do everything we know how to do to resist that.”

New York City will receive $7.7 billion in federal grants in fiscal 2017, just under 10 percent of the city’s $82 billion budget.

In New Haven, Connecticut, the city of 130,000 that’s home to Yale University receives about a quarter of its $523 million budget from various federal grants, said Mayor Toni Harp.

“That would be really very difficult,” Harp said. “We would be willing to take that as far as it needed to go in our judicial system.”

Trump made attacks on sanctuary cities a campaign staple, often invoking the shooting death of Kathryn Steinle by an undocumented immigrant in San Francisco. The shooter had been released from a county jail even though federal officials had asked him to be held until they could deport him.

The incoming president has said he would deport more than 11 million people, beginning with gang members, drug dealers and other criminals. He’s also said he would create a special deportation task force within Immigration and Customs and Enforcement. If that’s the case, local jurisdictions might see even more requests for cooperation.

Many cities say that immigration is a federal responsibility and they should be left out of it. Others say that they simply don’t have the time or resources to address it.

Stretched Force

In New Orleans, which doesn’t consider itself a sanctuary city but whose officers don’t ask about immigration status, the specter of losing federal funds is daunting. Some money the city receives is enough to fund nine police officers, said Zach Butterworth, executive counsel for Mayor Mitch Landrieu and director of federal relations.

”The federal government’s support for local law enforcement has really been slashed significantly already,” Butterworth said. “For them to come down here and say you also need to be doing our job on immigration is a tough sell.”

Others say that singling out undocumented immigrants impedes law enforcement because large populations will shun any interaction with the authorities.

“Essentially, for the police, you’ve got a significant number of undocumented illegals in the country and they’re afraid of the police,” said Darrel Stephens, executive director of the Major Cities Chiefs Association.

Lena Graber, special projects attorney at the San Francisco-based Immigrant Legal Resource Center believes Trump will run into legal challenges if he threatens municipal funding.

“The federal government can’t force state and local law enforcement to use their resources to enforce federal regulatory programs like immigration law,” she said. “He can try to offer incentives, but the more that those incentives look like coercion, the more it won’t be legal.”

In Denver, which has a policy of refusing to hold detainees solely on a request by immigration officials, Mayor Michael Hancock said he won’t be cowed.

“This is all legal what we are doing here,” he said. “The president doesn’t have the authority to unilaterally decide how we move forward.”

In Oakland, California, Mayor Libby Schaaf says she is proud to run a sanctuary city, and is planning to recruit even more towns for the movement.

“The best defense is offense,” she said. “There is strength in numbers.”

Bloomberg Politics

by Lauren Etter and Tim Jones

November 16, 2016 — 2:00 AM PST Updated on November 16, 2016 — 12:30 PM PST

The global bond rout couldn’t have come at a worse time for the U.S. municipal market.

State and local government bonds dropped by the most in more than three years since the Nov. 8 election amid speculation that President-elect Donald Trump’s plan to slash taxes and unleash a new wave of spending will spur inflation and weaken demand for the tax-exempt securities. That’s coming just as municipalities are forecast to keep selling new debt at a swift pace after voters approved at least $55 billion of borrowing at the polls, threatening to put further pressure on prices.

“You have all these factors in play at a time when more supply is going to be trying to come to the market,” said Peter Hayes, who oversees $120 billion as BlackRock Inc.’s head of munis. “That typically is not very good,” he said. “I suspect demand next year is not going to be as strong.”

The election fallout is threatening to wipe out gains posted in the municipal market this year as the Federal Reserve held off on raising interest rates. Since last week’s election results, the securities have lost 2 percent, cutting this year’s return to 1.1 percent, according to Bloomberg Barclays municipal index. The yields on benchmark 10-year debt soared Monday by 0.2 percentage point to 2.13 percent, the highest since December, before steadying early Tuesday. It was the biggest one day jump since June 2013.

Trump’s tax plans pose a unique risk to the $3.8 trillion municipal market, which is dominated by investors seeking returns that are exempt from federal income taxes. That benefit makes the securities less valuable when levies are lowered.

With Congress also in Republican control, Trump has made reducing taxes one of his first priorities. He has backed cutting rates across the board, including on wealthy households that are key buyers of municipal bonds.

“Any or all of these tax policy changes, if implemented, would likely raise issuers’ borrowing costs and depress market prices of existing coupon munis as investors no longer seek out the exemptions offered by munis,” Peter Block, managing director for credit strategy at Ramirez & Co., wrote in a note last week.

Any sweeping overhaul could also result in the elimination — or reduction — of the tax-exemption on municipal bonds, if lawmakers close loopholes to offset cuts elsewhere. The leaders of President Barack Obama’s deficit-reduction commission recommended taxing the income on municipal bonds in 2010, though the proposal never made headway in Congress.

“It may find itself in jeopardy if and when loopholes start to close,” Vikram Rai, head of municipal strategy at Citigroup Inc., said in a note last week.

Besides, more bonds may be on the way if Trump follows through on proposals to pump as much as $1 trillion into crumbling roads and bridges. While the construction would give a boost to local economies, it’s not clear how much — if any — of that would come from borrowing by states and localities, as was done under part of Obama’s stimulus program.

“It remains to be seen if states primarily are going to have to pick up some of the tab for infrastructure, or it’s going to be a partnership or it’s going to be more private sector involvement,” said Block of Ramirez. “The details are too thin.”

Some of the pressure on the municipal market could be eased if rising interest rates cause local governments to put the brakes on borrowing. This week, for example, Chicago’s school district postponed a $426 million sale due to market conditions, with plans to potentially revive it next year.

The selloff in the bond market “could be a buying opportunity,” said Dawn Mangerson, a managing director at McDonnell Investment Management, which oversees about $7.6 billion of tax-exempt debt. “Even if they put through some type of reform, the attractiveness of munis is still going to be there.”

As the growing economy lifts their tax collections, localities have been moving forward with plans to improve their fraying infrastructure, with many rushing to borrow before the Fed raises interest rates as soon as next month.

Issuers have sold about $390 billion in bonds this year, marking the fastest pace since 2010. Citigroup forecasts that sales may reach $430 billion, while Ramirez projects about $450 billion.

“It looked like based on this year, next year was certainly setting up to be another big year of issuance,” said BlackRock’s Hayes. “The offset to that is when interest rates go up, you’ll actually see less issuance. Borrowers are more averse, they may wait.”

Bloomberg Markets

by Tatiana Darie

November 15, 2016 — 2:00 AM PST Updated on November 15, 2016 — 6:30 AM PST

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

Watch video.

November 17, 2016

New York, November 18, 2016 — Unfunded pension liabilities now exceed debt used to fund campus facilities and other capital investment at Moody’s-rated public universities, the rating agency says in a new report. While annual pension expenses are currently manageable for universities at only 3% of operating expenses in FY 2015, they will rise as investment earnings lag discount rates and some states shift pension payment obligations to their universities.

“Based on investment results and discount rates used by state pension plans in fiscal 2015 and 2016, we project that aggregate Adjusted Net Pension Liabilities (ANPL) will increase about 40% between now and fiscal year end 2017,” Edie Behr, a Moody’s Vice President — Senior Credit Officer says in “Higher Education — US: Pension Liabilities Exceed Capital-Related Debt at US Public Universities.”

Across the public university sector, unfunded pension liabilities of more than $183 billion exceeds aggregate capital-related debt and will represent over 60% of total adjusted debt by fiscal year end 2017. Meanwhile, debt issuance for new capital–related projects will continue to be moderate.

Moody’s says while pension-related expenses are presently low for public universities, they are expected to increase as actual investment returns lag discount rates and net liabilities continue growing.

A few states currently make some or all of the employer contributions to pension plans on behalf of their public universities, but there is a growing risk that states will begin shifting this burden due to ongoing fiscal strain. Illinois (Baa2 negative) and New Jersey (A2 negative) have significant unfunded pension liabilities and budget imbalances, and Oklahoma (Aa2 negative) and West Virginia (Aa1 negative) are encountering budget pressure from low energy prices.

“Pension challenges are typically similar for public universities within the same state because they participate in the same state-sponsored, cost-sharing, pension plan,” Behr says.

The larger and higher-rated public universities also have more than enough liquidity and reserves to cushion short-term revenue disruptions. These reserves can be used for pension contributions and debt payments if needed.

The report is available to Moody’s subscribers at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1038438.

Recent delays and cost overruns among some US public private partnerships are bringing to light the importance of having an experienced, insightful, and independent technical advisor be part of the process.

Read the report.

Voters authorize $55.7 billion in debt on Election Day, the most approved since 2008

President-elect Donald Trump is promising an infrastructure boom once he is sworn in. In some parts of the country, a burst of new construction spending by states and cities is already under way.

State and local governments around the U.S. have issued $149 billion in bonds for new infrastructure projects thus far this year, putting 2016 municipal borrowing on track to surpass each of the past five years, according to Thomson Reuters data.

Much of the new bond issuance happened in the second and third quarters, after a long stretch of low borrowing. Total bond issuance, including refinancing, has reached $388 billion, also a five-year record.

On Tuesday, voters across the country authorized state and local governments to borrow another $55.7 billion for similar projects, according to Ipreo. It was by far the most borrowing approved since 2008.

“I think there’s a lot of momentum, not only at the political level but also by the general public, to start spending more on infrastructure,” said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management.

Mr. Trump made a $1 trillion infrastructure investment over the next decade one of his first priorities as president, promising in his victory speech Wednesday to “rebuild our highways, bridges, tunnels, airports, schools, hospitals.” The proposal relies on private financing. Experts and industry officials say it is unlikely the nation’s aging infrastructure can be updated without public support.

In the short term, however, costs could go up for government borrowers. Municipal-bond prices have dropped along with Treasurys in days after the election, with interest rates for an A-rated 20-year general obligation bond at 3.2% on Thursday, compared with 2.94% on Monday, according to Thomson Reuters. Analysts cited concerns that inflation under a Trump administration could increase borrowing costs.

“In an era where the range has been pretty tight, that’s a pretty dramatic move in such a short period of time and he hasn’t even taken office yet,” said Howard Cure, director of municipal research at Evercore Wealth Management.

Florida bond finance director Ben Watkins is relieved to have refinanced more than $1 billion in mostly state general obligation bonds since June. His only regret, he said, is that he didn’t also push through a planned $250 million bond to improve Florida’s turnpike and another deal to refinance school construction borrowing.

“With this change in [municipal bond] rates, I wish I had been smart enough to go ahead and sell regardless of what the market felt like,” Mr. Watkins said.

Local infrastructure projects have languished for years as cities and states struggled to balance their budgets in the aftermath of the recession. Long-term borrowing for new projects by major U.S. cities hit a 24-year low in 2014, according to an analysis by The Pew Charitable Trusts.

But with expectations of a federal rate increase in December, local officials were eager to get in on historically low interest rates, many analysts said. Municipalities issued $108 billion in bonds in the third quarter of this year, compared with $86 billion in the third quarter of 2015, according to Thomson Reuters data. They also asked voters Tuesday to approve nearly 700 ballot measures seeking to issue bonds and won approval for more than 70% of them, according to Ipreo.

“The low interest rates are very attractive to us and the idea of waiting any longer means the cost will drive up,” said Alicia Trost, spokeswoman for San Francisco’s Bay Area Rapid Transit, or BART. The transportation system won voters’ approval Tuesday to issue $3.5 billion in bonds, its first referendum since 2004. The money will be used to replace 90 miles of rail and fix leaky tunnels and other infrastructure improvements.

Voters in Texas’ El Paso Independent School District approved $668.7 million in new borrowing in what was the school system’s first successful bond referendum since 2007, said spokeswoman Melissa Martinez. The money will pay for a consolidation of school campuses to accommodate declining enrollment, 81 new school buses and laptops for middle-school students in the 60,000-student district.

A citizens committee working on the referendum chose not to limit the borrowing to $500 million after learning that the additional money would add only $2.39 to the tax bill for a $100,000 home.

That type of deal will likely still be available to them. Despite the postelection volatility, “borrowing costs are still relatively and historically low,” U.S. Bank’s Mr. Heckman said.

THE WALL STREET JOURNAL

By HEATHER GILLERS

Nov. 12, 2016 7:00 a.m. ET

Write to Heather Gillers at heather.gillers@wsj.com

Norwalk, CT—November 16, 2016 — The accounting and financial reporting standard for state and local governments that addresses fund balance reporting and governmental fund type definitions achieves its purpose, according to a report issued today by the Financial Accounting Foundation (FAF). The Post-Implementation Review (PIR) Report on Governmental Accounting Standards Board (GASB) Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, addresses technical, operational, and cost-effectiveness aspects of the Statement.

GASB Statement 54 was issued in 2009 to improve the usefulness of information provided to financial report users about fund balance by providing clearer, more structured fund balance classifications, and by clarifying the definitions of existing governmental fund types.

“The PIR process has provided some important stakeholder feedback on the benefits and costs of Statement 54 in light of actual experience in using and preparing the information,” said GASB Chairman David A. Vaudt in the Board’s response to the PIR report. “On behalf of the GASB, I would like to thank the Foundation for undertaking this important process and all of the individuals and organizations who gave their time to share their insights and experiences with the PIR staff.”

The PIR team received broad-based input from GASB stakeholders including auditors, preparers, financial statement users, and academics. Based on its research, the review team concluded that:

• Overall, Statement 54 resolved the primary issues underlying its stated need—it introduced fund balance classifications that are easier to understand and clarified fund type definitions. Although some stakeholders have indicated that it is difficult to distinguish between committed and assigned fund balances, the Statement was an improvement over prior literature.
• Statement 54 provides users of financial statements with decision-useful information.
• Overall, Statement 54 is operational because it is understandable, can be applied as intended, and enables fund balance and governmental fund type information to be reported reliably.
• The changes made to financial and operating practices as a result of Statement 54 were not significant or unexpected.
• There were no significant unanticipated consequences as a result of the adoption of Statement 54.
• Overall, implementation and continuing application costs associated with Statement 54 were not significant and were consistent with the GASB’s expectations.
• Overall, Statement 54 achieved its expected benefits.
• The PIR team’s review did not result in any standard-setting process recommendations for the GASB.

The review of Statement 54 was undertaken by an independent team of the FAF, the parent organization of the GASB and the Financial Accounting Standards Board (FASB). The team’s formal report is available here. The GASB’s response letter to the report is available here.

The next PIR of a GASB standard will not be conducted for a few years, as the PIR team has completed all the reviews of significant GASB standards that have been effective for at least two years.

WASHINGTON – Standard & Poor’s is reassessing some of its existing ratings and deferring some new ones in certain sectors because of errors in credit scoring models.

The sectors include higher education, social housing (which is the rating agency’s name for public housing), and water and sewer.

S&P released notices on the sectors with the model errors between Sept. 29 through Oct. 28 and has assigned a few ratings “with developing implications,” resolving one of them since then.

However, some issuers in the higher education sector who wanted to remain anonymous recently reported having trouble getting ratings.

Credit scoring models are tools used by analysts to apply rating criteria, said Adom Rosengarten, lead analytical manager for S&P’s enterprise group.

“We’ve identified those three models that have errors,” he said in a interview. “We’re working to correct those errors … and to assess the rating impacts, if any, that may be related to the correction of the models’ errors.”

“We’re working with issuers as they come in and are discussing how we can rate deals on a transaction by transaction basis,” he added.

The errors were discovered by analysts, according to Rosengarten. He declined to specify them beyond the disclosures made by S&P in the recent notices.

“On the water and sewer side, what it led to was a single CreditWatch that we’ve already resolved,” he said. “On the social housing side, it led to two CreditWatch development ratings total.”

In the higher education sector “we continue to assess if there will be any rating changes,” he added.

The most recent S&P notices, on higher education, were released on Oct. 28 and Oct 21. The earlier one said that S&P had found errors in its credit scoring model for higher education.

“We do not know the likelihood at this time of rating changes following the correction of this error although it is possible that such changes will be required,” S&P said. “We will continue working to correct the error and provide additional information as appropriate.”

In the Oct. 28 notice, S&P said, “We have discovered additional errors in the higher education credit scoring model. We do not know the likelihood at this time of rating changes following the correction of the errors although it is possible that such changes will be required.”

In an Oct. 18 notice, S&P said an error had been found in the social housing provider credit scoring model.

The credit rating agency later issued a notice on Oct. 27 that said it has placed its A-minus ratings on Fall River Housing Authority in Massachusetts and the authority’s 2012 general obligation lease revenue bonds on CreditWatch “with developing implications.”

S&P announced at the same time that it has issued an A-plus rating on Credit Watch “with developing implications” for the Wisconsin Housing Preservation Corp.

“The CreditWatch Developing status reflects our view that we could raise, affirm, or lower our ratings following correction of the model error,” the rating agency said, adding, “At the same time, we will review the … transactions based on the latest audited financials, which we anticipate completing within the next 90 days.”

In a Sept. 30 notice, S&P said it found an error in its water/sewer credit rating model. “We do not know the likelihood at this time of rating changes following the correction of this error with the exception of Clackamas County Service District No. 1, Ore., whose ratings have been place on CreditWatch.”

The day before, S&P placed its double-A rating on the Clackamas County issuer on CreditWatch “with positive implications.”

“This action reflects the recent discovery of an error in the water/sewer credit scoring model as it relates to our assessment of the enterprise profile, specifically the economic fundamentals assessment,” S&P said. It added, “We believe that there is at least a one-in-two likelihood the rating will be raised following the completion of our review.”

After the rating agency corrected the credit scoring model, it issued a notice on Oct. 21 raising Clackamas County issuer’s long-term and underlying rating for its sewer revenue and refunding bonds to double A-plus from double A and removed the rating from CreditWatch. It said the outlook is stable for the bonds.

The rating contained a lengthy rationale for the rating, detailing the enterprise risk profile and financial risk profile for the bonds.

The Bond Buyer

By Lynn Hume

November 7, 2016

U.S. voters on Tuesday favored a surge in borrowing for public projects, approving some of the biggest bond measures on ballots, while support for new taxes was mixed, according to election results on Wednesday.

Final voting tallies were not immediately available for all of the 682 state, school and local government bond measures, according to data company Ipreo.

At $70.3 billion, the amount of bond issuance requested to fund the building and repairing schools, mass transit, roads, and other projects was the largest in a decade. To view the historical amount of bond ballot measures, click on tmsnrt.rs/2e9Z5bb.

Some of the largest bond requests won approval, including the biggest bond proposal in Tuesday’s election: $9 billion of California general obligation debt in the state’s so-called Proposition 51. This will finance new construction and modernization for K-12 and charter schools and community colleges, according to semi-official election results on the California Secretary of State’s website.

“Passage of Proposition 51 is credit positive for school districts with approved, but unfunded capital projects under the state School Facility Program, which is depleted,” Lori Trevino, an analyst at Moody’s Investors Service, wrote in a research note on Wednesday.

With 195 bond measures totaling $41.7 billion, California issuers accounted for nearly 60 percent of the total par amount of debt on ballots nationwide.

California’s voters rejected Proposition 53, a proposal to rein in debt by requiring statewide voter approval for revenue bonds exceeding $2 billion for projects financed, owned or managed by the state.

The rejection removes a hurdle standing in the way of projects such as the $14.9 billion California Water Fix project for upgrading its water infrastructure.

“It assures that the state’s water policymakers will have the tools necessary to implement the California Water Fix, although they still face an uphill battle to secure the full approval and financial backing necessary to implement the plan,” Shannon Groff, Fitch Ratings director of U.S. Public Finance, said in a statement.

As for tax measures, California voters passed a 12-year extension of a temporary state personal income tax increase on earnings of $250,000 or more and a cigarette tax hike.

Voters in 35 states weighed 154 state-wide measures, including bonds and taxes, according to the National Conference of State Legislatures, which posted results on its website.

Montana voters said no to creating a biomedical research authority funded by $200 million of bonds over 10 years.

PUBLIC HEALTHCARE INSURANCE OPTION FAILS

In Colorado, voters turned down a proposed constitutional amendment calling for a public option universal healthcare payment system, funded by a new 10 percent state payroll tax. They also rejected a cigarette tax hike.

Arkansas voters agreed to lift a cap on state bond issuance for economic development projects. Illinois will have to earmark money generated from transportation-related fees and taxes exclusively for transportation uses, under a new constitutional amendment approved by voters.

New Jersey voters approved the use of gasoline taxes solely to fund road, bridge and mass transit projects, and to allow $12 billion of transportation borrowing over eight years. Governor Chris Christie signed a 23-cent gas tax hike into law in October.

In Missouri, voters amended the state constitution to prohibit any new tax on services or transactions. Oklahoma voters turned down a sales tax hike for public education. A corporate tax hike to fund education in Oregon also failed.

Washington state voters rejected the nation’s first tax on carbon emissions.

At the local level, San Diego voters rejected a measure to raise hotel taxes and direct hundreds of millions of public dollars toward building a new National Football League stadium in downtown San Diego for the Chargers team.

Reuters

Wed Nov 9, 2016 | 7:20pm EST

(Reporting By Karen Pierog and Dave McKinney in Chicago, Robin Respaut in San Francisco, and Hilary Russ in New York; Editing by Daniel Bases and Richard Chang)

As stocks rose after Trump’s election victory, bonds tumbled. But the worst may soon be over.

While the stock market held an election celebration last week, the bond market threw a Trump tantrum. Yields rose sharply, especially those on long-term Treasuries. The 30-year bond climbed 0.3 percentage point to 2.94%, resulting in a 6.3% decline in price. (Bond prices move inversely to yields.) The 10-year Treasury yield climbed almost as much, to 2.15%, the first time since January it has topped the 2% mark.

It wasn’t just Treasuries. Municipal bonds, corporate bonds, and preferred securities all fell. Bloomberg estimates $1 trillion in the value of bonds evaporated last week after the election. Stocks bought for yield, like utilities and real estate investment trusts, suffered too.

The main reason for the rate surge is the expectation that inflation will rise. Thanks to the Republican sweep, investors are betting Donald J. Trump will be able to implement tax cuts, increase infrastructure spending, and ease regulations, stimulating economic growth. Trade restrictions, a key pillar of the Trump platform, would also spur inflation, even while impeding growth.

Rate strategists believe yields could rise further when markets reopen Monday after the Veterans Day holiday Friday. But there are reasons to expect the spike to end fairly soon. Yields may rise another 0.2 to 0.3 percentage point this year, says Raman Srivastava, deputy chief investment officer at Standish Mellon. But he doesn’t expect anything like the spike in yields in 2013 that took the 10-year Treasury to 3%.

For starters, the Federal Reserve remains likely to raise short-term rates in mid-December, which should act to dampen inflation expectations. Even if all goes as planned for Trump, the economic growth the market is forecasting will take time to materialize. For example, it will take at least until the end of next year before growth from infrastructure spending could emerge, says Srivastava. Longer term, demographic and global macroeconomic trends are going to restrain inflation. “Structurally, I don’t see a shift,” he says.

And the president-elect may face more hurdles implementing his policies than many expect. “Investors shouldn’t take this past week too much to heart,” says Dan Heckman, fixed-income strategist at U.S. Bank Wealth Management. “There has been a lot of anticipation of certain things happening, but the reality is that we don’t know if they are going to come to fruition or not.”

A FEW TRUMP MISSTEPS, and the stock market could get less optimistic. “I expect volatility in the markets over the next few months going into the first 100 days,” says Michael Arone, chief investment strategist at State Street Global Advisors.

Owning bonds as a buffer against that volatility makes sense, but investors need to “pivot” for a rising-rate environment, he says. Stay in government bonds, but shorten maturities and add some Treasury Inflation-Protected Securities, Arone suggests. He is overweighting corporate credit—both high-yield and investment-grade—and adding some floating-rate securities, like senior loans.

Consider a barbell approach, balancing longer-term, higher-yielding bonds with short-term debt that can be reinvested at higher yields as rates rise, suggests Heckman. Srivastava encourages diversifying—including globally—as some bond markets may have overshot to the downside.

Munis may already be an opportunity, argues John Miller, head of Nuveen’s municipal-bond group. Yields jumped 0.25 percentage point last week. “If one can get over the shock of how fast that move was, I would say this does look like a good opportunity to put money to work for the long run,” he says.

To be sure, it’s still early to buy more bonds; no one wants to catch a falling knife. But selling off high-quality issues in your portfolio now doesn’t seem like the right move either.

BARRON’S

By AMEY STONE

November 12, 2016

Mutual funds and exchange-traded funds benchmarked to the Bloomberg Barclays Aggregate U.S. Bond Index lost about $17.7 billion in value this week, according to a MarketWatch analysis of data provided by Morningstar.

As of last Friday, the roughly 1,700 exchange-traded and mutual funds benchmarked to the index collectively managed about $1.2 trillion. By the close of trading on Thursday, the Bloomberg index registered a total return of minus 1.487 percentage points. Funds benchmarked to an index are supposed to reflect its holdings as accurately as possible, but occasionally there are slight discrepancies.

Because many mutual funds report their holdings only once a month, the total AUM figure used as the basis for these calc£ulations doesn’t reflect changes in valuation due to market movements between Oct. 31 and Nov. 4. It also doesn’t reflect changes due to investor withdrawals between Oct. 31 and Thursday.

The index, which is weighted by market capitalization, comprises a broad range of U.S. dollar-denominated bonds, including Treasurys, asset-backed securities and corporate debt. Only fully taxable bond issues are eligible, which excludes most municipal bonds and inflation-linked government bonds.

Republican President-elect Donald Trump’s unexpected victory over Democrat Hillary Clinton in Tuesday’s election triggered an explosive bond-market selloff—the biggest since the “taper tantrum,” which occurred in the summer of 2013.

Former Federal Reserve Chairman Ben Bernanke unwittingly sparked the taper tantrum when he told Congress that the Fed would “gradually reduce the flow of [bond] purchases” as the U.S. economic outlook improves. The comment led to a prolonged selloff that saw the 10-year yield rise from about 1.6% to nearly 3% between late May and early September 2013.

Many, including a team of macro strategists at Bank of America Merrill Lynch led by David Woo, expect bonds to continue falling as Trump and the Republican-controlled Congress cut taxes and fund infrastructure projects. That will increase the budget deficit and increase the supply of Treasurys as government borrowing rises.

“We believe the outcome of a Republican clean sweep means fiscal loosening is now a foregone conclusion. We believe this will lead to both higher rates and a higher [dollar],” Woo said, in a note.

On Wednesday alone, the yield on the 10-year Treasury note TMUBMUSD10Y, +5.22% rose 20.3 basis points on Wednesday, its largest-one day gain since July 5, 2013. Bond yields move inversely to prices.

Treasury yields have risen steadily in recent months, after plunging to historic lows following the U.K.’s late-June vote to leave the European Union. Treasurys represent a plurality of the index’s holdings.

MarketWatch

by Joseph Adinolfi

Published: Nov 12, 2016 11:59 a.m. ET

* Tax rate reductions make muni bond tax-exemption less attractive unless yields rise

* Medicaid funding plan could squeeze state budgets

* Unraveling trade deals may hurt Southeastern states

* Negatives could be offset by big infrastructure boost, repatriating corporate profits

U.S. municipal bonds could lose favor with investors under President-elect Donald Trump’s proposals to cut personal income tax rates, thereby reducing the benefit of the bonds’ tax exemption, analysts said.

Muni bonds have long been attractive to wealthy Americans who fall into higher tax brackets because income earned on the bonds is exempt from federal income taxes.

“Tax reform is a key risk for munis – and one not reflected in current pricing,” Morgan Stanley analysts said in a note after Trump was elected president and Republicans took control of Congress in Tuesday’s election.

Muni bonds “could become less attractive from a portfolio perspective given lower tax value and the potential for yields to move higher to compensate for this loss,” the note said.

Trump has proposed reducing the top marginal tax rate to 33 percent from the current 39.6 percent.

Under that lower rate, muni bond yields would have to be higher to make their tax exemption as attractive as it is today – by 20 basis points on 10-year debt and 29 basis points on 30-year paper, all else being equal, according to Citi analyst Jack Muller.

That, in turn, would increase the cost of borrowing for the states and cities that issue muni bonds to finance everything from school construction to sewer systems.

Trump’s presidency, coupled with Republican control of Congress, could smooth the implementation of an agenda that will have broad ramifications on investor behavior and the public sector.

Many of Trump’s proposals are unclear but are expected to solidify in the coming months as he assembles his Cabinet and prepares to take office in January.

In addition to repealing the Affordable Care Act, Trump has called for using federal block grants – instead of the current cost-sharing system with states – to send money to the states for Medicaid, the nation’s healthcare program for the poor.

Under that idea, federal funding could drop between 4 and 23 percent over 10 years, Fitch Ratings said on Thursday, citing a Congressional Budget Office review of previous Medicaid block grant proposals.

“Reduced federal Medicaid aid could lead states to tighten overall spending and reduce transfers to local governments,” the credit rating agency said.

However, states could also benefit from the autonomy and flexibility of the block grant structure, Fitch said.

Other pressures could come from Trump’s proposals to withdraw from and renegotiate trade agreements with foreign countries.

“Trump’s trade policy proposals would have significant adverse implications for U.S. investment and growth and push up prices, particularly in the event of foreign counter measures or ‘currency wars,'” Fitch said.

In turn, that could disrupt American manufacturers’ supply chains, which would be challenging for businesses especially in Southeastern states that have recently had job growth in automotive and aerospace industries, Fitch said.

INFRASTRUCTURE, CORPORATE PROFITS COULD HELP

Trump’s proposal to boost infrastructure spending, which he reiterated during his acceptance speech early Wednesday morning, could offset negative implications from other proposals.

His plan calls for $1 trillion of infrastructure investment over 10 years through public-private partnerships and private investments, to be incentivized by $137 billion of tax credits.

The need for spending is certainly acute. The American Society of Civil Engineers estimates the country requires $1.4 trillion of infrastructure spending by 2025.

Issuance of municipal transportation bonds could grow dramatically if Trump’s administration directed federal money through state and local grants or loans, according to Citi. But if the federal government bears the full cost, municipalities would not need to issue debt for the projects.

Institutional investors are also increasingly interested in infrastructure as confidence in the equity markets wanes and investors seek stable, cash-generating investments in the current low interest-rate environment.

Offsetting a possible drop in revenue from infrastructure tax credits is another Trump proposal to let companies repatriate foreign profits at a one-time reduced tax rate of 10 percent, down from the current 35 percent corporate tax rate.

All that money flowing back into the United States “could be a huge tax windfall for states, which would realize one-time tax revenues from any money entering that state, a significant boon for California, New Jersey, New York and Illinois,” Eaton Vance portfolio managers said in a note.

Reuters

By Hilary Russ and Robin Respaut

Fri Nov 11, 2016 | 12:00am EST

(Reporting by Hilary Russ in New York and Robin Respaut in San Francisco; Additional reporting by Karen Pierog in Chicago; Editing by Daniel Bases and Matthew Lewis)

NEW YORK – It’s not just Detroit and Puerto Rico with financial problems.

The pressure is rising on local governments around the country that are struggling with big pension obligations and other debts. Five states need to put aside more than 25 percent of their annual tax revenues just to pay pensions and other debts, an untenable amount, according to a recent study by the nonprofit Center for Retirement Research. For major cities, debt costs above 40 percent of revenue are typically an unmanageable burden, and the report counts eight of them.

Overall, U.S. state pension plans are underfunded by at least $1 trillion, various experts and credit rating agencies say. And that funding hole will almost certainly hurt taxpayers, government workers and bondholders.

“It’s getting harder to sweep these problems under the rug,” says Tracy Gordon, a senior fellow with the Urban-Brookings Tax Policy Center.

After taking into account health care and other debt obligations, states like Hawaii, Kentucky and Massachusetts and cities like Houston and San Jose, California, are all above thresholds that the Center for Retirement Research considers worrisome.

For many years, politicians hoped to make up for the funding gaps by getting strong returns from investments in stocks, bonds and hedge funds, says Gordon. But the typical public pension plan had a return of just 0.5 percent for the fiscal year that ended in June, according to credit-rating agency Moody’s.

That has increased the risk for a major crisis at municipalities with outsize debt payment, says Lisa Washburn, a managing director for Municipal Market Analytics, a municipal bond research firm. “This is a liability that they are going to have to come to terms with eventually, and the longer they delay coming to terms with it, the worse it’s going to be.”

How you might be affected depends on your relationship to the location in question:

— You’re a bond holder.

For muni bond investors, the chief worry is a default. But despite the dramatic headlines, investors who hold state-issued bonds until they mature have little to fear. “You can expect to be repaid,” says Washburn. If your state’s debt rating is downgraded, however, you may find that your bond is worth less if you need to sell it before maturity.

Those who hold the bonds of struggling cities overburdened with debt, however, have cause for concern. “States have sovereign ability to do just about anything they want, so they have a very wide array of options to pursue,” says Alan Schankel, a municipal bond strategist at Janney Capital Markets. “Depending on the level of oversight, cities and counties have much less flexibility. And many of them are dependent on state aid.”

When a city files for bankruptcy, judges sometimes allow payments to be curtailed to muni bondholders. That’s what happened in Detroit and Stockton, California. Moreover, severe budget problems at the state government level can also have a trickle-down effect leading to less support for schools and hospitals supported by the state, which also issue municipal bonds.

— You’re an employee.

The good news for public service workers is that, in some states, pension payments are guaranteed by law. And even in places where they may not be, legislators tend to be sympathetic to pension holders.

Now for the bad news: If things get really bad, you still might find your benefits thwacked. Detroit workers, for example, had their pensions cut when the city filed for bankruptcy. A more likely situation is that you’ll be the victim of pension “reform,” which could involve an increase to your annual contribution rate or fewer cost-of-living salary bumps. You may also see cutbacks in other benefits, such as health care, which are easier for states and cities to enact. Rhode Island suspended cost-of-living adjustments for retirees in 2011 and introduced a 401(k)-like funding system for current state workers, for example.

— You’re a taxpayer.

A simple way for states to boost their sagging budgets is to increase taxes. A sales tax increase along with an income tax increase on wealthy residents helped California pull out of its massive budget hole from the Great Recession, for example. Simple, though, doesn’t mean easy. Politicians are often reluctant to increases taxes on their watch. “Politically, that’s just very hard to do,” says Washburn.

Other places have tried different tactics to boost revenues. A few years ago, Kansas tried cutting taxes in hopes that it would boost its economy and lead to eventual gains in income tax revenue, for example. Unfortunately, the state still recently had a projected $290 billion shortfall.

Instead of raising taxes, states sometimes cut back services in order to save money. “Maybe the Department of Motor Vehicles is open five days a week instead of six,” says Schankel. The challenge is that if too many services are cut, residents will become disenchanted with the community and move elsewhere. That only exacerbates the revenue problem.

It all shows how no single approach will lift local governments out of their troubles. One thing, however, is clear, says Gordon: “Someone has to be left holding the bag.”

Fox Business

Published November 07, 2016

WASHINGTON – Donald Trump’s plans to dismantle the Dodd­Frank Act and impose a moratorium on new regulations could affect the municipal bond market.

The president-­elect’s transition team said on Trump’s webpage: “The Dodd­Frank economy does not work for working people. Bureaucratic red tape and Washington mandates are not the answer. The Financial Services Policy Implementation team will be working to dismantle the Dodd­Frank Act and replace it with new policies to encourage economic growth and job creation.”

At the same time, Kroll Bond Rating Agency said in a release that it is betting the House will modify and pass the Financial Choice Act (H.R. 5983), which House Financial Services Committee chairman Jeb Hensarling, R­Texas, introduced last September to roll back DoddFrank Act and other requirements.

The bill would divert to Treasury funding that the Municipal Securities Rulemaking Board gets from Securities and Exchange Commission and Financial Industry Regulatory Authority sanctions against violators of muni rules. The funding arrangement was set up under DoddFrank.

The Act also made non­-dealer municipal advisors subject to federal oversight and regulation and extended the MSRB’s reach to protecting municipal issuers.

Former SEC Commissioner and Dodd­Frank critic Paul Atkins has been tapped by Trump to lead the transition team’s review of independent financial agencies. Nominated by thenPresident George W. Bush, Atkins was at the SEC from August 2002 to August 2008. He is currently CEO of Patomak Global Partners, which provide consulting and other services in the financial arena.

David Malpass, former chief economist at Bear Stearns and founder and president of Encima Global LLC, an economic, research and consulting firm who sits on the board of UBS Funds, is heading Trump’s transition team of economic issues along with Bill Walton, who chairs Rappahannock Ventures, a private equity firm.

A moratorium on new rules could thwart the Municipal Securities Rulemaking Board initiatives on markup disclosure, pre­trade price transparency, and syndicate practices. Dealers have complained about non­stop rules coming out of the MSRB in response to Dodd­Frank and the SEC’s 2012 Report on the Municipal Securities Market.

“As of right now, if you look at the types of things that have been impacting the muni market, especially on the retail and regulatory side, they’re all born out of the 2012 [report],” said John Vahey, managing director of federal policy for Bond Dealers of America. The report came out of the SEC with bipartisan support, but the expected changeover in the administration raises questions about whether that kind of support will continue, he added.

Vahey said dealers have a bit of regulatory fatigue from the past five years. “Could dealers use a breather from reg compliance changes and time to adapt to a new environment? Yes,” Vahey said. “Is there at the same time some potential negatives out there to a regulatory moratorium across the entire economy Potentially, yeah.”

Trump will also have the chance to choose the new SEC chair as well as fill two vacant commission slots. SEC chair Mary Jo White has said she will step down and Congress never confirmed Obama’s nominees: Hester Peirce, a senior research fellow and director of the financial markets working group at the Mercatus Center at George Mason University, and Lisa Fairfax, a professor of law at George Washington University.

Matt Fabian, a partner with Municipal Market Analytics, said that it is easy to imagine Trump would appoint industry-friendly individuals to fill the chair and vacant commissioner slots at the SEC.

“It’s a very volatile situation right now in terms of myriad policy outcomes from the commission,” Vahey said.

Trump’s promised moratorium on new regulations comes as the Treasury Department has been hoping to finalize rules on issue price and also press forward with rules on political subdivisions, which have been very controversial in the muni market.

A list of potential cabinet members from Trump’s transition team obtained by BuzzFeedNews on Thursday included three names for Treasury Secretary: Hensarling, businessman Carl Icahn and banker and political fundraiser Steven Mnuchin.

Fitch Ratings on Thursday warned: “Trump’s Medicaid and trade policy proposals would significantly lower federal transfers to state budgets and could negatively affect economic growth and revenues if they are implemented.”

Trump would convert Medicaid funding into a block grant program that would “lead to much lower federal funding to states,” the rating agency said.

Uncertainty

There are still many uncertainties surrounding Trump and his proposals and policies. Fitch Ratings said Trump’s policies would be “negative for U.S. public finances” because of uncertainties about the detail of his proposals, the degree to which he’ll promote them, and his ability to implement them. Senate Democrats will still be able to filibuster Republican legislation they don’t like, the rating agency pointed out.

“The election of a polarizing figure like Trump may put institutional relationships under strain, although his victory will give him some significant political capital,” Fitch said.

Earlier this year, Trump suggested he would try to negotiate down the national debt of the U.S., setting the financial markets on edge.

Trump’s proposals would contribute $5.3 trillion to the national debt, according to an analysis by the Committee for a Responsible Federal Budget.

A key test for him will be whether to continue to fund the federal government and raise or suspend the federal debt limit, which has been lifted until March 2017.

The Bond Buyer

By Lynn Hume and Jack Casey

November 10, 2016

Powered by P3 INGENIUM: The most comprehensive source for P3 project updates in North America.

Read the Digest.

November 7, 2016

President­-elect Donald Trump’s promise to rebuild the nation’s infrastructure is resonating with Republican and Democratic lawmakers, but could spell trouble for municipal bonds.

Trump has proposed a $1 trillion, 10­year infrastructure plan, which he touted during his victory speech.

“We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals,” he said. “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.”

House Minority Leader Nancy Pelosi said Wednesday that infrastructure is one area on which she and Trump can agree.

But Trump’s plan relies on $137 billion of tax credits that he would ask Congress to authorize and that has drawn concerns from some muni market participants.

“The little we know about Trump’s plan is that it focuses on tax credits,” said Jessica Giroux, BDA’s general counsel. “Our concern is that it says nothing about munis.”

Trump advisors Wilbur Ross, a billionaire private-­equity investor, and Peter Navarro, a professor at the University of California at Irvine, said the infrastructure plan’s tax credits could be used by investors to leverage $167 billion in private funds.

Companies taking advantage of the tax credits would be able to borrow money on the private market at low interest rates to finance $1 trillion of projects without the need for any new taxes, they said.

“Trump’s plan will harness market forces to help raise construction funds by incentivizing private sector investors through tax credits, thereby revolutionizing American infrastructure finance,” Navarro said.

Trump wants to pay for infrastructure through repatriation pf companies’ overseas earnings. Companies would be able to bring overseas earnings back to the U.S. at Trump’s proposed reduced tax rate of 10% rather than the current 35%. With the credits, companies could avoid any tax liability by investing $122 million of the repatriated profits in infrastructure projects, Ross and Navarro said.

Repatriation would take away a significant amount of tax revenue available for tax reform, thereby increasing the pressure on Congress to look even harder at cutting tax deductions and exemptions.

The Joint Committee on Taxation has estimated that American companies hold a total of $2.6 trillion of foreign income in overseas banks.

Transportation groups also have some concerns about Trump’s infrastructure plan. Bud Wright, executive director of the American Association of State Highway and Transportation Officials, said tax credits are not a long­term solution.

“We’re sort of agnostic about the tax credits,” Wright said. “We’re not opposed to the idea, but it is not the long­term funding solution that we need to repair the deficit in the Highway Trust Fund.”

Federal tax credits are not transportation user fees, he said.

“A one-­off, short-­term type of program like that would be useful but it does not do anything for the long term sustainability of federal transportation funding,” Wright said. “Corporate tax reform is not really a transportation issue either, but in some circles it has been linked to infrastructure funding as well. Again, it’s not something we oppose but it is not a solution.”

However, Wright concedes that Increases in the federal gasoline tax are not likely. “The fuel tax is the best understood and most administratively effective revenue source there is but it is about as politically volatile as any issue I’ve seen in Washington,” he said. “That goes for Democrats as well as Republicans. There’s just a knee­-jerk reaction to oppose it.”

Jim Tymon, chief operating officer and director of policy at AASHTO, said, “I think we’ll see an infrastructure package coming out of Congress, probably not quickly but certainly within the first year.”

As always, the sticking point will be how to pay for increased infrastructure spending, he said.

“We’ll have to see what sort of pay-­fors and offsets are available and acceptable,” Tymon said.

The Bond Buyer

By Jim Watts and Lynn Hume

November 10, 2016

The ex-Microsoft CEO is working on a project that aims to make government data more accessible.

Steve Ballmer is pretty bummed out about the election. A self-proclaimed “numbers guy,” Ballmer said the truth is getting lost in the political rhetoric, and he wants to arm citizens with data to defend against lies by the campaigns. “Nobody seems to care about the facts,” he said.

When not jumping around on the sidelines of Los Angeles Clippers games, the former Microsoft Corp. chief executive officer has been spending his retirement on the inside of an Excel spreadsheet. Ballmer and a team of about 25 data geeks have been poring over more than three decades of government documents to create a comprehensive accounting of U.S. spending. The goal is to treat the nation like a company and create what Ballmer describes as a “10-K for the government,” like the one publicly traded businesses are required to file with regulators each year.

Ballmer’s project, called USAFacts, exists in the form of hundreds of Excel files and 385 PowerPoint slides, many of which require a magnifying glass to read. While the complete report won’t be ready in time for Election Day, he’s using the research as the basis for a class he teaches at Stanford University. His group of 19 sophomores are getting a peek at what Ballmer plans to publish early next year in the form of a 10-K filing, investor presentations, charts, graphics and a dedicated website.

Mary Meeker, a partner at venture capital firm Kleiner Perkins Caufield & Byers, undertook a similar effort called USA Inc. that Bloomberg Businessweek published in 2011. Two years ago, President Obama signed the Data Act, designed to make federal spending information more accessible, while OpenGov and other venture-backed startups have sprung up with the goal of increasing transparency. While any effort toward greater visibility is a good thing, the government shouldn’t be analyzed in the same way as a business in some cases, said Alex Howard, a senior analyst at the Sunlight Foundation, an advocacy group for government openness who hasn’t seen Ballmer’s report.

In Ballmer’s worldview, data trumps all. “I just think it’s important if you are going to make your case, for you to make your case in the context of numbers,” Ballmer said at his office in Bellevue, Washington. “Here are the numbers. You don’t have to be a rocket scientist. You don’t have to be an economist. You decide what you believe. And when things come up that you need to vote on, you need to opine on, you’ll have the view of a citizen that’s informed by facts.”

A childhood veteran of math camp with an undergraduate degree in mathematics and economics from Harvard University, Ballmer tends to mentally organize his life into rows and columns. He has a superhuman memory for numbers that would impress, and sometimes terrify, his lieutenants at Microsoft. He’d frequently ask detailed questions about a manager’s business unit, sometimes reciting metrics off the top of his head that no one else in the room knew. “Steve sees the world as an Excel spreadsheet,” said Kevin Turner, who Ballmer hired as Microsoft chief operating officer in 2005 and is now CEO at financial firm Citadel Securities.

Ballmer’s obsession with government data originated from a disagreement with his wife. Almost three years ago, Connie Ballmer told her newly retired husband that he should focus more on philanthropy. His wife has dedicated herself to child welfare and other causes, and there’s plenty left to give: Ballmer’s estimated net worth is $25.1 billion, according to the Bloomberg Billionaires Index. “I said, ‘Eh, why do you worry about it so much?'” Ballmer said. “At the end of the day, the biggest philanthropy in the U.S. is the government. So as long as we pay our taxes, we’re doing our part.”

It was an unusual argument to make, and as with many Ballmer debates, it turned into a research exercise. He scoured the web for a summary of government spending at all levels. He started with Bing and then tried Google. Neither had what he was looking for. So he decided to build it.

Working with data, design and academic experts at Stanford and in the Seattle area, Ballmer runs the project from the 20th floor of a high-rise overlooking Lake Washington. One challenge they faced early on was figuring out how to divide the government into business units. After several failed approaches, a staffer suggested a look through the Constitution. “The Constitution!” Ballmer recalled, suddenly speaking many decibels louder as he got up to diagram the segments on a massive Microsoft Surface Hub touchscreen computer. “It’s the perfect way!”

USAFacts breaks down government operations into four main segments based on the preamble to the Constitution. For “establish justice, insure domestic tranquility,” they chose police, workplace safety and child welfare; another includes military, defense, foreign affairs and immigration; the third has the economy and caring for the poor; and in the last, civil rights, environmental sustainability and education. The 10-K has a section on risk factors, an essential part of public company filings. It includes war, interest rate hikes, civil unrest and climate change. The draft report also talks about America Corp.’s customers, using copious amounts of demographic data on U.S. citizens.

Researchers collected information from 55 government or nonpartisan sources, including from state and local municipalities, going back to 1980—the year Ballmer joined Microsoft. They kept analysis and interpretation to a minimum. Ballmer’s goal is to be completely unbiased. The billionaire said he’s an independent and has been an active political donor in recent years, with a tendency to give to both sides. He won’t say who he’s voting for.

Ballmer said the idea that the U.S. is getting worse mostly isn’t true. Infrastructure, such as road and bridge safety, is better than or comparable to 1990. The government doesn’t seem as big as some people say it is, either. Of about 24 million government workers, teachers account for some 11 million jobs; police, firefighters and the like for 3 million; and military for about 2 million. Add in public hospitals, waste management, prisons and other workers, that leaves just 1.7 million or so bureaucrats.

Mark Duggan, a Stanford economics professor who is teaching the course with Ballmer, said this project is especially important as Americans consider the need for spending cuts or other changes to Medicare or Social Security. “What Steve is trying to do is to make it possible for people who want to make an informed decision to do that,” Duggan said.

Staff working on USAFacts said Ballmer already knows unusual factoids about government spending and demographics by heart. Ballmer, 60, said he doesn’t recall as much as when he was 40.

The project has helped settle Ballmer’s dispute with his wife. Government funding accounts for a larger share of many social-services organizations’ budgets for aiding children than private donations, he said. But economic mobility remains largely unachievable for America’s poorest families. The data helped convince the Ballmers to focus their philanthropy on impoverished kids in U.S. cities with the lowest chances of improving their situations. Ballmer will continue making political contributions as well. He still believes influencing public policy is one of the most effective ways to effect change, he said. “We were both right.”

Bloomberg

by Dina Bass

November 7, 2016 — 8:55 AM EST

– With Emily Chang

Local governments across the U.S. are asking voters to approve about $70 billion of bond sales, the most in a decade, seeking to seize on improvements in their fiscal positions and near record-low interest rates to borrow for public works.

The jump is driven largely by California, which accounts for about $42 billion of the proposed debt, as officials seek to raise funds for schools, public transportation and affordable housing, according to financial-data provider Ipreo. Elsewhere, voters are being asked to back large issues for roads in Austin, Texas, schools in Denver and waterworks in Columbus, Ohio.

“The cost of borrowing is low,” said Mark Ferrandino, chief financial officer of Denver Public Schools, which is asking voters to approve $572 million, the second-biggest amount for schools in Colorado history. “It allows us to have our money go further.”

 

The increase signals that states and cities are backing away from the austerity that persisted for years as they contended with budget shortfalls left in the wake of the recession. Amid speculation the Federal Reserve will resume raising interest rates as soon as December, governments have stepped up their borrowing, issuing $387 billion of bonds this year. That’s the fastest pace since 2010, when municipalities rushed to sell federally subsidized bonds as the program expired.

 

There are large sales proposed around the country:

• California has a $9 billion school bond on the statewide ballot, while residents around San Francisco are being asked to support $3.5 billion of borrowing for the Bay Area Rapid Transit system. In Los Angeles, ballot measures would raise $3.3 billion for community colleges and $1.2 billion to ameliorate homelessness. Santa Clara County, where the Silicon Valley boom has pushed up the cost of living, is weighing a $950 million bond for housing;
• Austin, Texas’s booming capital city, is proposing $720 million of borrowing for roads, streets, bike trails and sidewalks. It’s the biggest issue outside of California, according to Ipreo;
• El Paso, Texas, is weighing almost $670 million of bonds to build schools;
• Columbus, the AAA-rated Ohio capital, wants to issue $460 million for its water and sewer system.

This proposed borrowing is the most since 2006, when about $82 billion went before voters. The uptick reflects the financial improvement among municipalities as the drop in unemployment and housing-price gains lift tax collections. Meanwhile, the yield on the Bond Buyer’s 20-year general-obligation index — while up from the record lows reached in July — is still just 3.27 percent.

“For many years, there was a spirit of austerity where municipal mangers felt pressure not to issue debt and not to leverage up,” said Eric Friedland, director of municipal research in Jersey City, New Jersey, for Lord Abbett, which manages $20 billion of local debt. “You get to a point now where infrastructure is crumbling, revenues are starting to increase, interest rates are relatively low and constituents are pressuring their leaders to actually fund more infrastructure projects.”

Such spending tends to be an easy sell: Since 2004, voters approved at least 75 percent of the proposed bond sales, based on the amount requested, according to Ipreo data.

The borrowing will only put a small dent in America’s backlog of infrastructure projects, an issue that Democrat Hillary Clinton and Republican Donald Trump have both promised to address if they’re elected president. The American Society of Civil Engineers estimates that the U.S. is on pace to spend $1.4 trillion less than needed on its roads, airports and other public works.

“We’ve dug ourselves a pretty deep hole,” said Brian Pallasch, managing director of government relations and infrastructure initiatives for the engineers’ group. “The problem is not going to be solved by one particular ballot measure or one particular congressional action. It’s going to be a series of them.”

Bloomberg Business

by Romy Varghese

November 8, 2016 — 2:00 AM PST

Taylor Riggs, a contributor to Bloomberg Briefs, talks with reporter Amanda Albright about this week’s municipal market news.

Watch the video.

Bloomberg Business

November 9, 2016

An early review of Donald Trump’s health-care and trade policies reveals some potentially bad news for state and local governments. According to Fitch Ratings, Trump’s proposals would “significantly lower federal transfers to state budgets and could negatively affect economic growth and revenues.”

Specifically, Trump has proposed converting Medicaid funding into a block grant program, which Fitch says would lead to much lower federal funding for the states. A Congressional Budget Office (CBO) assessment of earlier Medicaid block grant proposals projected declines of between 4 and 23 percent in federal funding over 10 years.

The president-elect has also harshly criticized the North American Free Trade Agreement and said he would slap tariffs on goods imported from countries, such as China, that have cheaper labor than in the United States. Fitch Ratings said Trump’s trade policy would have adverse implications for U.S. investment and growth, and would push up prices.

On the positive side, Trump has also talked about major investments in infrastructure. But he’s been low on details for his plan — only suggesting that federal tax credits could encourage private investments in revenue-generating projects — and could make it more expensive for state and local governments to borrow money for those infrastructure projects. That’s because his planned tax cuts would lower the benefit of buying tax-exempt municipal bonds for many individual investors. Without the full benefit, governments may have to swallow a higher interest rate payment in order to attract investors.

The Takeaway: Let’s put things in perspective. Since when has a presidential candidate gotten everything he wanted once he took office? Chances are low that every single outcome listed above will actually happen. It’s also important to note that President Obama has also called for reducing the municipal bond tax benefit for much of his presidency. So, that particular threat to state and local finances is not a new one, although some suspect tax reform will make its way from the back to the front burner now that Republicans control the executive and legislative branches.

The proposed changes to Medicaid are perhaps the most worrisome for state and local budgets because aid from the feds makes up approximately 15 percent of total state expenditures, according to the National Association of State Budget Officers. If the CBO’s estimates are accurate, “reductions of this magnitude would have a significant effect on states’ budgets,” according to Fitch. And you can bet that states will pass some of that hurt on down to local governments in the form of reduced state aid.

But right now, the word of the day is ambiguity: Trump has been fuzzy on details up to this point, so it remains to be seen if his policies will pass muster with Congress and how, specifically, they’ll impact state and local government coffers. Even the proposed changes to Medicaid aid could have a happier ending if states get more spending autonomy under a block grant system. “Depending on the specifics of the program,” Fitch said, “states could lower their Medicaid costs with that flexibility.”

GOVERNING.COM

BY LIZ FARMER | NOVEMBER 11, 2016

The first-ever environmental impact bond gives an agency some of its money back if its idea doesn’t pan out.

As the drive for accountability in government spending increases, many are looking for ways to keep from paying the full price for programs that don’t work.

In Washington, D.C., that desire has led to the first-ever environmental impact bond, issued this fall by DC Water, the city’s water and sewer authority. The $25 million bond will pay for new, green infrastructure like rain gardens and permeable pavement to reduce stormwater runoff.

But if the projects don’t work as expected, that’s where the new financing structure comes in. Under the terms of the bond, which DC Water sold directly to Goldman Sachs Urban Investment Group and the nonprofit Calvert Foundation, the utility stands to get a multimillion discount on its total borrowing costs if the project doesn’t meet a certain threshold.

It’s essentially an insurance policy on the project’s effectiveness. Here’s how it works: After five years, the new infrastructure will be evaluated. If stormwater runoff isn’t reduced by at least 18.6 percent, investors will owe DC Water a $3.3 million “risk share” payment. The payment represents a near-full refund of the 3.43 percent interest rate payments DC Water made during the first five years of the bond. After that, the bonds would likely be refinanced into 25-year bonds. DC Water would also drop green infrastructure projects and go back to so-called gray ones (like pumps and water tunnels) to reduce runoff.

So what’s the incentive for Goldman Sachs and the Calvert Foundation to buy these bonds? If the reduction of stormwater runoff exceeds expectations — if runoff is reduced by more than 41.3 percent — the investors get a bonus payment of $3 million from DC Water after five years. The bonds would then still refinance into 25-year bonds.

Although the deal took two years to iron out, DC Water’s CFO Mark Kim said it’s a structure that could easily be copied by other utilities because it is still, at its core, a basic market transaction. This makes environmental impact bonds different from so-called social impact bonds or pay for success projects, which are not bonds at all but are negotiated contracts between a private financier and a government. These “bonds” finance certain projects that aim for an agreed-upon outcome, such as reducing recidivism among a certain prison population. The financier gets paid back only if the project outcomes are met after a certain period of time.

For those reasons, pay for success projects are very difficult to replicate. “We structured this as a debt instrument rather than a [pay for success] service contract, so it is very scalable, very transparent and very accessible,” said Kim. “Utilities know how to issue debt. We’ve just structured the deal so that they can look and replicate.”

While the environmental impact bond is getting interest from other governments, and was even held up by the White House as a model, it has its critics. Dan Kaplan, who manages a $4 billion debt portfolio for the King County, Wash., Wastewater Treatment Division, said he isn’t convinced the environmental impact bond is a better deal because of the “exceptionally high interest rate” DC Water is paying the first five years of the deal. Typically, the shorter the terms of the bond, the lower the interest rate. Under a regular five-year bond, Kaplan said, DC Water would likely pay less than 2 percent instead of 3.43 percent.

Also, given that rain gardens and permeable surfaces aren’t new, untested technology, Kaplan doesn’t see the point in DC Water hedging its bets that the projects won’t do their jobs. “If there’s some new technology that needs to be tested and there simply aren’t the resources within the utility to commit the personnel and technology to do it,” he said, “then perhaps [this financing mechanism] could be a tool.”

But Kim said comparing the bond’s terms with a five-year bond’s terms isn’t an apples-to-apples comparison. Although the deal does refinance after five years, it is structured as a 30-year deal and therefore is assigned an interest rate comparable to the utility’s typical long-term borrowing cost. In addition, Kim said, a typical five-year bond doesn’t “provide a risk transfer or downside protection if green infrastructure does not work, which is the whole point of the deal.”

Beth Bafford, investments director for the Calvert Foundation, said she hopes the DC Water deal spurs a new field of social investing that essentially splits the difference between a pay for success project and a traditional bond. Investing in the former means returns might not be realized. Investing in the latter is far less risky — and less exciting.

“We’ve looked at a few pay for success deals,” says Bafford. They are such uncertain , complex systems that it’s “hard to determine what’s causing the outcome. In the environmental space, you can measure it, look at it, it’s more of a science. The hope is it’ll help investors who are more risk averse get into the social contracting space.”

GOVERNING.COM

BY LIZ FARMER | NOVEMBER 10, 2016

The municipal-bond market is facing headwinds from President-elect Donald Trump and more than $250 billion in hospital debt is most at risk.

Yields on benchmark tax-exempt securities climbed the most Wednesday in more than three years after the stunning victory of the real estate developer and reality television star, who has proposed slashing income taxes, which will reduce the incentive to own the bonds. Trump and Republicans in Congress made the repeal of Obamacare a central point of the campaign, a possible one-two punch for hospital debt.

Under the Affordable Care Act, 20 million people obtained health insurance as 30 states expanded Medicaid, the joint federal-state health program for the poor, and others purchased insurance on exchanges. Repealing or scaling back Obamacare would reduce revenue for hospitals and nursing homes as Medicaid expansion is curtailed and private subsidies cut.

“There’s a clear indication that Obamacare benefited a lot of hospitals,” Mikhail Foux, head of municipal strategy at Barclays Plc. “You will probably see weaker systems, especially the ones that are mainly operating in states that have expanded Medicaid, come under some pressure.”

Trump’s victory was felt by some bondholders immediately. Tuesday, the risk premium on debt issued by Livonia, Michigan-based Trinity Health Corp. and maturing in 2045 rose to 1.77 percentage point more than top-rated bonds compared with 1.20 percentage point a month ago, according to data compiled by Bloomberg.

Spreads on bonds issued by Providence St. Joseph Health to refinance debt at hospitals in Washington state and California rose about 0.15 percentage point Tuesday from the day before.

Trump supports letting states administer Medicaid block grants, while promoting tax-free health savings account to encourage people to buy insurance. He also advocates allowing insurance companies to sell policies across state lines.

“The ACA is going to be under threat fairly early on. And that will probably impact more of the low grade standalone hospitals,” said Triet Nguyen, a managing director at NewOak Capital, a New York financial-advisory firm. “The larger systems will be able to cope with any change.”

The Affordable Care Act, which took full effect in January 2014, has been a boon to investors who hold tax-exempt bonds sold by hospitals: Hospital bonds returned 12.72 percent in 2014 and 4.09 percent in 2015, the best of 10 revenue-bond sectors, according to Bloomberg Barclays Indexes.

Performance has weakened this year as factors that have driven enrollment growth waned. States, including Texas and Florida, haven’t expanded Medicaid and aren’t likely to. Hospital bonds have returned 3.57 percent this year.

Political Will

Investors should shift to higher-rated and more diversified hospital systems such as AA- rated Cleveland Clinic and Memorial Sloan Kettering which have specialty clinics for cardiology and cancer, respectively, and that have cheapened recently, Foux said.

The new administration and congressional leaders can forge unity by repealing Obamacare quickly, loosening regulations and cutting taxes, said Dan Holler of the conservative group Heritage Action.

“They will succeed if they focus on the big-ticket items where they have agreement,” he said. “Democrats showed extraordinary political will when they had complete control. I hope Republicans have learned that lesson.”

Not so fast, says Todd Sisson, a senior analyst in Charlotte, North Carolina, for Wells Capital Management, which manages more than $40 billion in municipals.

While Republicans control the White House and Congress, they don’t have a supermajority in the Senate and Democrats can use the filibuster to block a repeal, Sisson said. Repealing Obamacare outright would also be difficult politically given how many Americans are now covered by it, he said.

“You’ve got a lot of people on insurance now, it’s hard to take that back,” Sisson said. “I’m looking for them to kind of tweak it and amend it but to flat out repeal it and replace it without a plan, I don’t have a crystal ball, but I’m thinking that will be difficult to do.”

Hospitals have already built an infrastructure based on Obamacare and transition to value-based reimbursements from a volume-based fee-for-service model, Sisson said.

Bloomberg Business

by Martin Z Braun

November 10, 2016 — 2:00 AM PST

Fitch Ratings-New York-10 November 2016: The frequency and severity of incidents like the recent water main break in Philadelphia will increase in coming years absent renewed attention and ongoing investment, Fitch Ratings says. Businesses were flooded, shoppers had to be rescued and cars were submerged when the Nov. 4 water main rupture – the third such incident in as many years at this location – released approximately six million gallons of water.

The cost of the damage will likely be significant, although no estimates have yet been reported. The main break is similar to other notable infrastructure failures in recent years in other older, urban cities like Los Angeles, Washington, D.C. and Boston.

The escalating age of the nation’s infrastructure and continued underinvestment in underground assets supports Fitch’s view that infrastructure failures will continue to occur. The American Society of Civil Engineer’s reports 240,000 water main breaks occur annually in the US, while the American Water Works association believes required costs to restore existing water systems reaching the end of their useful lives, and to keep pace with population growth, could be upwards of $1 trillion nationwide.

Moreover, a recent survey compiled by the Environmental Protection Agency showed nearly $385 million is needed to improve and replace the nation’s drinking water infrastructure through 2030 to continue providing safe drinking water.

In our 2016 Water and Sewer Medians report, capital spending dropped to the lowest level Fitch has observed since publishing its annual medians (just 113% of annual depreciation). The lack of spending contributed to an inability to improve the median age of facilities, which, at 14 years, is the same as the 2015 median and ties the oldest of any median result.

Moderate increases in planned capital spending are expected for the 2017 medians and beyond, but Fitch expects planned outlays will remain below historical spending levels exhibited during and immediately before the recession, heightening concern regarding the ongoing age of utility infrastructure over the coming years.

Contact:

Christopher Hessenthaler
Senior Director
US Public Finance
+1 212 908-0773

Rob 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.

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.

Reliance on private financing could fall short of goals and still see political resistance

Donald Trump’s proposal for $1 trillion worth of new infrastructure construction relies entirely on private financing, which industry experts say is likely to fall far short of adequately funding improvements to roads, bridges and airports.

The president-elect’s infrastructure plan largely boils down to a tax break in the hopes of luring capital to projects. He wants investors to put money into projects in exchange for tax credits totaling 82% of the equity amount. His plan anticipates that lost tax revenue would be recouped through new income-tax revenue from construction workers and business-tax revenue from contractors, making the proposal essentially cost-free to the government.

Mr. Trump has made a $1 trillion infrastructure investment over 10 years one of his first priorities as president, promising in his victory speech early Wednesday morning to “rebuild our highways, bridges, tunnels, airports, schools, hospitals.”

The Trump team’s thinking is laid out in a 10-page description of the proposal posted on the website of Peter Navarro, a public-policy professor at the University of California, Irvine, and an adviser to Mr. Trump. Separately, a presidential transition website that went up this week said Mr. Trump planned to invest $550 billion in infrastructure, without offering details on where that funding would come from. Top Trump aides couldn’t be reached to comment on the proposal.

Experts and industry officials, though, say there are limits to how much can be done with private financing. Because privately funded projects need to turn a profit, they are better suited for major projects such as toll roads, airports or water systems and less appropriate for routine maintenance, such as repaving a public street, they say.

Officials also doubt that the nation’s aging infrastructure can be updated without a significant infusion of public dollars.

The plan “strikes me as sort of a concept paper or a thought piece as opposed to a real plan,” said Pat Jones, executive director of the International Bridge, Tunnel and Turnpike Association, which represents private operators of toll roads. “These are sort of formulaic numbers that you could come up with to present something that looks like a plan.”

For now, members of Congress of both parties and transportation advocates say they are optimistic lawmakers can reach a bipartisan deal to provide some of the needed funding to update roads, power lines and airports. According to the McKinsey Global Institute, the U.S. needs to boost infrastructure spending by 0.7% of gross domestic product between now and 2030 to meet the demands of a growing economy.

Both parties have said they agree on the need for new spending on infrastructure, but the challenge has been finding the money to pay for it. An Obama administration proposal to use new revenue from a corporate tax overhaul didn’t get through Congress last year. In December, lawmakers cobbled together a $305 billion measure using a reserve account held by the Federal Reserve.

Mr. Trump’s plan would essentially sidestep the political funding squabbles by focusing mostly on private investment, a concept that both parties generally support.

But the plan could still face an uphill battle in Congress, where Democrats have been pushing for more public funding.

Industry experts note that private financing can complement public funding for some projects but is far from a perfect substitute. Historically low interest rates have made it very cheap for state and local governments to borrow directly on the municipal bond market, giving them less incentive to work with private funders.

At the same time, tolls have proved unpopular in much of the country, with toll-road operators in Indiana and Texas filing for bankruptcy protection in recent years.

“The real need is straight up funding, not additional financing tools,” said Bud Wright, executive director of the American Association of State Highway and Transportation Officials.

Only about 6,000 of the nation’s four million road miles are tolled. And only about 3.1% of the assets under management of U.S. investors are in infrastructure, of which some share is invested in projects abroad, according to Preqin, a research firm.

“Not every project is necessarily feasible,” said Patrick Rhode, vice president of Cintra, which develops privately funded infrastructure projects. “The public and state authorities have to make a determination as to what best serves the public good.”

It’s also unclear how Mr. Trump’s proposal would generate enough new revenue to offset the cost of the tax credits. If the construction workers hired on the new projects were previously unemployed, the proposal would indeed generate significant new tax revenue. But with the unemployment rate for construction workers around 5.7%, it is likely those workers would have found other jobs and paid income tax regardless.

“It’s unclear exactly what [Mr. Trump] has in mind for his infrastructure tax credit,” said Michael Sargent, a transportation policy analyst at the conservative Heritage Foundation. “He says they’re deficit neutral, but I’m not sure how exactly they could pay for themselves.”

Heritage has been advocating reducing the federal government’s involvement in transportation and leaving it up to the states to fund improvements.

THE WALL STREET JOURNAL

By DAVID HARRISON

Updated Nov. 11, 2016 1:22 p.m. ET

Write to David Harrison at david.harrison@wsj.com

NEW YORK — It’s not just Detroit and Puerto Rico with financial problems.

The pressure is rising on local governments around the country that are struggling with big pension obligations and other debts. Five states need to put aside more than 25 percent of their annual tax revenues just to pay pensions and other debts, an untenable amount, according to a recent study by the nonprofit Center for Retirement Research. For major cities, debt costs above 40 percent of revenue are typically an unmanageable burden, and the report counts eight of them.

Overall, U.S. state pension plans are underfunded by at least $1 trillion, various experts and credit rating agencies say. And that funding hole will almost certainly hurt taxpayers, government workers and bondholders.

“It’s getting harder to sweep these problems under the rug,” says Tracy Gordon, a senior fellow with the Urban-Brookings Tax Policy Center.

After taking into account health care and other debt obligations, states like Hawaii, Kentucky and Massachusetts and cities like Houston and San Jose, California, are all above thresholds that the Center for Retirement Research considers worrisome.

For many years, politicians hoped to make up for the funding gaps by getting strong returns from investments in stocks, bonds and hedge funds, says Gordon. But the typical public pension plan had a return of just 0.5 percent for the fiscal year that ended in June, according to credit-rating agency Moody’s.

That has increased the risk for a major crisis at municipalities with outsize debt payment, says Lisa Washburn, a managing director for Municipal Market Analytics, a municipal bond research firm. “This is a liability that they are going to have to come to terms with eventually, and the longer they delay coming to terms with it, the worse it’s going to be.”

How you might be affected depends on your relationship to the location in question:

— You’re a bond holder.

For muni bond investors, the chief worry is a default. But despite the dramatic headlines, investors who hold state-issued bonds until they mature have little to fear. “You can expect to be repaid,” says Washburn. If your state’s debt rating is downgraded, however, you may find that your bond is worth less if you need to sell it before maturity.

Those who hold the bonds of struggling cities overburdened with debt, however, have cause for concern. “States have sovereign ability to do just about anything they want, so they have a very wide array of options to pursue,” says Alan Schankel, a municipal bond strategist at Janney Capital Markets. “Depending on the level of oversight, cities and counties have much less flexibility. And many of them are dependent on state aid.”

When a city files for bankruptcy, judges sometimes allow payments to be curtailed to muni bondholders. That’s what happened in Detroit and Stockton, California. Moreover, severe budget problems at the state government level can also have a trickle-down effect leading to less support for schools and hospitals supported by the state, which also issue municipal bonds.

— You’re an employee.

The good news for public service workers is that, in some states, pension payments are guaranteed by law. And even in places where they may not be, legislators tend to be sympathetic to pension holders.

Now for the bad news: If things get really bad, you still might find your benefits thwacked. Detroit workers, for example, had their pensions cut when the city filed for bankruptcy. A more likely situation is that you’ll be the victim of pension “reform,” which could involve an increase to your annual contribution rate or fewer cost-of-living salary bumps. You may also see cutbacks in other benefits, such as health care, which are easier for states and cities to enact. Rhode Island suspended cost-of-living adjustments for retirees in 2011 and introduced a 401(k)-like funding system for current state workers, for example.

— You’re a taxpayer.

A simple way for states to boost their sagging budgets is to increase taxes. A sales tax increase along with an income tax increase on wealthy residents helped California pull out of its massive budget hole from the Great Recession, for example. Simple, though, doesn’t mean easy. Politicians are often reluctant to increases taxes on their watch. “Politically, that’s just very hard to do,” says Washburn.

Other places have tried different tactics to boost revenues. A few years ago, Kansas tried cutting taxes in hopes that it would boost its economy and lead to eventual gains in income tax revenue, for example. Unfortunately, the state still recently had a projected $290 billion shortfall.

Instead of raising taxes, states sometimes cut back services in order to save money. “Maybe the Department of Motor Vehicles is open five days a week instead of six,” says Schankel. The challenge is that if too many services are cut, residents will become disenchanted with the community and move elsewhere. That only exacerbates the revenue problem.

It all shows how no single approach will lift local governments out of their troubles. One thing, however, is clear, says Gordon: “Someone has to be left holding the bag.”

By THE ASSOCIATED PRESS

NOV. 7, 2016, 5:03 A.M. E.S.T.

The Municipal Securities Rulemaking Board (MSRB) today released municipal market statistics for the third quarter of 2016, showing par amount traded totaled $837.9 billion in 2016:Q3, up 52.1 percent from the $551.0 billion traded in 2015:Q3. Total par traded was the highest since the $825.4 billion traded in 2013:Q2 when volume reached $838.3 billion. The MSRB’s quarterly statistical summaries include aggregate market information for different types of municipal issues and trades, and the number of interest rate resets for variable rate demand obligations and auction rate securities.

View the 2016:Q3 statistics.

Counsel Paul Epstein (New York-Project Development & Finance) wrote a two-part article, titled “Funding and P3s for Water Infrastructure Projects,” that was published by Law360 on October 17-18.

This two-part series discusses funding and public-private partnerships (P3s) related to U.S. water infrastructure projects. Part 1 describes the key existing sources of funding available at the federal, state and local levels. Part 2 discusses the use of P3s in the water sector, followed by an examination of enhancements proposed by stakeholders to the funding mix, including through the Water Resources Development Act (WRDA) currently pending before Congress, and the impact of such enhancements on the P3 market.

Read Part 1 of the article here.

Read Part 2 of the article here.

Last Updated: November 2 2016

Article by Paul J. Epstein

Shearman & Sterling 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.

This publication discusses some of the more significant changes that could affect issuers (“Applicants”) and borrowers (“Sponsors”) in connection with awards of volume cap (“Awards”) if California Debt Limit Allocation Committee’s (“CDLAC”) proposed regulations were adopted in their current form.

CDLAC released proposed revisions to its regulations (“regulations“) on September 23, 2016. Major changes include (i) requiring Applicants to adopt written bond issuance and compliance policies (“Policies”), (ii) changing the required form of compliance certificates, (iii) requiring certain new provisions to be added to bond regulatory agreements (“Regulatory Agreements”) associated with qualified residential rental projects (“QRRPs”); (iv) requiring that CDLAC receive a copy of the recorded Regulatory Agreement for a QRRP before releasing the associated performance deposit, (v) providing for greater post-issuance monitoring of the terms and conditions of the Award; and (vi) imposing conditions on certain types of subordinate cash-flow bonds paid with residual payments.

Additional proposed changes would affect (i) the eligibility of Joint Powers Authority (“JPA”) Applicants to apply for an Award, (ii) the term of the qualified project period (“QPP”) for acquisition and rehabilitation transactions associated with QRRPs, (iii) filing fees, (iv) general and rural multifamily deals, and (v) projects requesting an assignment and assumption of an existing housing assistance payment contract (“HAP Contract”).

Bond Issuance and Compliance Policies

The proposed Regulations would require all Applicants to submit Policies regarding the process of issuing private activity bonds and post-issuance compliance. For QRRP Applicants, the proposed Regulations would require that Policies “be reviewed by counsel having expertise with the federal and state laws pertaining to the issuance or conversion and post-issuance compliance of private activity conduit bonds for consistency with applicable federal and state laws.” Such review would be documented by a letter from such counsel stating that the review has taken place. Policies would also be accompanied by an approving resolution of the Applicant’s governing board or a certificate of the Applicant’s Executive Director, Housing Director or Finance Director with delegated power to make such approvals.

Policies also would be required to include “a description of the fee structure, application and approval process (including TEFRA), threshold eligibility criteria for applicants and projects, long-term regulatory requirements and monitoring practices.” If a contractor were to provide services on behalf of the Applicant, “the Policies [would have to] clarify the relationship between contractor and Applicant and what, if any, rights the contractor [had] to income and obligations generated from issuance activity.”

Additional proposed changes to the Regulations would require that CDLAC review the Policies for compliance with its Regulations. The requirements would apply immediately to those Applicants who have not received an Award since January 2013 and any new Applicants. All other Applicants would have until December 31, 2017 to comply. An Applicant could request a one-year waiver, if it had not received an Award (presumably since January 2013), but had a 2017 project pending. All such Policies would have to be reauthorized every ten years. For those Applicants that had Policies in place, they would have to be approved by the Applicant in 2006 or later. These proposed revisions are contained in Sections 5000 (definitions) and 5031 of the Regulations.

Conditions on the Issuance of Certain Types of Subordinate Cash-Flow Bonds Paid with Residual Payments

The proposed Regulations introduce restrictions on certain subordinate bonds that are issued to provide permanent financing and paid with cash from residual payments based on cash-flow availability. These are bonds that do not otherwise meet CDLAC’s debt service coverage ratios and which (together with any other such bonds) “exceed 5% of the total project cost” (“Cash-Flow Bonds”). Such Cash-Flow Bonds include “bonds purchased by a property seller in consideration of the provisions of a purchase and sale agreement.”

For applications submitted after December 31, 2016, that include Cash-Flow Bonds, the proposed Regulations would require that the purchaser provide a traveling investor letter from a Qualified Institutional Buyer or an Accredited Investor three days prior to bond issuance, or provide for the issuance of the Cash-Flow Bonds in $100,000 authorized denominations. Cash-Flow Bonds also would have to comply with the requirements of Section 5062(a).

Further, the proposed Regulations provide that when Cash-Flow Bonds finance project costs, all units identified in the Award, including both the Federally Bond-Restricted Units (“Restricted Units”) and other affordable units identified in the Award as income and rent restricted (“Other Restricted Units”), would have to be incorporated into the Regulatory Agreement. The assumptions in the Regulatory Agreement regarding the Other Restricted Units would have to “include the area median income as outlined in the Award, a limitation that tenants pay no more than 30% of their income, and assume 1.5 persons occupy each unit.”

These proposed Regulations are contained in Sections 5062(b), 5170 (definitions) and 5220(b).

Monitoring Compliance with Terms and Conditions of the Award

Applicant’s Submission of Compliance Certification

The proposed Regulations provide that for those projects receiving an Award prior to December 31, 2016, Applicants will be required to submit annually to CDLAC an Annual Application Public Benefits and Ongoing Compliance Certification via CDLAC’s online compliance certification system (“Compliance Certification”). For projects receiving an Award after December 31, 2016, the Applicant would be required to submit the Compliance Certification to CDLAC “every year until completion of the project and every three years thereafter.” In both cases, the Compliance Certification would be due by March 1 and Applicants would be subject to penalty (including disqualification) for failure to comply. These proposed revisions are contained in Sections 5144(a) and 5146 of the Regulations.

Sponsor’s Verification of Tenant Income

The proposed Regulations provide that for all QRRPs receiving an Award after December 31, 2016, Sponsors will be required to: (a) use HUD Handbook 4350.3 to verify tenant income at initial occupancy; and (b) annually collect and retain the following income and verification documentation related to all the Restricted Units identified in the Award or as defined in Section 5200(e) of the Regulations: “Tax Credit Allocation Committee (“TCAC”) Tax Income Calculation (“TIC”) or equivalent documentation, all associated source income documentation, and evidence of the verifying income computation.” Project Sponsors also will be required to provide a TCAC Project Status Report or equivalent report to the Applicant annually in connection with the Applicant’s submission of the Compliance Certificate. Sponsors will have to retain this information for ten years. These proposed new Regulations are found in Section 5144(b).

For Non-TCAC QRRPs, Sponsors would have to elect additional compliance options, which would be included in the Award. In addition, these non-TCAC QRRPs would have to designate CDLAC to receive notice of project name and ownership changes, default, and foreclosure as may be provided in the bond documents. These new proposed Regulations are found in Sections 5144(d) and 5145(d).

CDLAC has also proposed revisions to its annual certification of compliance forms for use in all projects receiving allocation after December 2016. Applicants would be required to collect and retain from the Sponsor the applicable Certification of Compliance II as attached in the Award or other comparable form outlined in an Applicant’s Policies (“Sponsor Compliance Certificate”). The Sponsor would submit the Sponsor Compliance Certificate to the Applicant annually until the Project is completed and then every three years thereafter during an existing regulatory period and/or compliance period. The Sponsor would also provide the Applicant with the applicable Certificate of Completion as provided in the Award or other comparable form outlined in an Applicant’s Policies. The Applicant would have to confirm its receipt to CDLAC by March 1 via its online compliance certification system (or such other date as requested by CDLAC). CDLAC would have the right to enforce these requirements through an action for specific performance or other available remedy of the Sponsor. This new proposed Regulation is found in Section 5145(b).

Applicant’s Verification and Certification of Tenant Income and Rent

Additional proposed changes provide that after December 31, 2016, an Applicant’s compliance with the income and rental requirements of the Restricted Units identified in the Award and the Regulatory Agreement would have to be demonstrated by an initial review of 20% of all management files associated with the Restricted Units and subsequent review every three years thereafter, including review of all newly leased units. Units would be selected at random with a distribution based on unit locations, sizes, and income levels. “For this 20% of files, Applicants [would] review each initial or subsequent occupant and their associated TIC in conjunction with the supporting income verification documentation and make a determination if the project is complying with the income and affordability standards.” This review could be performed on-site or through an electronic file audit.

Applicants would also be required to submit a Sponsor Compliance Certificate or equivalent form, which together with the above review would provide Applicants with the ability to report annually to CDLAC regarding compliance with the unit restrictions of the Restricted Units. Records of the income verification process would be kept on file for ten years together with documentation memorializing review and determination of income eligibility. Source income documentation would be retained for one year. These new proposed Regulations are found in Section 5144(c).

CDLAC (or an entity acting on its behalf) would monitor all TCAC QRRPs for compliance with the terms and conditions of the Award, and such projects would be subject to the provisions of the California Code of Regulations regarding the TCAC regulatory agreement.

This new proposed Regulation is found in Section 5145(c).

Regulatory Agreement Revisions

The proposed Regulations provide that for projects receiving an Award after December 31, 2016, the Regulatory Agreement for all QRRPs terminate prior to the end of the Award’s affordability term only for:

“(i) [I]nvoluntary noncompliance with the provisions of the Regulatory Agreement caused by fire or other casualty, seizure, requisition, change in a federal law or an action of a federal agency after the bond issuance, which prevents the Issuer, Fiscal agent and/or the Trustee (as applicable) from enforcing such provisions, or (ii) foreclosure, exercise of power of sale, and/or, transfer of title by deed in lieu of foreclosure in connection with a deed of trust directly or indirectly security[ing] repayment of bonds, or condemnation or a similar event, but only if, in the case of the events described in either clause (i) or (ii) above, if the bonds are redeemed within a reasonable period or the proceeds for the event are used to provide a project that meets the requirement of the Regulatory Agreement.”

This new proposed Regulation is found in Section 5220(a).

For projects receiving an Award after December 31, 2016, the proposed changes provide that the Regulatory Agreement for all QRRPs (1) incorporate the Award by reference and as an attachment; (2) have the requisite 30 or 55 year term from the date of 50% occupancy or the commencement of the CDLAC QPP; (3) include all applicable income and affordability requirements outlined in the tax code and the applicable portions of the California Health & Safety Code; (4) clarify that compliance with items not contained within the body of the Regulatory Agreement but referred to in the Award are the responsibility of the Sponsor to report to the Applicant; and (5) list CDLAC as a contact to receive notice of changes in project name, ownership, issuer, and management company as well as a contact to receive notices of defaults associated with rents and income requirements, foreclosure, Regulatory Agreement termination and bond redemption. This new proposed Regulation is found in Section 5220(c).

Finally, CDLAC’s proposed Regulations would require receipt of a digital copy of the recorded Regulatory Agreement as an additional condition for release of the Applicant’s performance deposit. This proposed revision is contained in Section 5051(a) of the Regulations.

Miscellaneous Proposed Revisions Regarding JPAs, the Term of the QPP, Filing Fees, General and Rural Multifamily Deals and Projects Seeking Assignment and Assumption of HAP Contracts.

JPAs

Another proposed revision to CDLAC’s Regulations would restrict applications from its JPA Applicants to projects located within the geographical boundaries of one or more of the JPA members, except for certain projects that are exempted from such requirement under Section 6586.5(c) of the California Government Code related to the Marks-Roos Local Bond Pooling Act of 1985. This proposed revision is contained in Sections 5031 and 5033 of the Regulations.

Term of the QPP

For acquisition and rehabilitation QRRPs, CDLAC’s proposed Regulations would amend its definition of QPP to acknowledge that, in certain circumstances, the income and rent restrictions identified in the Award begin 12 months after the bond issuance date and end the later of 31 years (and presumably 56 years during an open application process) after the bond issuance date or the date on which the bonds are no longer outstanding. This additional time would be available for such projects unless less than 10% of the units were available for occupancy within 60 days of the earlier of the date of project acquisition or the issuance date of the bonds. This proposed revision is contained in Section 5192 of the Regulations.

Filing Fees

CDLAC’s proposed Regulations further increase its filing fees to review an application for an Award from $600 to $1,200 and introduce an additional $600 fee to review an application for a Supplemental Award. Both fees would be nonrefundable, but would be credited against the total filing fee. This proposed revision is contained in Section 5054(a) of the Regulations.

General and Rural Multifamily Allocation Limits

The proposed Regulations also provide that bond allocation limits for General and Rural Multifamily Pools are now subject to limits on a per unit basis as provided in Section 5233 of the Regulations.

Assignment and Assumption of HAP Contracts

Finally, CDLAC’s proposed Regulations would require that all projects that request an assignment and assumption of an existing HAP Contract submit an application to HUD by the CDLAC application date. No later than four calendar days prior to the first posting, CDLAC would require that it receive a letter from HUD stating that it will approve the assignment and assumption of the HAP Contact prior to the expiration of the Award. This proposed revision is contained in Section 5255(d) of the Regulations.

Next Steps

These proposed revisions to the Regulations are available for public comment until October 26, 2016.

Last Updated: October 27 2016

Article by Paul A. Toland and Justin S. Cooper

Orrick

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.

Monthly municipal bond volume surged to a three-decade high in October, as issuers rushed to take advantage of near-record low interest rates and get deals done before the presidential election.

October bond issuance totaled $53.16 billion, according to Thomson Reuters, the most in digital records going back to 1986 and surpassing the $50.79 billion total set in June 2008. The last time volume was higher was in December 1985, when it hit $59 billion, according to Bond Buyer yearbooks.

“We had three weeks of exceptionally large issuance and there were a couple of factors driving issuers into the market,”said Jim Grabovac, senior portfolio manager at McDonnell Investment Management. “You have the presidential election plus an increasing probability the Federal Reserve will raise rates again in December.”

Volume for the month was up 51.4%, from $35.12 billion in the same month last year. Issuance for the year-to-date is $339 billion, meaning volume is likely to surpass the $400 billion plateau for the second year in a row and could also challenge the yearly record of $433.3 set back in 2010.

“The volume is explainable, as concerns about rising interest rates and getting in ahead of the election, pushed issuers into the market,” said Natalie Cohen, managing director of municipal securities research at Wells Fargo Securities. “For the year through October there were 25 deals larger than $500 million and 200 deals larger than $100 million – much of which occurred on October. In October alone, there were 21 deals over $500 million and 126 over $100 million.”

New money sales increased by almost half to $21.62 billion in 575 deals from $14.49 billion in 489 deals a year earlier, fueling expectations that demand for infrastructure improvement will propel muni sales in the months ahead.

“Looking ahead, if there’s any testimony to the hope that bi-partisan agreement provides, look at transportation,” Cohen said. “At the end of 2015 Congress finally passed a longer term, five-year highway and transit bill. At this time there are more than $250 billion ballot measures related to transportation in the November election. Those that pass will create jobs and be good for economic growth.”

Refundings, which have been strong for most of the year due to persistent low interest rates, catapulted 60.2% higher to $20.54 billion in 451 transactions. from $12.82 billion in 397 transactions during the same period last year.

“Refundings are great for issuers because they help with balance sheets and cash flows,” Cohen said.

Issuance was also helped by a correction in market yields over the past several weeks, according to Grabovac.

“We have seen a fairly decent correction, as a higher supply turned into a 25 basis point or so backup in yields, which is something that participants were wanting, and now I think we are at a comfortable level,” he said.

Combined new-money and refunding issuance climbed 41% to $11 billion from $7.81 billion.

Negotiated deals, at $43.22 billion, were higher by 76.3%, while competitive sales increased by 8.6% to $9.25 billion from $8.52 billion.

Issuance of revenue bonds increased 54.5% to $35.85 billion, while general obligation bond sales gained 45.3% to $17.32 billion.

Taxable bond volume was 18.9% higher at $2.92 billion, while tax-exempt issuance increased by 64.9% to $49.66 billion.

Minimum tax bonds issuance slipped to $587 million from $2.55 billion, while private placements sank to $691 million from $2.08 billion.

Zero coupon bonds increased to $240 million from $98 million.

Bond insurance increased 52.6% for the month, as the volume of deals wrapped with insurance rose to $2.69 billion in 169 deals from $1.76 billion in 154 deals.

Variable-rate short put bonds inclined 30% to $1.09 billion from $841 million. Variable-rate long or no put bonds rose to $115 million from $2100 million.

Bank qualified bonds improved 11.4% to $1.88 billion from $1.69 billion.

Five out of the 10 sectors saw year-over-year gains. Health care more than doubled to $7 billion from $2.93 billion, general purpose also saw a more than double increase to $14.84 billion from $7.21 billion, education related more than doubled as well at $13.31 billion from $6.71 billion, hosing increased 23.7% to $1.99 billion from $1.61 billion and utilities improved 45.2% to $6.93 billion from $4.77 billion. The other sectors all saw at least 6.2% decrease.

California is still the top issuer among states for the year to date, followed by Texas, New York, Pennsylvania and Florida.

Issuance from the Golden State so far this year has totaled $57.38 billion, with the Lone Star State next at $48.44 billion. The Empire State follows with $39.49 billion. The Keystone State is in fourth with $18.49 billion and The Sunshine State rounds out the top five with $16.23 billion.

“Going forward, there should be more infrastructure spending, which will also create more jobs and will be good for the economy as a whole,” said Cohen. “New money projects are much lower than 2010 but we are starting to see it come back and that is a good sign for infrastructure.”

The Bond Buyer

By Aaron Weitzman

October 31, 2016

The Mountain and Pacific states continue to add employment and attract new residents, with coastal metropolitan areas experiencing strong upward pressure on housing prices.

Continue reading.

Oct. 31, 2016

Read the Digest.

S&P Global Ratings held an interactive, live audio webcast and Q&A on Tuesday, November 1, 2016 at 3:30 p.m. Eastern Time where we discussed the results of our annual survey and our view of credit implications for U.S. States in the context of rising costs, funding trends, and revised accounting standards.

View the webcast replay.

Standard & Poors

Nov. 1, 2016 | New York, NY

Sales of municipal bonds and notes soared to a record $52.5 billion in October, the biggest month of issuance since records began in the 1980s, according to Thomson Reuters data.

Municipal supply has surged in recent months as state, city and other public agencies eagerly sell bonds and notes at low interest rates.

October brought nearly $52.5 billion of new supply to the $3.7 trillion U.S. municipal market. The last time the market reached similar levels was in 2008, when $51.4 billion was sold in April 2008 and $50.6 billion was sold in June 2008, according to Thomson Reuters data.

Muni bonds have outperformed other fixed income securities and retained value for domestic investors seeking a tax exemption. Historically low and negative sovereign interest rates have also driven foreign investors, even if they cannot benefit from tax-exempt status.

The pace of issuance, however, may be slowing. Forecasts for November show supply dropping somewhat, perhaps reflecting higher interest rates, fewer refunding opportunities and the uncertainty surrounding the U.S. presidential election on Nov. 8, Janney Fixed Income Strategy’s Alan Schankel said last week.

Reuters

By Robin Respaut

Mon Oct 31, 2016

(Reporting by Robin Respaut; Editing by Dan Grebler)

Fitch Ratings-New York-04 November 2016: If Hillary Clinton’s presidential bid is successful and her broad healthcare proposals are implemented, they have the capacity for near-term benefits for nonprofit hospitals, but they may also create some operating risk and uncertainties. While the proposed universal Medicaid expansion and proposed cost controls are generally positive over the near term, the longer term effect of expanding Medicare eligibility and implementing a “public option” is uncertain, Fitch Ratings says.

On the positive, Clinton’s plan to expand Medicaid in the 19 states that have thus far declined to do so would be beneficial in the short term for nonprofit hospitals in those states. Mirroring the impact seen in states that have already expanded Medicaid, Fitch would expect an increase in patient volumes and reduction in bad debt and charity deductions from revenue. Hospitals in the few states that have implemented expansion alternatives — such as waiver programs — would likely experience a more muted benefit.

However, over the long run, Fitch would expect the benefits to wane with deterioration in payor mix. As seen in states that expanded Medicaid, hospitals have experienced a decline in commercial insurance which has not been fully offset by reduced bad debt or supplemental reimbursement from the state through programs like the Disproportionate Share Hospital program and provider-tax and provider-fee programs. These supplemental revenue streams are always susceptible to cuts in funding.

Similarly, Clinton’s plan to expand access to health insurance exchanges regardless of immigration status, as well as increasing reimbursement to aid access in rural areas, is likely to be positive for nonprofit hospitals. Likely outcomes include a reduction in charity and bad debt expense, and incremental reimbursement for telehealth, federally qualified health centers and rural health clinics.

The impact of Clinton’s plan to implement premium and drug cost controls is uncertain and will vary by hospital especially related to premium increases with the growing interest in owning health plans.

Lastly, Clinton’s proposal to broaden Medicare eligibility and provide a “public option” has the potential to negatively impact the sector, though the plan details remain unclear. Her proposal includes allowing people over 55 years old to purchase Medicare coverage, which may push revenue mix further toward Medicare and away from commercial insurance, compressing overall reimbursement. The impact largely depends on whether existing supplemental reimbursement mechanisms that offset care would be reduced for the uninsured/underinsured. The impact could also hinge on whether the incremental revenue from Medicare/Medicaid, and the public option, reimbursement would offset that loss.

Fitch has not commented on the Trump healthcare plan due to the lack of specificity on what would be implemented after “repeal and replace.” The Trump platform emphasizes the use of health savings accounts, increased price transparency, modification of state insurance laws and allowing easier access to foreign pharmaceuticals, which may or may not have a residual impact on hospital providers.

A repeal of the current Medicaid program (and the expansion of eligibility) with a block grant program would have to be evaluated on a state by state basis. The level of infrastructure and investment in the current ACA has been significant. However, the ongoing pressure on healthcare costs and funding and push toward value-based reimbursement by Medicare would likely result in reform measures remaining in place regardless of a repeal of ACA.

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Munis have historically outperformed taxable bonds during periods of rising rates

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

Watch video.

Bloomberg Business

November 3, 2016

TOKYO — Bank of Japan Governor Haruhiko Kuroda on Wednesday signalled that the central bank’s massive asset purchases will continue to focus on government bonds, saying it was difficult to buy municipal bonds given the fairly small market for them.

“It’s hard to see how we can buy municipal bonds as part of our monetary policy,” Kuroda told parliament, when asked by a lawmaker whether it could be a policy option.

Kuroda also said prices are not determined by the pace of money printing alone, distancing himself from the views of BOJ Deputy Governor Kikuo Iwata – a former academic who was an architect of the central bank’s asset-buying programme dubbed “quantitative and qualitative easing” (QQE).

“Price moves are influenced by various factors like oil price fluctuations and exchange-rates… so you can’t say inflation is completely a monetary phenomenon,” Kuroda said.

“But from a long-term perspective, you can say monetary policy has significant influence on inflation,” he said.

Under QQE deployed in 2013, the BOJ set base money – or the amount of deposits and cash in circulation – as its policy target under Iwata’s theory that the central bank can accelerate inflation simply by printing money aggressively.

But after more than three years of aggressive government bond purchases failed to end economic stagnation, the central bank in September switched its policy target to interest rates in an overhaul of its policy framework.

The BOJ still loosely commits to buying government bonds so its holdings increase at an annual pace of 80 trillion yen (627 billion pounds) per year. It does not buy municipal bonds, though some analysts have proposed doing so if it were to ease policy.

On Wednesday, Kuroda dismissed concerns voiced by some market participants that the central bank’s aggressive purchases were drying up bond market liquidity.

“I don’t think the market’s liquidity has shrunk sharply, or its functions have deteriorated significantly, compared with historical levels,” Kuroda told parliament, when asked about the rising costs of the BOJ’s stimulus programme.

Trading volumes of Japanese government bonds hit their lowest levels in years in October, as the BOJ’s large presence in the market squeezed opportunities for trading.

By REUTERS

NOV. 2, 2016, 5:12 A.M. E.D.T.

(Reporting by Leika Kihara; Editing by Richard Borsuk)

CHICAGO/SAN FRANCISCO — U.S. voters on Tuesday will decide the fate of $70.3 billion of municipal bond issuance, the largest amount of borrowing requests in a decade, with much of it earmarked to help pay for fixing the nation’s crumbling infrastructure.

The biggest concentration of bonds hanging in the balance is in California, which accounts for nearly 60 percent of the total.

Nationwide, the state, school and local government bond measures, 682 in total, would fund building and repairing schools, mass transit and roads, and even biomedical research in one state, according to data company Ipreo.

To view the historical amount of bond ballot measures, click on http://tmsnrt.rs/2e9Z5bb.

The governments will be able to take advantage of still-low borrowing costs and a stable economy, even when considering the possibility of an increase in historically low benchmark interest rates by the Federal Reserve in December.

“This year, the finances at the state level look better. We’ve had more stability in revenues and more stability in the economy as a whole, so we would expect a substantial amount of these proposals to be accepted,” said Philip Fischer, municipal research strategist at Bank of America Merrill Lynch.

Yields on top-rated 10 and 30-year bonds hit all-time lows in July on the U.S. municipal market’s benchmark scale. While yields have risen since then they remain attractive for state and local government borrowers.

BOND MEASURES PLENTIFUL IN CALIFORNIA

California ballots are bursting with 195 bond measures totaling $41.7 billion, including the biggest nationwide — $9 billion of state general obligation debt to finance new construction and modernization for K-12 and charter schools and community colleges.

Another California ballot measure is aimed at reining in debt by requiring statewide voter approval for revenue bonds exceeding $2 billion for projects financed, owned, or managed by the state.

Opponents of the initiative, called Proposition 53, say mandating voter approval would delay critical infrastructure projects.

“The drought over the past four years has highlighted the need for infrastructure in California,” said David Guy, Northern California Water Association president, at a September panel on California propositions. “We don’t need another hurdle to progress in California.”

While school and infrastructure financing are dominant themes this election, a measure on Montana’s statewide ballot would create a biomedical research authority funded by $200 million of bonds over 10 years.

Voters will also be weighing 154 state-wide measures, including bonds, taxes, gun control and the minimum wage, in 35 states, according to the National Conference of State Legislatures.

In several states, voters will be deciding whether to increase various sales, income, property, cigarette and other taxes.

For example, in Colorado there is a proposed constitutional amendment calling for a public option universal healthcare payment system, funded by a new 10 percent state payroll tax. Employers would cover two-thirds and employees one-third of the cost, according to the citizen-led initiative known as Amendment 69.

Washington state voters will weigh the nation’s first tax on carbon emissions, while five states, including California, seek to legalize and tax recreational marijuana.

Oregon voters will consider changing the corporate tax code to collect revenue equivalent to one-third of the state’s general fund expenditures. The legislature would decide how to use the proceeds.

Eno Center for Transportation, a nonprofit think tank, reported that voters will decide tax and bond measures for roads, seaports, railroads, airports and mass transit that would raise an estimated $250 billion for specified projects over a period of years during which specific taxes would be collected.

These include $3.5 billion of bonds to repair and improve the San Francisco area’s BART transit system, a regional property tax hike to raise $3.1 billion over 20 years for mass transit in the Detroit area and $70 million of bonds to improve Rhode Island’s seaport.

Kerry O’Hare, vice president of Building America’s Future, a bipartisan coalition on infrastructure investment, said the dearth of reliable long-term federal transportation funding has left a void that state and local governments are trying to address via ballot measures.

“At the state and local level, it’s ‘Listen, we need to step up and raise money for transportation needs,'” she said.

By REUTERS

NOV. 4, 2016, 1:39 P.M. E.D.T.

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

Moody’s gives its highest airport credit rating to just one major airport, Boston Logan, and its lowest to privately operated Terminal B at New York’s LaGuardia.

In Moody’s rating of credit at 92 leading U.S. airports, only one — Boston Logan — has the highest rating.

Two hundred miles and seven credit notches separate Logan from New York’s LaGuardia Airport, where privately operated Terminal B, home to every airline but Delta (DAL) , is grouped with six small airports that have the lowest rating.

“Our ratings are basically an assessment of the issuer’s ability to repay principal and debt obligations on time,” said Maria Matesanz, Moody’s senior vice president.

“We have the highest current airport ratings for government-owned Massachusetts Port Authority,” Matesanz said. “It has credit strengths that we think are important — strong debt service coverage ratios, a strong service area, and a very diverse airline carrier base, with no airline responsible for more than 27% of enplanements.”

Boston Logan is a hub for JetBlue (JBLU) , which has about 30% of all domestic passengers, according to Bureau of Transportation statistics for the 12 months ended July 30. American is second with 23%; Delta, which has 12%, said it will grow its Boston presence.

The bonds, issued primarily against revenue for Boston Logan, but also covered by Worcester Regional Airport and Hanscomb Field in Bedford, have an Aa2 rating.

Moody’s next highest rating, Aa3, is assigned to 10 leading airports including Atlanta, Charlotte, Los Angeles and the Port Authority of New York and New Jersey.

But the bonds that cover Terminal B at LaGuardia are a special case, not covered by the Port Authority because the terminal is operated and financed by LaGuardia Gateway Partners LLC. Those bonds are rated Baa3.

While the City of New York owns all of the LGA terminals, LaGuardia Gateway Partners won the right to manage the airport’s recently started construction project, which could cost as much as $8 billion. The partnership includes Vancouver-based Vantage Airport Group, Swedish construction firm Skanska, and Paris-based Meridiam SAS.

All of the airlines except for Delta operate out of Terminal B. Delta operates out of Terminal D, which is covered by its balance sheet and its credit, which also has a Baa3 rating. Corporate bond ratings are generally lower than municipal bonds or project finance bonds.

Privately managed airports and terminals are rare in the U.S., which partially explains the low ranking. In this country, only the San Juan, Puerto Rico airport, JFK Terminal One and the JFK International Air Terminal are privately managed.

“There’s not a history,” said Earl Heffintrayer, Moody’s lead airport analyst. “From our reading of the documents, they should be able to recover the debt service.”

Globally, privately managed airports are not uncommon. In general, their coverage is 1.5 to 2 times debt. The LGA Gateway Partners is at the low end of that range.

Another rating issue is the ongoing improvement project. “It’s the most complicated construction project we have rated at Moody’s,” Heffintrayer said. “They are building a new terminal beside, above and around an existing facility while trying to maintain the existing facility.

“The methodology we use for construction is informed by our view that it’s an investment grade credit, but it hits every bucket of complexity that we have.”

In its June credit opinion for the Massachusetts Port Authority, Moody’s said, “The Aa2 is based on the credit fundamentals of the authority, which are currently among the strongest of Moody’s rated airports.

“The airport has a strong and improving relative market position in a robust and diverse economy and is expected to maintain above-average financial metrics for the foreseeable future despite substantial additional planned debt to fund its 2016-2020 capital program.

“Massport’s enplanement base remains among the most diversified in the US airport sector and the airport has had above average growth in recent years, which is continuing into 2016. The high rating is tempered by expectations of an additional $1 billion in debt through 2020.”

In its June opinion on LaGuardia Gateway Partners, Moody’s said that during the construction project, which began this summer, “the requirement to build around the existing facility while maintaining operations introduces the potential for schedule delays.

Moreover, “the construction risk is additionally amplified by poor geotechnical conditions, known environmental contamination, and limitations on the ability to access the site by commercial vehicles,” Moody’s said.

Nevertheless, it said, “the high level of air traffic demand at LaGuardia will overcome the high project costs.”

In general, airlines have no place else go to because JFK operates under slot constraints while Newark, where slot constraints are ceasing, “lacks large amounts of gate capacity to accommodate a large scale diversion of operations from LGA,” Moody’s said.

The Street

by Ted Reed

Oct 28, 2016 7:00 AM EDT

Dive Brief:

• The Chicago Board of Education is expected to greenlight up to $840 million in additional debt today for new school construction and renovations, according to the Chicago Tribune. The board will also vote on a $160 million bond deal to refinance previous obligations.
• After a Moody’s downgrade in the board’s bond rating, detractors of the school board’s plan claim that the cost to sell the new property tax-backed bonds will be high. However, the prospect of such a large construction program for the city is bound to garner favor, according to the Tribune.
• The school board’s borrowing and construction plan relies on a tentative $200 million state contribution, outlined in the as-of-yet unapproved board budget. The district had put forward a $338 million capital budget, with $233 million financed through property taxes, before its most recent proposal.

Dive Insight:

School districts have been increasingly taking on ambitious construction and renovation programs, with many of them focused on boosting energy efficiency and producing more sustainable structures. For example, California voters will decide next month on Proposition 51, a measure that would authorize a $9 billion bond deal to finance new school construction, as well as repair and replace older facilities. State officials said this measure is only the beginning of a necessary $22 billion in school construction spending for the next 10 years. The state’s construction industry is obviously pro-51, but Gov. Jerry Brown said the state can’t afford the extra $500 million payment on education bonds.

While not as pricey as California’s proposed plan, Baltimore has started construction of two multimillion-dollar schools as part of a $1.1 billion school upgrade and construction initiative. The program, financed though revenue bonds, will see 28 new and rehabbed schools completed by 2020, all managed by the Maryland Stadium Authority. The project will allow for at least double the district’s current enrollment.

Although it’s the job of public watchdogs to play devil’s advocate when it comes to public spending, this is truly the time for bond-financed deals. According to Bloomberg report, more local public entities are using municipal bonds to finance their public building and infrastructure projects, thanks to record-low interest rates. In the dash to complete these deals, Barclays Plc said municipal bond issues might reach $400 billion by the end of 2016.

Construction Dive

by Kim Slowey
@kimslowey

Oct. 26, 2016

NEW YORK, Oct. 25, 2016 (GLOBE NEWSWIRE) — Kalotay Analytics, a provider of high speed, high precision fixed income valuation software, announced the licensing of patent-pending tax-neutral municipal bond valuation and risk analysis methodology to BlackRock.

When interest rates rise, the prices of lower coupon bonds may drop much more precipitously than predicted by traditional risk calculations. The traditional approach fails to account for the tax payable at maturity on the discount when prices fall below par, which pushes prices further down.

“Incorporating tax effects is vital for the proper risk analysis and tax management of municipal bonds. We’re thrilled that BlackRock recognizes the benefits of our innovative methodology, and is implementing it across its existing platforms,” said Andy Kalotay, president of Kalotay Analytics.

Antonio Silva, the head of the Financial Modeling Group at BlackRock said, “We continually look for improvements to our analytics platform and are pleased to integrate the tax effects model into the new valuation methodology used for municipal bonds.”

About Kalotay Analytics
Kalotay Analytics has been providing fixed income valuation and risk measurement tools to major market participants since 1990. Applications of its patented, lightning-fast, technology include real-time pricing of bond ETF’s, risk management, tax management, and pre-trade analysis. The firm has unparalleled expertise in the valuation and risk analysis of callable municipal and agency bonds. Analytics coverage spans the global fixed income universe, including fixed rate bonds, floaters, MBS, and inflation-indexed structures. Kalotay technology drives the recently introduced live municipal yield curve distributed by the Associated Press.

For more information about Kalotay Analytics, please visit: www.kalotay.com.

Kalotay Contact:
Andrew Porter
(212) 482 0900 press 1
andy.porter@kalotay.com

About BlackRock
BlackRock is a global leader in investment management, risk management and advisory services for institutional and retail clients. At September 30, 2016, BlackRock’s AUM was $5.1 trillion. BlackRock helps clients around the world meet their goals and overcome challenges with a range of products that include separate accounts, mutual funds, iShares® (exchange-traded funds), and other pooled investment vehicles. BlackRock also offers risk management, advisory and enterprise investment system services to a broad base of institutional investors through BlackRock Solutions®. As of September 30, 2016, the firm had approximately 13,000 employees in 30 countries and a major presence in global markets, including North and South America, Europe, Asia, Australia and the Middle East and Africa. For additional information, please visit the Company’s website at www.blackrock.com | Twitter: @blackrock_news | Blog: www.blackrockblog.com | LinkedIn: www.linkedin.com/company/blackrock

BlackRock Media Contact
Katherine Ewert
212-810-5204
katherine.ewert@blackrock.com

Date: Thursday 6 October

Click here to listen to the replay.

Fitch analysts discussed our recent report that focuses on the ratings impact of event risk on airports and other infrastructure projects, including natural disasters, terrorism and conflict or political instability.

Speakers:

• Joseph Cass, Associate Director, Global Investor Development
• George Abbatt, Associate Director, Global Infrastructure Group
• Ian Dixon, Managing Director, Head of Infrastructure EMEA

Key discussion points included:

• Recovery of Passenger Volumes – Major Airports’ Traffic Resilient
• Potential Benefits of Asset and Creditor Protections
• Historical Impact on Credit Ratings
• Rating Approach to Event Risk

S&P Global Ratings clarifies its treatment of information sufficiency in the U.S. public finance ratings process. In this CreditMatters TV segment, Managing Director Robin Prunty explains why the receipt of quality and timely information is essential to maintaining our ratings of municipal credits.

Watch the video.

Oct. 25, 2016

S&P Global Ratings is clarifying its approach to information sufficiency in U.S. public finance (USPF) as part of the ratings process. S&P Global Ratings monitors and updates public credit ratings on an ongoing basis.

Continue reading.

Oct. 25, 2016

In this CreditMatters TV segment, Larry Witte, Senior Director with Global Fixed Income Research, discusses recent findings for the third quarter of 2016, which marked 16 straight months in which there were more upgrades than downgrades. The downward trend for state ratings continued, however, with two downgrades compared to one upgrade.

Watch the video.

Oct. 27, 2016

Read the press release.

U.S. wind energy installations fell 44 percent in the third quarter, though projects under construction are approaching record levels thanks to its low cost and the recent five-year extension of a key tax credit, according to an industry group.

Installations of wind capacity fell to 895 megawatts during the quarter from 1,603 a year earlier, according to a quarterly report by the American Wind Energy Association (AWEA).

Wind energy makes up about 5 percent of U.S. electricity, while solar lags at about 1 percent. There is still far more wind capacity, 75.7 gigawatts, than solar, which had nearly 32 GW installed at the end of the second quarter.

Wind is converted into mechanical energy then electricity. A wind turbine 80 feet tall can power a single home while a utility-scale turbine powers hundreds of homes.

With the renewal late last year of a tax credit for wind projects through 2019, developers are no longer under pressure to begin projects this year, AWEA officials said.

All of the capacity added during the quarter was in two states: Texas, the nation’s top state for installed wind capacity, and Minnesota.

The pace of wind energy development has been highly dependent on the federal production tax credit over the last decade, and goes through boom and bust cycles when it is renewed or allowed to lapse by Congress.

Projects under construction were up 2 percent from the third quarter of last year, and have climbed 16 percent, on average, every quarter this year. At 13,563 MW, projects under construction are within 1,000 MW of the record hit in 2014, the AWEA said.

The cost of wind energy dropped 61 percent between 2009 and 2015, according to a study by investment bank Lazard last year, which also found wind to be competitive with, and often below, the cost of conventional generation like natural gas.

New power contracts for wind facilities are up 39 percent so far this year, with the majority coming from corporate and other nonutility purchasers. Amazon.com Inc, Johnson & Johnson and Target Corp all struck deals for wind power during the quarter.

With contracts for wind power, big corporations are able to lock in electricity rates for 10 or 15 years, according to AWEA Chief Executive Officer Tom Kiernan.

“They appreciate that stability and seeing the benefit,” Kiernan said.

During the quarter, Iowa became the first state to generate more than one-third of its electricity, 35.8 percent, from wind power. Iowa has 6,365 MW of wind capacity installed, and an additional 3,100 MW under construction or in advanced development.

REUTERS

Thu Oct 27, 2016 | 3:00pm EDT

(Reporting by Nichola Groom; Editing by Jeffrey Benkoe)

Read the Digest.

Nora Wittstruck and Oscar Padilla discuss a recent report on how the Texas economy is weathering the prolonged downturn in oil prices and Sussan Corson provides an overview of the revised state criteria and our approach to pensions.

Listen to the podcast.

Oct. 25, 2016

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

Watch the video.

Bloomberg Business

October 27, 2016

Sales of municipal bonds and notes soared to a record $52.5 billion in October, the biggest month of issuance since records began in the 1980s, according to Thomson Reuters data.

Municipal supply has surged in recent months as state, city and other public agencies eagerly sell bonds and notes at low interest rates.

October brought nearly $52.5 billion of new supply to the $3.7 trillion U.S. municipal market. The last time the market reached similar levels was in 2008, when $51.4 billion was sold in April 2008 and $50.6 billion was sold in June 2008, according to Thomson Reuters data.

Muni bonds have outperformed other fixed income securities and retained value for domestic investors seeking a tax exemption. Historically low and negative sovereign interest rates have also driven foreign investors, even if they cannot benefit from tax-exempt status.

The pace of issuance, however, may be slowing. Forecasts for November show supply dropping somewhat, perhaps reflecting higher interest rates, fewer refunding opportunities and the uncertainty surrounding the U.S. presidential election on Nov. 8, Janney Fixed Income Strategy’s Alan Schankel said last week.

REUTERS

Mon Oct 31, 2016 | 5:20pm EDT

By Robin Respaut | SAN FRANCISCO

(Reporting by Robin Respaut; Editing by Dan Grebler)

In this edition of CreditMatters TV, Senior Director John Sugden and Director Sussan Corson discuss our updated criteria for rating U.S. state governments and territories. They explain the key changes and impact on existing ratings.

Watch the video.

Oct. 17, 2016

NEW YORK (S&P Global Ratings) Oct. 17, 2016—S&P Global Ratings today updated its methodology for rating United States state governments. The revised rating criteria is effective immediately.

“The changes are intended to better align our criteria with new pension reporting and disclosure, and provide additional transparency and guidance with respect to potential rating caps and overrides,” said credit analyst Sussan Corson.

The updated methodology applies to all U.S. state governments and U.S. territories. We do not expect any rating changes as a result of the revised criteria.

Concurrently, we published an FAQ on the revised criteria, as well as a process summary. The revised rating criteria follows the publication on May 25, 2016, of our Request For Comment on proposed changes to our methodology. The new criteria fully supersede the U.S. State Ratings Methodology that we published on Jan. 3, 2011. The articles published today are:

• U.S. State Ratings Methodology
• Credit FAQ: Changes In U.S. State Ratings Methodology
• RFC Process Summary: U.S. State Ratings Methodology

The report is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to research_request@spglobal.com. Ratings information can also be found on the S&P Global Ratings’ public website by using the Ratings search box located in the left column at www.standardandpoors.com. Members of the media may request a copy of this report by contacting the media representative provided.

Primary Credit Analysts: Sussan S Corson, New York (1) 212-438-2014;
sussan.corson@spglobal.com
John A Sugden, New York (1) 212-438-1678;
john.sugden@spglobal.com

Secondary Contacts: Robin L Prunty, New York (1) 212-438-2081;
robin.prunty@spglobal.com
Horacio G Aldrete-Sanchez, Dallas (1) 214-871-1426;
horacio.aldrete@spglobal.com
Eden P Perry, New York (1) 212-438-0613;
eden.perry@spglobal.com

Criteria Officer, U.S. Public Finance: Liz E Sweeney, New York (1) 212-438-2102;
liz.sweeney@spglobal.com
Senior Criteria Officer, Government Ratings: Laura J Feinland Katz, CFA, New York (1) 212-438-7893;
laura.feinland.katz@spglobal.com

Criteria Owner, U.S. Public Finance: Steve C Tencer, CPA, New York (1) 212-438-2104;
steve.tencer@spglobal.com

Help wanted: Top-notch financial talent needed to face intense regulatory scrutiny; no bonuses or equity awards; modest civil servant’s paycheck.

That is not a job that would appeal to most of the nation’s best and brightest financial executives, who enjoy the big cash and stock incentives—not to mention the prestige—offered by the private sector. But states and towns increasingly need such executives to manage bond sales and pension deficits, as they come under closer government oversight.

“Getting people in government is not easy,” said Robert Mayer, chief fiscal officer for the town of Fairfield, Conn. “They’re all making more than the mayor.”

Municipal finance chiefs in the Midwest earn between $85,000 and $160,000, depending on the town’s size and affluence, while those working on either coasts can expect slightly more, said Heidi Voorhees, head of GovHR USA LLC, an Illinois recruiter for the public sector and nonprofit groups. By contrast, the median compensation package—salary, bonus and stock options—for public-company finance executives was valued at $3.57 million, based on proxies filed as of late June.

“It’s always our toughest recruitment,” said Ms. Vorhees.

Adding to the difficulty: Municipalities and for-profit businesses follow very different bookkeeping and budget rules, she said.

One thing many public-sector CFOs have in common with private-sector peers is that they have to answer to the Securities and Exchange Commission. The agency regulates municipal-bond sales, as well as corporate offerings, and can impose fines for violations.

While most corporations have the resources they need to monitor compliance, SEC disclosure rules pose a special challenge for cash-strapped states and cities, which are under pressure to do more with less. While disclosure rules are less stringent for municipalities than for companies, that doesn’t get them off the hook for even small lapses.

If a municipality is 30 days late in filing its budget with state and federal regulators, the SEC considers that a disclosure violation, even if the delay is unlikely to harm its bondholders.

The SEC is “really naive in their understanding of what municipalities are capable of,” said Jeffrey Esser, chief executive of the Government Finance Officers Association, which has about 18,000 members in the U.S. and Canada.

In August, the SEC reached settlements with 71 municipalities and other public entities across 45 states over alleged bond-disclosure violations. Many of the parties that settled had voluntarily reported their violations, such as failing to disclose a change in tax-revenue forecasts.

The town of Fairfield was among those that self-reported, a move that tends to win leniency. It settled with the SEC without admitting or denying wrongdoing or paying a monetary penalty.

Mr. Mayer, Fairfield’s fiscal chief, is a career finance executive who left Wilkes-Barre, Pa., where he held a corporate job as a divisional chief executive, to be closer to his wife and daughters, who didn’t want to relocate.

“To keep myself a little bit busy I ended up getting into local politics,” he said. In 2012, Fairfield’s first selectman appointed him chief of staff. When the CFO job later opened up, Mr. Mayer was asked to step in. “Most good CFOs could make a positive impact,” he said of government service.

Most towns, hard-pressed to find money for such projects as pothole repair, park upgrades or a new public-transportation extension, are reluctant to spend precious cash staffing up their finance departments to ensure regulatory compliance. “The attention isn’t there, the budget isn’t there,” Mr. Mayer said.

Despite such pressures, municipalities and related entities don’t get a free pass, Andrew Ceresney, director of the SEC’s enforcement division, said at a conference last week. They have a total of over $3.7 trillion in outstanding debt, spread across about 44,000 issuers, compared with the about 8,600 corporate issuers the SEC regulates, he said.

Mason Neely, finance chief of East Brunswick, N.J., voluntarily reported to the SEC that his town failed to let investors know that S&P Global Ratings dropped coverage of the town’s sewer bonds when it decided to pay them off early. He said that while he takes responsibility for not immediately informing bondholders, the violation was minor.

Another potential pitfall for public-sector CFOs is that their predecessors often leave them with decades worth of financial information they know little about. When their town or regulators want to investigate something, “Well, I didn’t know that” is a common refrain, said J.T. Klaus, a partner at Kansas law firm Triplett Woolf Garretson LLC.

Succession planning is also nearly impossible for some towns and cities, said Mr. Klaus, who represents Andover, Kan., one of the 71 municipalities and related nonprofits that recently settled with the SEC. “There are not enough people living in the community who can do the job,” he added.

Mr. Klaus declined to discuss specifics of the town’s settlement.

To lure financial talent, towns need to modernize and be more flexible when it comes to issues like work-life balance, given they lack the pay scale to compete with the private sector, said Elizabeth Kellar, CEO of the Center for State and Local Government Excellence, a research group focused on helping municipalities meet staffing needs. “The governments that are making the best decisions are upgrading on technologies,” she said.

THE WALL STREET JOURNAL

By MAXWELL MURPHY

Oct. 17, 2016 4:21 p.m. ET

U.S. municipal market supply will likely be among the highest in a decade when an estimated $16.7 billion of bonds and notes goes up for sale next week, lead by deals from New Jersey and Alaska.

With $16.5 billion in expected bond sales and $213 million in notes, according to Thomson Reuters estimates on Friday, the week would be one of the 10 biggest for supply in the last 10 years. Looking at just bonds, it would be the biggest since December 2006.

New Jersey will sell $2.76 billion of highway reimbursement notes through Bank of America Merrill Lynch, and Alaska plans to offer $2.35 billion of taxable pension obligation bonds via Citigroup, with both deals set to price on Wednesday.

Muni supply is surging lately. This week, an estimated $15.9 billion of bonds and notes hit the market.

“We expect the issuance pipeline to remain robust over the next few weeks as some issuers look to place deals prior to the November general election and a potential (Federal Reserve) rate hike in December,” Barclays analysts said in a Friday report.

Barclays said the weakness in the muni market “is technical in nature, and as soon as supply subsides, the market should regain its footing.”

As this week’s big supply hits, U.S. municipal bond funds’ net flows turned negative for the first time since the end of September 2015, according to Lipper, a unit of Thomson Reuters Corp. Funds reported nearly $136 million of net outflows in the week ended Oct. 19.

Next week’s biggest competitive offering comes from Maryland, whose department of transportation will sell more than $690 million of new and refunded bonds in a two-part deal on Wednesday.

Reuters

Fri Oct 21, 2016 | 3:20pm EDT

By Nick Brown

(Reporting by Nick Brown and Karen Pierog; Editing by Lisa Shumaker)

There was a tremendous amount of volatility in the quarter in terms of state ratings. This is unusual because state ratings tend to be sticky – it takes major deterioration to cause a downgrade. States have vast resources and the ability to institute revenue increases and reduce budgets. States are also prohibited from filing for bankruptcy – they cannot just fold up and go away – which is true of most municipal issuers as well. States can manage spending by reducing funding to state instrumentalities and municipalities in the state as well as by reducing services provided, thus reducing the budget. However, as has been cited in our past commentaries, the factors that have caused state ratings to be weakened and eventually downgraded include (1) the severe underfunding of pensions due to overpromising and falling short on both required contributions and investment returns; (2) slow or declining revenue and economic growth combined with dipping into reserves rather than cutting budgets or raising revenues – also referred to as structural imbalance; and (3) exposure to the oil and gas industry, which has led to volatile revenue and economic growth and financial operations.

Five states were downgraded during the third quarter:

• Alaska was downgraded by Moody’s to Aa2 due to political instability, structural imbalance, outsized pension liabilities, and economic difficulties caused by low oil prices -basically, for all the reasons cited above!
• Mississippi was changed by Fitch to AA from AA+ due to weaker than expected operating performance and, in this case, a change of methodology in Fitch’s rating of states.
• Kansas was downgraded by S&P to AA- due to structural budget pressures, drawdown of reserves, and deferral of pension contributions.
• West Virginia was downgraded by Fitch to AA because of economic and fiscal challenges associated with the state’s dependence on the coal industry, and Fitch continues to maintain a negative trend on the state’s rating as a consequence of significant domestic and international momentum to reduce coal utilization.
• Finally, Illinois was again downgraded by S&P to BBB on September 29thafter just having been downgraded by the agency in June. The downgrade reflects continued weak financial management and increased long-term and short-term pressures tied to declining pension funding levels. Illinois pensions are 41% funded, compared with an average funding level of 75% for the states, per a recent Pew Charitable Foundation brief.

 

New Mexico’s Aaa rating was put under review for a downgrade by Moody’s because of an extremely large revision in 2016 and 2017 revenues, resulting in a large drawdown of reserves. The New Mexico legislature has a history of promptly addressing issues and has scheduled a special meeting. Expect a downgrade if the structural imbalance is not addressed. Although not a downgrade, the flooding in Louisiana (Aa3/AA by Moody’s and S&P, both with negative trends) devastated a state already weakened by exposure to the oil and gas industry. However, the long-term ramifications remain to be seen, as the economic stimulus from rebuilding may help the state’s revenues.

Pennsylvania received a reprieve in the form of Moody’s changing the negative trend to stable on its Aa3 rating. The revision of the commonwealth’s outlook to stable recognizes that Pennsylvania’s problems – while sure to persist – are unlikely to lead to sharp liquidity deterioration, major budget imbalances, or other pressures consistent with lower ratings for US states. After the revision to stable, Pennsylvania resorted to interfund borrowing, which is a credit negative, though Moody’s maintained the stable trend.

Alaska’s AA+ S&P rating was removed from CreditWatch negative – which indicates S&P was conducting a review that may have resulted in a downgrade; instead, it put in place a negative trend – a contrast to Moody’s downgrade action. Both agencies recognize that the state has a sizable structural imbalance, i.e., annual expenses exceed annual due to low oil prices and dependence on the oil industry; but the state still has substantial reserves. However, Moody’s views more negatively Alaska’s political instability resulting from ineffective governance and a divided legislature, which impacts long-term decision making.

States continue to be pressured, though there are bright spots.

Hawaii was upgraded by Moody’s and S&P to Aa1 and AA+, respectively, due to economic and revenue growth resulting in restoration of strong reserves and strong fiscal management. Minnesota was upgraded to AAA by Fitch – above the Moody’s and S&P ratings of Aa1 stable and AA+ positive – due to its broad-based economy, low debt, stable employee benefits, and strong, flexible finances and management.

To put this in perspective, the average rating for a state is AA and has recently been trending down. Generally, a state rating in the single-A category is considered very low.

Ten states are rated AAA by all three rating agencies. They are: Delaware, Georgia, Iowa, Maryland, Missouri, North Carolina, Tennessee, Texas, Utah, and Virginia. They stand in contrast to those states that have not been faring so well and that we have expounded on in the past. These include Illinois (rated Baa2, BBB, BBB+) – plagued by huge pension and revenue issues, New Jersey (A2/A/A) – dealing with revenue, economic, and pension issues, Kentucky (Aa2, A+, AA-) – affected mostly by pension issues, and Connecticut with all three ratings in the double A category at Aa3, AA-, AA-, but the ratings are tenuous due to the inability of the state to come up with long-term solutions as it continues to lose population.

The continuing pressure on state ratings puts other areas on our radar screen, including the increasingly visible burden of OPEB (other post-employment benefits), in addition to pension benefits, that will now need to be disclosed in a concise manner in accordance with GASB 74 and 75, to be instituted for fiscal years ending after June 15, 2016 and June 15, 2017, respectively. Many states and municipalities fund on a pay-as-you-go basis, so to estimate future obligations may add, or rather make more visible, significant liabilities. Governments can change other post-employment benefits more easily than pensions, which are constitutionally mandated; however, OPEB burdens are growing.

We will also be sensitive to state agencies and municipalities that may experience reduced funding from the state. We will evaluate credits to make sure there is financial flexibility in the form of strong reserves and revenue flexibility – which are characteristics of highly rated bonds. For example, the State of Maryland has announced it will be reducing funding to counties in the state. For the most part, Maryland counties are strong, although like most counties they have few revenues and numerous social service spending obligations. State institutions of higher education and state housing agencies have traditionally been hit by state reductions; however, these institutions are currently displaying resilience, and many should be able to handle reduced state funding.

Other developments over the quarter were:

Zika spread to the United States and may have credit implications for Puerto Rico and Miami – these situations will be watched for long-term implications. We will also watch for spread of the virus to other locales. Immediate effects may be a decline in tourism and population, while longer-term implications could be increased social service spending. These outcomes will depend on preventative measures, which may be helped by recent congressional approval of Zika funding.

Bond insurance industry strength was affirmed after rating agencies reported that bond insurers’ exposure to numerous defaulted entities in Puerto Rico would not affect their claims-paying ratings. Moody’s, KBRA, and S&P all published reports or updates in the quarter.

The City of Chicago, suffering from pension problems and political gridlock, approved a rate increase for its water and sewer utility to help prop up one of its severely underfunded pension funds. We will be watching to see if this move causes contagion risk to other city utility systems.

One reason municipal utilities have gotten stronger is limits on the ability of municipalities to use utilities as a cash cow. This trend came about at least 20 years ago when utilities needed market access to fund improvements to their systems to comply with clean water and clean drinking water acts. Rating agencies and investors looked unkindly on unlimited and unscheduled transfers, so there was pressure to make transfers predictable. Consequently, transfers to the general fund of a municipality from its utility are generally limited to something akin to a tax or a fixed percentage of revenues. This provides certainty for the utility to accumulate funds for operations, maintenance, and capital improvements as well as reserves for unexpected events – and to maintain strong credit ratings. As has been widely reported, there is considerable underfunding of our nation’s infrastructure, including water and sewer systems. Thus, we expect increased debt issuance from the sector, so any extra “tax” on the system to fund something outside of the system will be scrutinized for its overall burden on the utility involved.

Our strategy of investing in higher-rated bonds will continue as we move into a rising interest rate environment. Some pundits think that because municipal bonds are generally so safe, lower-rated and longer-dated bonds will provide enough yield to compensate; however, credit spreads tend to widen with rising interest rates. You can see the narrowing spread as interest rates decline in the following chart, which compares the yields of AAA-rated bonds with BBB bonds over time.

Source: RBC Capital Markets, LLC

Interest rate increases contribute to outperformance of higher-quality credits. Although the absolute return may be negative, the performance of AA and AAA-rated bonds will be better than that of lower-rated bonds.

This is why Cumberland Advisors invests predominantly in AA bonds and single A-rated bonds that are stable or improving.

David Kotok
Registered investment advisor, portfolio strategy
Cumberland Advisors

By Patricia Healy, CFA

Oct.23.16

 

Powered by P3 INGENIUM: The most comprehensive source for P3 project updates in North America

State-level debates over how to fund transportation projects continued to dominate the landscape over the past week with proposals ranging from gas and sales tax hikes to toll charges to mileage-based fees. Meanwhile, legislators continue to consider bills that would make it easier for agencies to enter into transportation P3s and one state continues to spur innovation by encouraging developers to submit original proposals for such projects.

Continue reading.

This year has seen a boost in bonds sold by states and localities in the municipal market. Experts are predicting 2016 will be the busiest year in a half-decade. RBC Capital Markets’ Chris Mauro said this week that October will likely represent the third consecutive month of record bond issuance volume. In fact, he predicts that total issuance this year “will likely exceed the $433 billion record set in 2010 — a particularly impressive accomplishment, given that Build America Bond issuance greatly inflated 2010 volume.”

The Takeaway: A big driver of all this activity on the governments’ end is uncertainty. The biggest question mark has been over who will win the presidential election, followed closely by whether or not the Federal Reserve will raise short-term interest rates by the end of the year. Given the vastly different positions of the candidates, governments are unwilling to gamble on the tax and spending policies of a new administration. As such, Mauro predicts bond issuance could creep up to $450 billion by the end of the year.

GOVERNING.COM

BY LIZ FARMER | OCTOBER 21, 2016

If you’re a pension fund or insurer from Europe or Japan, U.S. investment-grade credit may be getting a little passe.

That’s the view of Principal Global Investors, which sees taxable municipal notes becoming a more popular alternative for some overseas-based institutional investors as they chase additional yield in a world of record-low central bank interest rates. Tax-free munis typically have little appeal for overseas buyers, who may not benefit from the securities’ exemption, although local government notes with taxed payouts do draw buyers from abroad.

“From a non-U.S. investor standpoint, taxable munis have the same yield as you get from U.S. investment-grade credit,” said Mark Cernicky, who oversees about $100 billion at Principal in London. “It’s higher credit quality, they have much lower default rates, and it’s also a play in infrastructure.”

The average yield on taxable munis due in 5-to-10 years is 3 percent and the rate on similar tenor U.S. corporate notes is 2.95 percent, Bank of America Merrill Lynch indexes indicate. While data compiled by Bloomberg show issuance of investment-grade corporate bonds in the U.S. has already topped $1.17 billion this year and is running at a record pace, Cernicky said the advanced age of the current credit cycle will spur investors to pivot more toward taxable munis.

The increasing prevalence of behavior that’s more friendly to shareholders than creditors — such as acquisitions — may also encourage that shift, as could the prospect that the European Central Bank will eventually dial back stimulus measures that have supported the corporate bond market, he said in an interview in Sydney on Thursday.

“You’re going to continue to see that diversification trend in taxable munis,” Cernicky said.
Local governments sell taxable bonds when the issues don’t meet Internal Revenue Service standards for tax-exemption, such as for pension funding because the money is invested to make a profit, or if a certain amount of proceeds goes toward commercial use.

Pension funds and other institutional buyers are also looking to do more private lending to companies as a way of diversifying the riskier part of their portfolios away from speculative-grade bonds, Cernicky said. There’s been a “significant increase” in requests for such arrangements among Japanese and European clients, he said.

“They’re reducing high-yield exposures and going into private credit, illiquid credit or private lending,” he said. “You get a similar type of return, but you get no mark-to-market volatility.”

The shift has come amid a reduction in junk bond sales this year, with new issuance in the U.S. 19 percent less than at the same point in 2015, according to data compiled by Bloomberg. Cernicky is tipping that to turn around next year, with energy, metals and mining companies leading the charge in the world’s biggest non-investment-grade note market. He also expects more industrial companies to make their debut in the European junk bond market next year.

“The story in 2017 is likely going to be about high-yield issuance, not so much the IG issuance,” he said. “In Europe, you see a lot of new companies coming into the market which is actually pretty positive.”

Bloomberg Business

by Ruth Liew

October 20, 2016 — 8:28 PM PDT

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

Watch the video.

October 20, 2016

Fitch Ratings will host a test teleconference on Thursday, October 13th at 11:00am EDT to discuss our recent ratings on Ontario International Airport Authority and the ownership and operational transfer:

– Ontario airport refunding financing will complete a rare government-to-government transfer of Ontario International Airport’s ownership and operation. This contrasts to efforts by other U.S. airports to engage with privatization of airport control

– Direct federal action was needed to effectuate the transfer, including unique financial arrangements for Ontario. Does this have implications to the airport’s credit?

– Ontario airport traffic trends have a history of elevated volatility. Will this continue?

Speaker
Seth Lehman, Senior Director, Global Infrastructure Group

Listen to the Teleconference.

Following prepared remarks, we will open the call for a question and answer session. Questions can also be emailed in advance to Danielle Riles at danielle.riles@fitchratings.com.

The related report/press release can be viewed here:
https://www.fitchratings.com/site/pr/101276

Contact:
Rick Kahn
Senior Director, Investor Development
Business & Relationship Management

Individual investors’ focus on higher yield and propensity to follow trends stoke volatility; for some clients, try separately managed accounts

Although retail municipal-bond mutual funds continue to be widely used by registered investment advisers as cost-effective investment vehicles for their clients, many advisers may not be aware that those funds are susceptible to hidden risks.

These funds may be significantly more costly than they first appear as they cater to retail, or individual, investors, are often focused on maximizing yield at the cost of credit quality and diversification, are subject to ill-timed flows of assets in and out of the fund, and are often susceptible to thin liquidity in the market.

A key problem with the municipal-fund market stems from the fact that the funds are typically owned by untrained individual investors. Many of those investors focus on yield rather than the riskiness of the underlying bonds in the fund, resulting in funds that are overconcentrated in risky securities.

Further, individual investors’ decisions to purchase or redeem shares largely dictate fund managers’ decisions. Managers are continuously buying and selling securities in order to provide returns or liquidity for investors, a process that makes it difficult for those managers to put their knowledge of the market to work for their clients.

Research shows that retail fund flows have historically followed past performance in the muni market, with the inflow of cash into funds typically following periods of high returns and outflows often coming in the wake of falling or negative returns. In other words, individual investors time the market poorly by buying high and selling low. As a result, as bond prices fall as interest rates rise, investment managers often find themselves forced to sell their municipal-bond holdings.

Although mutual-fund shares can be immediately liquidated, the actual liquidity of the underlying assets can vary. Often this means mutual funds sell the highest quality, most liquid securities to raise the cash for the individual investors redeeming their fund shares. For those fund investors who have a long-term buy-and-hold approach, that kind of activity lowers the overall quality of the securities in the fund and actually increases the riskiness of their investment.

For advisers of clients who are long-term investors, it is wise to explore alternatives to standard municipal-bond mutual funds. There are options that enable investors to avoid individual co-investors altogether or carefully choose co-investors whose investment behaviors more closely mirror the patience of institutional investors.

One strategy to consider is separately managed accounts with low fees and minimums that are on par with low-cost mutual funds. These accounts provide access to the muni market, but unlike a mutual fund, investors have ownership of the individual securities and control over the transactions of those securities—an important feature during times of rising rates.

Rather than selling shares of a muni-bond fund, which must be done at the net asset value of that fund, managers of separately managed accounts have the ability to sell individual securities. That allows the manager to potentially select and sell shorter duration bonds within the account, which will be less negatively affected by rising rates.

For clients with less in assets, there are also options to purchase mutual funds that are limited to approved investors only. In this case, the fund manager limits investment exclusively to institutionally minded investors and investors working with investment advisers. Without being subject to the whims of individual investors, the fund’s management can avoid frequent flows in and out of the funds.

While rates are low and markets are still liquid, it’s a good time to begin having conversations with clients about the hidden risks of municipal-bond mutual funds, and make any adjustments necessary to position them well for the future.

THE WALL STREET JOURNAL

by STEVEN SIMPSON

Oct. 20, 2016 2:42 p.m. ET

Steven Simpson has worked in the financial-services industry for more than 20 years, and was most recently president and managing partner at Gurtin Municipal Bond Management in Solana Beach, Calif. Voices is an occasional feature of edited excerpts in which wealth managers address issues of interest to the advisory community. As told to Alex Coppola.

A reform-driven rise in short-term borrowing costs is focusing attention on an often-overlooked corner of the market: municipal debt.

Three-month AAA munis are offering the equivalent of about 1.3% in taxable yield when adjusting for those who would ordinarily pay the top income tax rate, according to Ned Davis Research Group. By comparison, buying U.S. Treasury debt for five years would offer a lower annual yield of 1.24%.

Municipal borrowers, who typically issue tax exempt debt to finance state and local projects, are paying higher rates to borrow thanks to new money market reforms that went into effect last week. Prime money market funds now have the ability to charge redemption fees or stop withdrawals during times of market turbulence.

In anticipation of those reforms, investors pulled hundreds of billions of dollars from prime funds, which typically invest in high-grade corporate or municipal debt. More than $100 billion fled municipal money market funds specifically, according to Pacific Investment Management Co.

Lower demand from that traditional buyer has led to higher short-term borrowing costs for municipalities. But many are also looking at it as an opportunity, echoing, and at times exceeding, investor excitement over short-term corporate debt that has also offered higher yields due to money market reform.

The new buyers include taxable money funds, separately managed accounts, hedge funds, and longer-term bond funds, according to Colleen Meehan, the director of municipal money market fund strategies for BNY Mellon Cash Investment Strategies.

“The beauty of that product is that they can move up rates to entice non-traditional buyers,” she said. “And that’s exactly what has happened.”

The yields look attractive to those investors in an otherwise low-rate world. The yield on three-month Treasury notes, for example, was recently at 0.33% Friday.

Another benchmark for municipal yields, the SIFMA Municipal Swap Index, was recently at its highest since the financial crisis, according to Pimco. Variable rate demand notes, which have rates that float, are typically reset based on the swap index rate, making them and other floating-rate instruments attractive buys, Pimco said in research this week.

The amount of outstanding VRDNs surpassed the amount of money in municipal money-market funds in recent months, a sign that new buyers are stepping into the space to replace those which are leaving, according to Ms. Meehan.

THE WALL STREET JOURNAL

By BEN EISEN

Oct 21, 2016 2:45 pm ET

Norwalk, CT, October 18, 2016 — The Governmental Accounting Standards Board (GASB) has issued an Exposure Draft of a proposed Implementation Guide that contains questions and answers intended to clarify, explain, or elaborate on the requirements of GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans.

The proposed Implementation Guide provides answers to more than 150 questions about the GASB’s new standards on financial reporting for postemployment benefit plans other than pension plans. These plans are referred to as other postemployment benefit plans (OPEB plans), and the benefits they administer (primarily retiree healthcare) are referred to as other postemployment benefits (OPEB).

The Exposure Draft of Implementation Guide No. 201X-X, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, is available on the GASB website, www.gasb.org. Stakeholders are encouraged to review and provide comments by December 19, 2016.

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)

A new trading platform dedicated to a niche area of the $3.8tn US municipal debt market has managed to entice the state of Ohio to issue debt on the venue, highlighting efforts to electronify even the most old-fashioned, recondite corners of the bond market.

Ohio will later this month price a “variable rate demand obligation” — a municipal bond where the interest rate resets periodically and that can be sold back to the issuer — on Clarity Bidrate Alternative Trading System, an arm of Arbor Research & Trading founded by Robert Novembre, a former Citi trader.

In a statement, Seth Metcalf, the deputy treasurer of Ohio, said: “The Treasurer’s Office is excited about the opportunity to lower interest costs for Ohio taxpayers by leveraging Clarity’s innovative technology to increase market competition through better price transparency and democratised access to Ohio paper.”

Clarity is talking to several other potential issuers to follow Ohio later this year. The platform has so far signed up 19 subscribers, mostly investors and two banks, and four more are in the process of being brought on board.

“Getting a bond issuer to step up was the final step,” said Mr Novembre “Ohio will help ignite this new market. We want to be the NYSE for variable-rate securities.”

Clarity is one of a clutch of new alternative trading venues that are attempting to revolutionise how the bond market is traded. While stocks are overwhelmingly traded on equity exchanges at hyperfast speeds, and US Treasuries are now mostly traded electronically, much of fixed income is still largely transacted via phone.

When compared with the infrastructure of corporate debt, the US municipal bond market is considered archaic.

“It’s a good market, but it falls somewhere between inefficient and broken,” Mr Novembre said. “Some people are ready to embrace change, and some are not. Are [bond] markets in need of more technology to bring more efficiency? To my mind the answer is absolutely yes.”

The details of Ohio’s VRDO issue are due to be released this month, but it will be “midsized” according to Mr Novembre. Sizes in the market typically vary from $7m to $75m.

Most of the new bond trading platforms, such as George Soros-backed Trumid, are focused on the corporate bond market, but Clarity’s technology is oriented around variable-rate securities like VRDOs. The $180bn VRDO market gives municipalities access to long-term financing at shorter-term, floating interest rates.

Short-term municipal borrowing rates have climbed sharply this year, as long-awaited regulatory changes have caused an investor exodus from money market funds that make up a big part of the investor base. The yield of the Sifma Municipal Swap Index — the market’s biggest benchmark — climbed to an eight-year high of 0.87 per cent last week, which Clarity hopes will burnish its lustre to municipal borrowers that want to attract new investors to the market.

The Financial Times

OCTOBER 10, 2016 by: Robin Wigglesworth in New York

WASHINGTON – The next president must maintain the tax exemption for municipal bonds — the “bread and butter” of infrastructure financing — or risk costing cities up to $500 billion, a group of mayors recently told Republican and Democrat campaign representatives.

The U.S. Conference of Mayors (USCM) stressed the importance of the muni exemption at its bipartisan fall leadership meeting last week in Oklahoma City, which focused on the actions that should be taken during the first 100 days of the next administration, including the development of a much-needed national infrastructure investment policy.

At the three-day conference that ran from Sept. 29-Oct. 1, the organization stressed that federal support is still needed to address infrastructure issues, such as the repair or construction of roads, bridges, power grids and water systems.

Stephen Benjamin, the mayor of Columbia, S.C. and the second vice president of USCM, said in a press conference that while Congress discusses the need for modernization of infrastructure, it continues to “play fast and loose” with the tools that will make that possible.

“The tax exemption on municipal bonds is the only thing we have left to meet the nation’s infrastructure needs,” said Benjamin, who also serves as chair of the advocacy group Municipal Bonds for America and formerly practiced public finance law at ParkerPoe. “This is not dessert – this is bread and butter, and it’s important to us that we reaffirm our position that investment in our cities is non-negotiable.”

In June 2015, USCM adopted a resolution against limiting tax-exempt bonds under proposals from Congress and the Obama administration. Obama has proposed capping the value of the muni exemption at 28% in his last few budget requests. The mayors group has warned such a cap would raise borrowing costs to issuers.

Should the incoming president adopt a measure capping the muni exemption at 28%, cities would see increased costs of almost $200 billion, Benjamin said at the press conference. If the exemption was to be removed entirely, those same costs would rise to nearly $500 billion, he added.

This would prohibit cities from making investments in infrastructure, which the U.S. has been “putting Band-Aids on” for too long, he warned.

He said USCM had unanimous support for the muni exemption, and cited the $1.65 trillion in debt issued for infrastructure by state and local governments from 2003-2012.

“We want this nation to continue to flourish,” Benjamin said. “The only way we can continue to do that is if we invest in infrastructure and we need the tax exemption of municipal bonds to do that.”

Trump does not explicitly mention municipal bonds in his tax plan, but several experts have warned that his proposal and its across-the-board tax cuts could reduce incentives for purchasing munis while increasing the federal debt. He has proposing borrowing several hundred billion dollars to spend on infrastructure.

Clinton’s plan specifically talks about bonds and has generally been more positively received in regards to its potential impact on munis because of its goal to raise taxes for those at the top, which could make tax-exempt bonds more appealing.

Her plan would increase federal funding for infrastructure by $275 billion over five years, allocating $25 billion to direct public investment and $25 billion to a national infrastructure bank to be leveraged to support an additional $225 billion in direct loans, loan guarantees and other forms of credit enhancement. She would renew and expand Build America Bonds under a program to be administered in part by the infrastructure bank.

A total of $181 billion of BABs was issued before the bonds expired at the end of 2010. The GOP tax plan released by the House Ways and Means Committee in June suggested repealing unidentified exemptions, deductions and credits, but does not mention munis directly.

Based in Washington, USCM is the nonpartisan organization of the roughly 1,400 U.S. cities with populations of 30,000 or higher.

A total of 41 mayors attended its fall meeting, including New York City Mayor Bill de Blasio, Baltimore Mayor Stephanie Rawlings-Blake, and New Orleans Mayor Mitch Landrieu, the USCM vice president.

The Bond Buyer

By Evan Fallor

October 4, 2016

​Municipal bond issuance for September swelled 45% to $35.7 billion, the highest volume for the month in records going back to 1986, driven by an unexpected surge in new money deals.

The total par amount of the month’s 980 sales surpassed the previous September volume record set in 2010, when $35.6 billion of bonds were sold. Through three quarters, the market has produced $334 billion of issuance in 10,046 deals, according to data from Thomson Reuters, on pace to surpass the $400 billion mark. At this time last year volume totaled $319.4 billion in 10,359 deals.

The largest recorded issuance year was 2010, when the volume hit $433.27 billion.

“It certainly seems likely given that October should also be heavy, with more than $14 billion next week. We had [estimated] $400 billion with a possible upside surprise and it seems the surprise might actually be happening,” Mikhail Foux, director of research at Barclays Capital, said Friday.

Foux said new money deals have been the biggest surprise.

“Who would have thought that after such a slow first quarter, we are likely going to surpass last year’s number, which one of the largest ever years in terms of issuance,” he said. “A pickup in new money is the biggest story of 2016 and likely going forward. It seems that we are finally starting to address our infrastructure needs. There was a lot more issuance from the transportation sector and there is more than $200 billion of bond deals on ballots.”

For the third quarter alone, there were $109.7 billion of deals in 3,131 transactions, up from the $92.6 billion in 2,951 transactions during the third quarter of 2015.

“The sheer amount of issuance has been pretty impressive. I think the hope is that the amount of supply puts some pressure on the yields and creates a backup, which would be welcomed,” said Dawn Mangerson, managing director and senior portfolio manager at McDonnell Investment Management. “We said issuance wouldn’t wane, and we were right. We are looking good right now; we should see a decent calendar throughout the rest of the year.”

Though volume was up the past two months and third-quarter issuance increased year-over-year, volume for the three months was down from the second quarter.

“The volume hasn’t reached a point where it was too much for the market to absorb,” Mangerson said. “It has been surprising how much consistent high demand for munis we have seen all year long and also that we didn’t see any volatility this month.”

Mangerson said volume could slip toward the end of the year, when and if the Federal Open Market Committee decides to raise rates.

“The second quarter is typically the heaviest; we had a substantial slowdown in July – partially due to Brexit- but supply picked up in August and September,” Foux said, referring to the British vote to leave the European Union.

For the month, new money deals catapulted nearly 68% to $16.99 billion in 470 issues, from $22.21 billion in 799 issues during the same period last year.

Refundings, which have been strong for most of the year due to persistent low interest rates, were up 19% to $12.19 billion in 423 transactions from $10.23 billion in 353 transactions during September of last year.

Combined new-money and refunding issuance rose by 54.6% to $6.51 billion from $4.21 billion.

Negotiated deals were higher by 57.7 % to $27 billion, while competitive sales increased by 58.6% to $7.61 billion from $4.79 billion.

Issuance of revenue bonds increased 82.2% to $26.65 billion, while general obligation bond sales were down 9.1% to $9.05 billion.

Taxable bond volume increased 32.8% to $2.13 billion, while tax-exempt issuance increased by 45.2% to $32.25 billion.

Minimum tax bonds issuance gained to $1.32 million from $760 million.

Private placements sank to $1.09 billion from $2.66 billion.

Zero coupon bonds more than doubled to $360 million from $132 million.

Bond insurance increased 26% for the month, as the volume of deals wrapped with insurance rose to $1.84 billion in 140 deals from $1.46 billion in 117 deals.

Variable-rate short put bonds gained 7.7% to $1.06 billion from $986 million. Variable-rate long or no put bonds jumped to $734 million from $31 million.

“This is probably due to all the SIFMA related concerns, much higher SIFMA and libor rates are making issuing floating rate notes more costly,” said Foux.

Bank qualified bonds improved 6.4% to $1.59 billion from $1.49 billion.

Seven out of the 10 sectors saw year-over-year gains. Health care more than doubled to $5.69 billion from $1.67 billion, utilities also more than doubled to $3.32 billion from $1.36 billion, general purpose increased 34.6% to $8.44 billion from $6.27 billion, housing rose to $2.16 billion from $943 million, health care increased to $5.69 billion to $1.66 billion, environmental facilities climbed to $379 million from $76 million and electric power went up to $1.83 billion from $516 million.

On the other end of the spectrum, the education sector was barely down to $7.17 billion from $7.20 billion, development dropped 15.9% to $729 million and public facilities were down to $932 million from $1.04 billion.

As for the different types of entities that issue bonds, five were in the green: state governments, state agencies, counties and parishes, cities and towns and districts.

One other thing that Foux noted was that in general, issuers tried to bring deals before FOMC announcements, not just this month but in general.

“It seems that we see more pension obligation bonds, as issuers are trying to plug the pension funding gap.”

California is still the top state for issuance for the year to date, followed by Texas, New York, Pennsylvania and Florida. These numbers encompass all of the individual issuers within the state.

Golden State issuers this year have sold $47.53 billion, with the Lone Star State in second with $41.55 billion. The Empire State follows with $35.36 billion. The Keystone State is in fourth with $15.24 billion and The Sunshine State rounds out the top five with $15.08 billion.

“October could be solid as issuers could try to bring deals before the elections,” Foux said. “November and December should be lighter, though we have some uncertainty related to the December FOMC and issuers might try to pull deals from January to get in front of it.”

The Bond Buyer

By Aaron Weitzman

September 30, 2016

Investors piled into U.S. municipal bond funds for the 52nd straight week, a milestone for debt funds seen as an acceptable compromise between risk and reward as trillions of dollars’ worth of bonds now yield less than zero.

Muni funds took in $1.1 billion in the week through Sept. 28, the Washington-based trade group said on Wednesday. Earlier data showed muni funds took in $63 billion in the 11 months through August.

“They look pretty robust relative to the rest of the world,” said Chad Rach, a portfolio manager at Capital Group in Los Angeles, which manages American Funds. There are $10.9 trillion of negative-yielding government bonds, according to Fitch Ratings data as of Sept. 12.

Overall, ICI said U.S.-based bond funds took in $7.8 billion for the week, continuing a rotation from stocks to bond funds that has lasted the better part of the year.

Rach said that while muni bonds have some risk of issuers not repaying their debts, they lack the exposure to energy markets that have haunted high-yield bonds and other areas of the market. He expects flows to remain strong but said rising rates are a major risk for the bonds.

“It’s a risk that we’re very focused on,” he said.

U.S.-based world stock funds posted $3.7 billion in outflows, their worst week since fears about China’s economy stoked a global selloff in the week through Aug. 26, 2015. But that week’s $8.3 billion outflow was far higher.

Strong demand for domestic stock funds pushed overall stock fund flows positive for the week as they took in $4.2 billion, according to ICI.

Reuters

By Trevor Hunnicutt

Wed Oct 5, 2016 | 2:50pm EDT

Read the Digest.

NCPPP

‘Overlapping’ is often ignored, resulting in misleading assumptions about government liabilities.

Last year, I wrote about an emerging theory among investors known as the “new neutral.” The theory holds that for the next several years we’ll see an unprecedented combination of slow economic growth, low interest rates and paltry returns on investments. So far, the new neutral has been spot on.

To see this theory in action, look no further than state and local pensions. Investment returns have lagged, and as a result, so too have pension fund balances. Pension critics have renewed their calls for reform, saying that pensions are an existential threat to many local governments’ financial health. This is true, but it’s also incomplete.

Consider this example. At the end of fiscal year 2015, Dallas had an unfunded pension obligation of $1,371 per capita. Denver’s was barely half that at $709 per capita. From that number alone we might conclude that Denver is in much better financial shape.

But now let’s add a few crucial layers of complexity. First count up each city’s “overlapping” pension obligations. Overlapping means two or more jurisdictions share some portion of their respective property tax bases. We can think of a region’s property tax base like money in a shared savings account: When one jurisdiction takes money out, there’s less for everyone else.

Dallas shares parts of its property tax base with 20 other governments, including counties, schools, hospitals and community colleges. These other entities’ unfunded pension obligations add up to $1,362 per capita. Denver shares its tax base with just one other entity — the Denver School District — but that district’s pension obligation is a comparatively high $4,876 per capita. So Dallas’ total direct and overlapping pension obligation is $2,733 per capita; Denver’s is $5,585. Maybe Dallas is in better shape after all?

These per capita figures are basically the norm for large cities. While Chicago’s overlapping pensions alone were almost $20,000 per capita at the end of fiscal 2015, the median for the 25 largest cities (based on 2014 data) was about $3,550, according to Morningstar, a credit research company.

OK, so now that we’ve counted up all the overlapping pension obligations, let’s add in long-term debt that’s supported by a shared property tax base. Dallas has a modest $1,700 per capita of tax-supported debt. At the same time, most of its 20 neighbors can also borrow against that shared tax base. That brings its total direct and overlapping debt up to $5,520 per capita. Add in its pension liabilities and Dallas’ total obligations are $8,235 per capita. Denver has just over $1,500 per capita of its own property tax-backed debt, and its neighboring school district has around $1,200. Add that to its pensions, and Denver’s total obligations are $8,285 per capita.

Which city is in better financial shape? It depends. And that’s the point.

It’s important to think about how cities will cover their unfunded pension liabilities. But when we talk about how pensions affect financial health, the far more important question is how does a region decide to manage its tax base and the overlaps that inevitably exist?

Here Dallas and Denver are instructive. Both cities grew tremendously over the past few decades. Dallas has dealt with that growth mostly by allowing new special local districts to crop up and expand as necessary. Now it must find a way to coordinate tax policy decisions across all those governments. To do so, it will have to find a way to deal with one of the laws of local political physics: Voters live in districts, not regions.

By contrast, Denver is a comprehensive, consolidated city/county government. It can manage liabilities in a coordinated way. As a result, all of those liabilities appear on its balance sheet, and that can make investors and elected officials a bit queasy.

There are lots of regional coordination mechanisms, usually in specific policy or infrastructure areas like transit, airports and homeland security. States like California and Texas even have agencies within state government that track and occasionally coordinate when and how local governments issue debt. If we want to understand what pensions mean for our financial future, we have to account for how well those mechanisms work. To address pensions and other long-term liabilities, we need to strengthen those mechanisms.

GOVERNING.COM

BY JUSTIN MARLOWE | OCTOBER 2016

If the District of Columbia’s transit system was a public-private partnership, some say it wouldn’t be falling apart right now.

As I listened to S&P Global’s Anne Selting at a Governing event earlier this year describe how public-private partnerships work, I had a sort of epiphany. “If Metro in Washington, D.C., were a P3,” I asked her, “would it still be falling apart right now?” She replied that, while S&P’s role is not to opine on public policy, her answer would be a qualified no. Under a P3 structure, she explained, the concession grantor, typically a government, is contractually committed to a funding regime that provides for adequate maintenance.

Maintenance — the lack of it, that is — is at the heart of the crisis facing the Washington region’s transit system. In the past year it has had several serious maintenance-related smoke and fire incidents, including one that resulted in a passenger’s death. Train delays and equipment failures, such as escalators and elevators not working, are an everyday reality for riders. With the subway system facing an $18 billion capital deficit over the next 10 years, fixing these problems will be extraordinarily difficult.

Metro is not alone, of course. The maintenance backlog for the Boston region’s transit system, for example, is reported to be at least $7 billion. The Federal Transit Administration’s most recent estimate of the nationwide transit repair backlog is $85.9 billion.

The ramifications go far beyond transit, encompassing our entire nationwide infrastructure mess. As the Beeck Center at Georgetown University put it in a recent report, “There is a strong public-sector bias to invest in new capital projects rather than effectively maintaining and extending the life of public infrastructure assets meant to last 30-50 years.” In other words, these problems are not simply the result of some politicians or some governments behaving irresponsibly. They are built into the system.

This is the crux of one the most important arguments for P3s for major infrastructure. It forces policymakers to confront the true life-cycle cost of a project up front. The accepted rule of thumb for capital projects is that for every $1 of design costs, $10 will be spent for construction and $100 for maintenance over the life of the asset. But since most public discussion focuses only on the money for construction, the public is horribly misled about real long-term costs.

As I learned in my epiphany, the power of a P3 isn’t that it’s a source of money. The revenue that will support a project will always be public money, whether the capital is raised through private equity or through traditional municipal bond financing. The strongest argument for a P3 is that it forces a more honest appraisal of life-cycle costs, better aligning the incentives of the public and private partners. When we get that right, we are less likely to have Twitter feeds like @dcmetrosucks, which as of a few weeks ago had clocked more than 23,000 tweets.

GOVERNING.COM

BY MARK FUNKHOUSER | OCTOBER 2016

Whether it’s prisons in Idaho or pensions in Michigan, several states are moving their outsourced services back in-house.

Privatization is one of the hottest topics in state and local government. Google the word and you come up with around 12 million entries. But for all the articles and academic reports on the best approaches to outsourcing government services, there’s also a surprising amount of activity around insourcing.

These days, roughly the same percentage of services that are newly being contracted out are being brought back into the government fold, according to Mildred Warner, a professor of city and regional planning at Cornell University. Her examination of data accumulated by the International City/County Management Association (ICMA) for the period from 2007 to 2012 showed that new outsourcing accounted for 11.1 percent of all services and new insourcing accounted for 10.4 percent of all services.

Minneapolis, for example, has been involved in moving its IT technical support — specifically help desks and desktop support — in-house, and away from private-sector firms. Why? A misalliance of goals was part of the problem. The vendors wanted “to get a call off their docket as quickly as possible. So a lot of shortcuts were taken,” says Otto Doll, chief information officer for Minneapolis. “There was a lot of patching of things, rather than looking at systemic issues.”

Not only has quality improved with the shift, there have been significant dollar savings. Of Minneapolis’ IT outsourcing contracts, the single most profitable portion for the contractor had emanated from help desks and desktop support. With those functions now in-house, Doll estimates that the city will realize nearly $3 million annually.

Of course, the potential benefits of outsourcing are pretty widely known. A fundamental one is the notion that the private sector can deliver services more effectively and efficiently than can government. But insourcing has some advantages too.

According to Warner’s analysis of ICMA data, the two main reasons governments reverse their privatized services are inferior service quality and a lack of anticipated cost savings. Additionally, improvements in the capacity of local governments to work with greater efficiency can make them the more appealing alternative.

In 2014, for instance, Idaho reversed a prison privatization decision when it became frustrated over less-than-acceptable service delivery. Back in the late 1990s, the state built the Idaho Correctional Center, a 2,000-bed mixed security facility just south of Boise, and then outsourced the operations. “The attitude was that the private sector could do it more efficiently,” says Josh Tewalt, the Idaho Department of Correction’s budget and policy administrator.

But by 2013, inmate violence, much of it driven by a failure by the private corporation to provide adequate staffing to deal directly with inmate gang activity and other inmate practices, had resulted in a series of high-profile lawsuits and media attention. The prison became known as the “Gladiator School” for the fighting that took place inside.

When state leaders decided in 2014 to insource prison management, several positive benefits emerged. In recent years it had been difficult for the state to shift inmates from that facility to others. “When the 2,000-bed facility was privatized,” says Tewalt, “it couldn’t say, ‘This guy is a bad actor, let’s get him out of this facility and try another one.’ [It] had to manage him in that environment.” Now that it’s one system, the state has the flexibility to move inmates from one facility to another in order to best match an inmate’s needs with his surroundings.

Tewalt stresses that he’s not indicting privatized prison services as a rule. The corrections department has a number of other contracts with private contractors for such services as health, food, food service and similar functions.

One significant function of state governments that has seen a significant turn to insourcing is in the investment of funds in pension plans. The majority are still managed externally, but as Keith Brainard, research director of the National Association of State Retirement Administrators, explains, “larger funds are more likely to manage internally since they can generate the economies of scale that makes the cost of money management relatively small.”

The key equation here is that states and localities typically have to pay investment fees between .25 and 1.5 percent to external managers. At a time when many money managers have not been outperforming the market as a whole, there’s less appetite for spending on a service with minimal additional return.

The Municipal Employees’ Retirement System of Michigan, for example, has made the switch and is saving $3.2 million a year on fees, according to Jeb Burns, chief investment officer there. In 2000, only 1.5 percent of funds were managed internally. Today it’s 24 percent and growing.

Not all services lend themselves to a smooth transition from outsourcing to insourcing. With prisons, for instance, a corrections department may have outsourced a prison or two, but the state is still in the business of running and managing correctional facilities. With other functions, however, the major obstacle to insourcing is that the government no longer has the personnel or physical infrastructure to provide the service again. “If you sold your assets and fired your workers, you’ve lost most of your internal capacity,” says ICMA’s Warner. Insourcing may be nearly impossible without restarting an entire line of business.

GOVERNING.COM

BY KATHERINE BARRETT & RICHARD GREENE | OCTOBER 2016

Read the Digest.

NCPPP

Fitch Ratings-New York-03 October 2016: Growth for the remainder of 2016 will remain healthy for all three U.S. major transportation sectors (airports, ports and toll roads) albeit at a slightly lower rate than the first half of the year, according to Fitch Ratings in a new report.

Fitch expects passenger traffic growth to increase around 3% for the second half of 2016 (2H16), with the bulk of air passenger growth coming from international hub airports. All but one major U.S. carrier has seen positive traffic growth through the first part of 2016, though a wide range of performance continued. JetBlue (12.1%) and Southwest Airlines (7.8%) led the way with strong increases in revenue passenger miles while increases among American Airlines (1.9%) and United Airlines (-0.1%) were more marginal.

Ports nationwide will continue to benefit from a stronger dollar driving imports, with 20-foot equivalent units (TEUs) growing at a level above GDP for the 1H16. A primary focus for ports remains “big ship readiness”. That said, shippers, logistics providers and ports will be keeping close watch over the expanded Panama Canal, which opened for commercial traffic this year. While large-scale shifts in cargo are not expected, some adjustments are possible.

As for toll roads, low fuel prices have boosted growth in traffic (6.3%) and revenue (7.0%) for the 1H16. The Southeast and Southwest U.S. have and will continue to lead in traffic performance. The higher rate of growth in revenues is reflective of typical inflationary toll rate increases, which Fitch expects to average roughly 2% over time.

A degree of uncertainty always remains for the long-term direction of the broader economy.

The Transportation Trends report includes an expanded data set in its appendices, including six-month year-to-date 2016 volume and revenues, six-month percentage change year-over-year for volume and revenue, 2015 full year volume and revenues, 2010-2015 five-year compounded annual growth rates, and recessionary peak-to-trough data. ‘U.S. Transportation Trends’ is available at ‘www.fitchratings.com’.

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 at www.fitchratings.com.

WASHINGTON – Democrats in the Senate and House have introduced separate bills to raise limits for both tax­-exempt small issue manufacturing bonds and highway or surface freight facility bonds.

The Modernizing American Manufacturing Bonds Act (S. 3416), introduced by Sen. Sherrod Brown, D­Conn. on Sept. 28, would increase the maximum size of an issue of tax­-exempt small issue manufacturing bonds to $30 million from $10 million.

The $10 million limit for these private activity bonds hasn’t been increased since 1979 and has never been indexed to inflation, according to the Council of Development Finance Agencies, a supporter of the measure.

The bill, which is identical to House bill H.R. 2890 that was introduced in the House on June 25, 2015 by Rep. Randy Hultgren, R­Ill., would also expand the types of projects that could be financed by these bonds.

It would broaden the definition of manufacturing facility so that small issues of industrial development bonds could be used to finance facilities that produce intangible property, such as software, in addition to tangible property.

The bill also would allow IDBs to be used to finance facilities that are functionally related and subordinate to the production of tangible or intangible property, such as warehouses that temporarily store materials and laboratories that test raw materials.

Facilities could also be financed with IDBs if the directly related and ancillary to a manufacturing plant as long as they were on the same site as the plant and not more than 25% of the bond proceeds were used for them.

Meanwhile, Rep. Eddie Bernice Johnson, D­Texas, introduced H.R. 6085 on Sept. 20 to raise to $20.8 billion from $15 billion the national limit for tax­-exempt highway or surface freight transfer facility bonds.

The $15 billion national limit was set by the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users, popularly known as SAFETEA­LU, which was signed into law in 2009.

The Bond Buyer

By Lynn Hume

October 6, 2016

The U.S. municipal bond market will be hit with a huge burst of issuance next week when states, cities, schools and other issuers will sell $15.9 billion of bonds and notes, according to Thomson Reuters estimates on Friday.

Bonds make up the lion’s share of the upcoming issuance at $15.4 billion, which would mark the biggest weekly bond supply since June 2008.

Some issuers are scurrying to refund outstanding bonds and lock in currently lower rates before the Federal Reserve acts.

“Refunding will be a major theme in the final quarter, with issuers pushing to lock in low rates ahead of a likely Fed rate hike in December,” Janney Managing Director Alan Schankel wrote in a report on Friday.

Underwriters on Tuesday will be bidding on a slew of California general obligation bonds — nearly $1.4 billion of tax-exempt refunding bonds and $255 million of taxable bonds.

Georgia will offer $881 million of GO refunding bonds for competitive bidding on Wednesday.

The Philadelphia School District will refund $561 million of lease revenue bonds through Pennsylvania’s State Public School Building Authority in a deal pricing on Wednesday.

The district also plans to sell $817 million of mostly GO refunding bonds on Wednesday. Another large refunding will come from New York’s Metropolitan Transportation Authority, which has a $627 million issue pricing on Tuesday through Jefferies.

Amid the supply surge, net flows into U.S. municipal bond funds were just $147.3 million in the week ended Oct. 12, according to Lipper, a unit of Thomson Reuters. While fund flows have been unrelentingly positive for more than a year, the latest week had the lowest inflows since the week ended Nov. 4, 2015.

High-yield muni funds reported a second-straight week of net outflows, which totaled $247.5 million.

Reuters

Fri Oct 14, 2016 | 12:53pm EDT

(Reporting By Karen Pierog)

Public policy and the water industry work like a two-way street. Yes, the former helps improve quality, funding, and infrastructure. But often distressed conditions in the industry are needed to affect policy change, which was proven at a “Financing In The U.S. Water Industry” conference panel on Sept. 8, 2016, in New York.

Continue reading.

Tetsuo Ishihara, a strategist for Mizuho Securities in New York, started fielding phone calls a couple months ago from Japanese clients interested in U.S. municipal bonds, which usually have little allure overseas because federal tax breaks depress the yields.

But with negative interest rates on Japanese bonds due in as many as 10 years and near record-low payouts on Treasuries, he discovered that state and local debt demanded attention. Even highly rated municipals are delivering bigger returns than U.S. government bonds, without the risk that comes with corporate securities.

“The risk return looks pretty good,” said Ishihara, U.S. macro strategist for the Tokyo-based brokerage, who sent clients a report in September showing how municipals stacked up favorably against other fixed-income investments. “The default rate for munis is much lower than for corporates. All that fits with what they need.”

Increasingly, investors outside the U.S. are contributing to the cash that’s flowed for a year into the $3.8 trillion municipal market, which caters largely to Americans willing to accept low yields because the income is exempt from U.S. taxes. By the end of June, foreign buyers had increased their holdings of the securities to $89.7 billion, about triple what they held a decade earlier, even though they don’t get any of the tax benefits.

Investment firms have courted the business. Shinsei Bank Ltd. and Western Asset Management, a unit of Baltimore-based Legg Mason Inc., last year started a private fund that invests in municipals for Japanese financial institutions. In March, Eaton Vance Management’s co-director of U.S. tax-exempt bonds was among those who spoke at an investment forum the firm co-sponsored in Tokyo.

Columbia Threadneedle Investments got its first account from Japan about a year ago and within six months anticipates that it will have at least $200 million from insurers, diversified financial companies and other clients in Asia, said James Dearborn, head of tax-exempt securities at the Boston-based firm. The funds are primarily invested in taxable municipals, which carry higher yields.

“They’ve come to like the idea that munis represent a relatively stable asset class and that the default incidence is very, very low for a long period of time,” said Dearborn, whose firm manages $24 billion in state and local debt. “They’re creating demand we didn’t have before, and that’s a good thing.”

U.S. municipal bond funds have pulled in money for 52 weeks straight, the longest stretch since 2010, according to Lipper US Fund Flows. Such demand pushed municipal yields to the lowest on record by early July, before they edged back up amid speculation that the Federal Reserve will resume raising interest rates as soon as December.

Even with the influx of funds, 10-year municipal revenue bonds with an AA rating yielded about 1.94 percent by the end of trading Wednesday, or 0.23 percentage point more than Treasuries, according to data compiled by Bloomberg.

Dearborn and Ishihara expect the interest to remain strong, regardless, as investors look for havens from equity-market swings and central banks around the world hold yields near zero. After Ishihara published his report, Japanese clients peppered him with questions, showing they had already been looking closely at the market.

Considering the environment of low rates and inflation, “the credit cycle could last maybe more than two years,” he said. “It could continue for a while.”

Bloomberg Business

by Romy Varghese

October 5, 2016 — 9:01 PM PDT Updated on October 6, 2016 — 6:17 AM PDT

Taylor Riggs, a contributor to Bloomberg Briefs, talks with reporter Amanda Albright about this week’s municipal market news.

Watch the video.

Bloomberg Briefs

October 6, 2016

While the $3.8 trillion municipal-bond market may have just posted its first negative quarterly returns since last summer, BlackRock Inc. says a buying opportunity is presenting itself.

Tax-exempt bonds lost 0.38 percent in September, the first quarterly drop since the three months ended in June 2015, and trailed Treasury bonds after another month of record-setting issuance and slowing demand.

$35.7 billion of municipal bonds were issued in September, 35 percent above the five-year average and up 51 percent from September 2015, according to BlackRock, which oversees $124 billion of municipal bonds.

Strong issuance in August and September has continued into October, said Sean Carney, director of municipal strategy in New York at BlackRock and one of the authors of a report released Monday. With uncertain political and economic events on the horizon, the issuers are “pulling deals forward.”

“Issuers are going to bring deals today rather than in uncertain times,” said Carney. “The amount of uncertainty the U.S. presidential race and the Fed rate hike are bringing to the market is causing increased issuance.”

Though recent weeks have seen weaker flows, demand for municipal bonds has remained “largely positive.” September saw nearly $4 billion enter municipal funds, bringing year-to-date inflows to $51 billion.
“This pocket of supply-induced weakness has not been followed by a pocket of demand weakness,” said Carney.

Bloomberg Markets

by Katherine Greifeld

October 10, 2016 — 1:14 PM PDT

Taylor Riggs, a contributor to Bloomberg Briefs, talks with reporter Amanda Albright about this week’s municipal market news.

Watch the video.

Bloomberg Briefs

October 13, 2016

NEW YORK — In July, investors gobbled up $1 billion of bonds from a financially-strapped Catholic hospital system in Illinois called Presence Health Network, even though it offered few contractual guarantees debt buyers typically require.

The deal, rated just above junk status, is emblematic of a fever that has swept the $3.7 trillion U.S. municipal bond market: yield-chasing investors not only piling into riskier debt, but also increasingly willing to accept less protection in the event of a default.

Some portfolio managers say it has been a decade since they have seen such a strong seller’s market.

“It’s reminiscent of right before the Great Recession, where there was a long period where high-yield rates were low and demand was high,” said William Black, senior portfolio manager for the City National Rochdale Municipal High Income Fund.

Low and negative sovereign interest rates have contributed to a scramble for relatively higher yielding U.S. municipal debt. Foreign buyers now hold more muni bonds than ever, U.S. Federal Reserve data show.

Overall, investors have poured nearly $10 billion into high-yield municipal bond funds so far this year, according to data from Lipper, a Thomson Reuters unit. That is more than any other full year in nearly the last quarter century except 2006, which had $10.1 billion of inflows. (Graphic: http://tmsnrt.rs/2dylqFl)

Taking advantage of the seemingly insatiable demand, some borrowers are offering weaker or fewer guarantees, so-called covenants, such as debt reserve funds and debt service coverage ratios.

Because they are based on many factors, credit ratings alone may not reflect the quality of covenants, so some investors may be taking on greater risks than they realize.

Such “covenant light” bonds were harder to offload after the market tumbled in late 2008, while investors who held them saw valuations swing wildly because of infrequent trading and huge price gaps, analysts said.

“Some funds got just clubbed. That was frankly very traumatic for a lot of investors, and fund managers too,” said Joseph Krist, partner at the Brooklyn-based public finance consulting firm Court Street Group.

In a default, workouts are harder. Covenant light bondholders have fewer tools to intervene, for example by requiring issuers to hire turnaround professionals or take other corrective action earlier. They also risk deeper losses in bankruptcy than those with greater protection.

HEALTHCARE AND CHARTER SCHOOLS

Sectors such as healthcare, charter schools, and senior living facilities tend to be more prevalent covenant light issuers, in part because they may struggle more to generate consistent operating margins.

Hospitals and charter schools issued 44 percent and 76 percent more debt by par amount so far this year, respectively, compared with 2015, Thomson Reuters data show. Senior living facility issuance rose 6 percent.

They come in other sectors too. The city of San Antonio, Texas, sold AA-rated junior lien water system bonds on Thursday without a reserve fund – a fact disclosed in the title of the bond documents.

But many covenant light deals are unrated or speculative grade. Issuers have sold more than 400 percent more bonds rated junk at BB and BB- by S&P Global Ratings so far this year than last year, Thomson Reuters data show.

One such example is Summit Academy North, a junk-rated Michigan charter school that missed deadlines for annual financial data in four of the last five fiscal years, according to bond disclosures.

Summit sold $22.5 million of refunding bonds on Aug. 31 with a cash on hand liquidity threshold of just 30 days, a very low level for the sector.

Even so, the top yield was just 4.75 percent on 2035 bonds – a rate that an investment-grade borrower would have likely offered only a couple of years ago.

“I cannot believe some of the deals that are getting done in the muni market right now – without a mortgage, low debt service reserve fund,” Mark Paris, head of municipal portfolio management at fund manager Invesco, said at a recent event.

Some funds say they have little choice but accept fewer safeguards in order to put clients’ cash to work.

“Money is coming in to the point where people have to buy something,” said one market professional who declined to be named.

Institutional investors have pushed back by demanding greater liquidity covenants, said Mark Taylor, a portfolio manager and head of high-yield research at Alpine Woods Capital Investors.

By September, he had a stack of rejected deals in his office that was four-feet tall, Taylor said. Nonetheless, the deals he has turned down are getting picked up by others.

“There is a plethora of deals coming to market that people probably would have rejected nine months ago.”

By REUTERS

OCT. 11, 2016, 1:03 A.M. E.D.T.

(Reporting by Hilary Russ; Editing by Daniel Bases and Tomasz Janowski)

NEW YORK — The great bull run for the municipal-bond market may be running out of juice.

For the past year, bonds issued by state and local governments have been red-hot investments. Muni-bond mutual funds have had 53 straight weeks of inflows, according to the Investment Company Institute. That’s one of the longest streaks on record, and they attracted cash at the same time that investors were leaving stock mutual funds. Even Puerto Rico’s default on its debt and Britain’s vote to exit the European Union, which roiled bond markets worldwide earlier this year, didn’t interrupt the muni market’s trajectory.

“Munis have been the darling asset class of the past two or three years,” says Chris Alwine, head of the municipal group at Vanguard.

Now there are signs that this long bull run may be coming to an end. After 10 straight months of positive monthly returns, the iShares National Muni Bond exchange-traded fund, the largest muni ETF by assets, posted a very narrow loss in July. While returns were positive in August, the fund lost about 0.6 percent in September and is on track for another loss in October.

Munis have always appealed to U.S. investors, who are attracted to their reputation for safety and the fact that their income is free of federal income taxes. It’s an incentive offered to get investors to lend to local government so they can build schools, highways and sewer systems. In some cases, income from muni bonds is also free from state or local income taxes.

Over the past 12 months, the iShares ETF has returned 4.3 percent. That beats the returns for the largest bond mutual fund, Vanguard’s Total Bond Market Index fund, which returned a nearly identical amount, after taking into account the tax savings.

In the past couple of years, low interest rates around the world and a volatile stock market have also driven investors from outside the United States into the municipal-bond market, even though non-U.S. residents don’t get the tax advantages.

Given how high prices for muni bonds have moved, some fund managers say that a pullback is inevitable. The 10-year yield on the AP Municipal Bond index, which moves inversely to bond prices, hit a low of 1.69 percent in July and has been climbing ever since. It ended last week at 1.878 percent. Even the relatively small increase in yields has put downward pressure on prices of municipal bonds, says James Kochan, chief fixed-income strategist at Wells Fargo Funds Management.

If many of the recent muni buyers have been coming with the intent of avoiding turmoil elsewhere in the bond world, a few months of negative returns for munis could spark a sell-off.

It wouldn’t be the first time that investors in munis, a historically sleepy market, have been spooked in recent years. The most recent case was in the 2013 “taper tantrum,” when investors became anxious about the possibility of an upcoming interest-rate increase. When investors dumped muni bonds during that episode, prices quickly dropped. The iShares ETF lost 8 percent in just four months.

“I think some investors are taking more risk than they are aware of,” says Chris Ryon, portfolio manager at Thornburg, who co-manages one of the largest muni bond funds.

Given the uncertainty, investors who hold munis should be looking to pare back on risk, says Ryon, who suggests sticking with higher-quality muni offerings, especially because lower-rated muni bonds aren’t offering that much more income than higher-quality muni bonds. In the parlance of bond investors, the “spread” is not that wide.

With that said, there’s no need to ditch high-yield munis entirely, says Peter Hayes, head of the municipal bonds group at BlackRock. “For the rest of the year, we think returns will be largely generated by income,” he says. “That means you need to own some amount of high-yield.”

Investors should also shorten the duration, or maturity, of their holdings, says Wells Fargo’s Kochan, because prices of longer-term bonds tend to fall more when interest rates rise.

Hayes says he favors 15-year maturities, which he calls the “sweet spot.” The good news for investors: With global interest rates still extremely low and the credit quality of munis generally stable, most experts view the recent dip as a pullback, not the start of a bear market.

Says Hayes: “The past month has created a little bit of better buying opportunity.”

By THE ASSOCIATED PRESS

OCT. 13, 2016, 12:39 P.M. E.D.T.

​Municipal bond issuance for September swelled 45% to $35.7 billion, the highest volume for the month in records going back to 1986, driven by an unexpected surge in new money deals.

Monthly Volume

The total par amount of the month’s 980 sales surpassed the previous September volume record set in 2010, when $35.6 billion of bonds were sold. Through three quarters, the market has produced $334 billion of issuance in 10,046 deals, according to data from Thomson Reuters, on pace to surpass the $400 billion mark. At this time last year volume totaled $319.4 billion in 10,359 deals.

The largest recorded issuance year was 2010, when the volume hit $433.27 billion.

“It certainly seems likely given that October should also be heavy, with more than $14 billion next week. We had [estimated] $400 billion with a possible upside surprise and it seems the surprise might actually be happening,” Mikhail Foux, director of research at Barclays Capital, said Friday.

Foux said new money deals have been the biggest surprise.

“Who would have thought that after such a slow first quarter, we are likely going to surpass last year’s number, which one of the largest ever years in terms of issuance,” he said. “A pickup in new money is the biggest story of 2016 and likely going forward. It seems that we are finally starting to address our infrastructure needs. There was a lot more issuance from the transportation sector and there is more than $200 billion of bond deals on ballots.”

For the third quarter alone, there were $109.7 billion of deals in 3,131 transactions, up from the $92.6 billion in 2,951 transactions during the third quarter of 2015.

“The sheer amount of issuance has been pretty impressive. I think the hope is that the amount of supply puts some pressure on the yields and creates a backup, which would be welcomed,” said Dawn Mangerson, managing director and senior portfolio manager at McDonnell Investment Management. “We said issuance wouldn’t wane, and we were right. We are looking good right now; we should see a decent calendar throughout the rest of the year.”

Though volume was up the past two months and third-quarter issuance increased year-over-year, volume for the three months was down from the second quarter.

“The volume hasn’t reached a point where it was too much for the market to absorb,” Mangerson said. “It has been surprising how much consistent high demand for munis we have seen all year long and also that we didn’t see any volatility this month.”

Mangerson said volume could slip toward the end of the year, when and if the Federal Open Market Committee decides to raise rates.

“The second quarter is typically the heaviest; we had a substantial slowdown in July – partially due to Brexit- but supply picked up in August and September,” Foux said, referring to the British vote to leave the European Union.

For the month, new money deals catapulted nearly 68% to $16.99 billion in 470 issues, from $22.21 billion in 799 issues during the same period last year.

Refundings, which have been strong for most of the year due to persistent low interest rates, were up 19% to $12.19 billion in 423 transactions from $10.23 billion in 353 transactions during September of last year.

Combined new-money and refunding issuance rose by 54.6% to $6.51 billion from $4.21 billion.

Negotiated deals were higher by 57.7 % to $27 billion, while competitive sales increased by 58.6% to $7.61 billion from $4.79 billion.

Issuance of revenue bonds increased 82.2% to $26.65 billion, while general obligation bond sales were down 9.1% to $9.05 billion.

Taxable bond volume increased 32.8% to $2.13 billion, while tax-exempt issuance increased by 45.2% to $32.25 billion.

Minimum tax bonds issuance gained to $1.32 million from $760 million.

Private placements sank to $1.09 billion from $2.66 billion.

Zero coupon bonds more than doubled to $360 million from $132 million.

Bond insurance increased 26% for the month, as the volume of deals wrapped with insurance rose to $1.84 billion in 140 deals from $1.46 billion in 117 deals.

Variable-rate short put bonds gained 7.7% to $1.06 billion from $986 million. Variable-rate long or no put bonds jumped to $734 million from $31 million.

“This is probably due to all the SIFMA related concerns, much higher SIFMA and libor rates are making issuing floating rate notes more costly,” said Foux.

Bank qualified bonds improved 6.4% to $1.59 billion from $1.49 billion.

Seven out of the 10 sectors saw year-over-year gains. Health care more than doubled to $5.69 billion from $1.67 billion, utilities also more than doubled to $3.32 billion from $1.36 billion, general purpose increased 34.6% to $8.44 billion from $6.27 billion, housing rose to $2.16 billion from $943 million, health care increased to $5.69 billion to $1.66 billion, environmental facilities climbed to $379 million from $76 million and electric power went up to $1.83 billion from $516 million.

On the other end of the spectrum, the education sector was barely down to $7.17 billion from $7.20 billion, development dropped 15.9% to $729 million and public facilities were down to $932 million from $1.04 billion.

As for the different types of entities that issue bonds, five were in the green: state governments, state agencies, counties and parishes, cities and towns and districts.

One other thing that Foux noted was that in general, issuers tried to bring deals before FOMC announcements, not just this month but in general.

“It seems that we see more pension obligation bonds, as issuers are trying to plug the pension funding gap.”

California is still the top state for issuance for the year to date, followed by Texas, New York, Pennsylvania and Florida. These numbers encompass all of the individual issuers within the state.

Golden State issuers this year have sold $47.53 billion, with the Lone Star State in second with $41.55 billion. The Empire State follows with $35.36 billion. The Keystone State is in fourth with $15.24 billion and The Sunshine State rounds out the top five with $15.08 billion.

“October could be solid as issuers could try to bring deals before the elections,” Foux said. “November and December should be lighter, though we have some uncertainty related to the December FOMC and issuers might try to pull deals from January to get in front of it.”

The Bond Buyer

By Aaron Weitzman

September 30, 2016

Regardless of which candidate takes the oath of office next January, improving our country’s infrastructure will be on the next President’s agenda.

An Association of Equipment Manufacturers poll shows that over 70% of Americans want government to address our growing infrastructure crisis.

Turning that into reality will require a clear understanding that the need for additional investment is real.

Members of Congress, governors and mayors from across the country have advanced bipartisan solutions to broadly address this critical need. So too has the financial services sector that works with federal, state and local governments to raise capital crucial to infrastructure investment.

Nevertheless, the level of investment by government and the private sector falls short of meeting the nation’s current and future infrastructure needs, and the central question remains how to pay for it.

We need to do more with existing resources while not losing sight of the crucial need for more investment to pay for infrastructure needs. While others attempt to address the political challenge of identifying more sources of infrastructure funding, we can work toward implementing a few tangible policy ideas.

Two ways for state and local governments to achieve more with existing resources is by encouraging broader use of a construction procurement method called design-build and treating infrastructure as assets.

The traditional approach to project procurement is known as “design-bid-build,” a multi-step process that separates the design and construction functions. Design-build simplifies the process by making a single entity responsible for both and collapses the procurement into one step, saving time and delivering a better, more cost effective result.

In New York, the NYU Rudin Center for Transportation and Citizens Budget Commission completed studies projecting design-build savings of up to 20% compared with traditional methods. However, design-build is still not broadly available for public infrastructure projects in all 50 states.

State and local government should also treat infrastructure as assets through better tracking and disclosure of on-going costs. The benefits are two-fold: a healthier understanding of the true ongoing costs and greater transparency will lead to more private sector involvement.

Identifying non-essential assets that can be auctioned to the private sector and put to productive use can create new revenue for government without affecting its core mission, a win-win scenario.

Three quarters of annual infrastructure spending in the U.S. is funded through the $3.7 trillion municipal bond market, where private investors purchase tax-exempt bonds issued by state and local governments.

The key advantage of municipal bonds is that interest on them is exempt from federal and state income taxes. This means investors will accept a lower interest rate, providing state and local governments with the benefit of borrowing money at the lowest interest rate available to anyone financing infrastructure, including the U.S. Treasury. This also allows state and local governments to raise capital up front to fund long use projects like airports, roads and bridges and amortize the cost over the life of the project.

The next administration should avoid calls to curb the use of tax-exempt bonds and rather seek to create a more certain tax and regulatory environment expanding the use and easing the availability of lower cost municipal debt for public-private partnership (P3) projects that involve a government entity.

Our economic competitors are using P3s as a way to capture private sector efficiencies while providing public infrastructure and retaining government ownership.

Making tax-exempt financing available for P3 projects would allow the two models to converge, leaving state and local governments with the best of both – access to the lowest cost financing available and private sector efficiencies.

The Move America Act, bipartisan legislation sponsored by Senators Ron Wyden (D-OR) and John Hoeven (R-ND), would authorize Move America Bonds, a new category of tax-exempt bonds that would be exempt from most private use restrictions, as long as the facilities are available for public use.

Providing tax incentives for investment in targeted sectors has been an effective in low income housing development and more recently renewable energy production. The Move America Act would provide for a limited, targeted tax credit applicable to equity investments in infrastructure, and Congress should consider such an idea.

The next president and Congress should embrace these ideas and spur a new chapter of infrastructure revitalization that will strengthen our economic future.

The Bond Buyer

By Kenneth E. Bentsen, Jr., and Chris Hamel

September 26, 2016

Kenneth E. Bentsen Jr. is president and CEO of the Securities Industry and Financial Markets Association. Chris Hamel is head of Municipal Finance at RBC Capital Markets and chair of SIFMA’s Infrastructure Policy Committee.

WASHINGTON – Infrastructure projects in the U.S. are plagued by long pre­-construction periods, an under-utilization of the public-­private partnership financing model, and an inability to both gain public support and access capital, a panel of market participants said this week.

The four­-member panel at the Securities Industry and Financial Markets Association’s annual conference here on Tuesday, entitled “Financing Infrastructure for the 21st Century,” discussed ways in which P3s could be used in order to improve roads, bridges and other struggling areas in a more effective manner.

Chris Hamel, the moderator of the panel and the managing director and head of the municipal finance group for RBC Capital Markets, said the panel’s goal was to foster a discussion on solutions rather than the underlying problems. He stressed the advantageous features of the $3.7 trillion muni market that allows for borrowing at a cost lower than Treasury rates.

The panel estimated that the U.S. is in need of $3.6 trillion of infrastructure investments by 2020, and cited a recent study that found 70% of Americans want governments at all levels to do more about infrastructure.

“We need to capture what is unique about our tax exemption and our highly decentralized government structure and combine it with the effectiveness of the private sector,” Hamel said.

“It is going to come from a collaboration of people with multiple levels of expertise.”

Several of the panel members, including Geoffrey Chatas, senior vice president and chief financial officer for Ohio State University, gave examples of how private help has been used effectively to expedite projects and help in their management after construction.

Chatas cited how his school’s airport, seven hospitals, set of energy assets and parking garages have been made possible by using the expertise of private entities. Ohio State is not shying from issuing debt, he said, adding that the school has had $3.5 billion in issuances over the last 20 years, while higher education costs have quadrupled.

The $483 million upfront payment for a 50­-year lease for a campus parking lot in 2012 has allowed for an endowment distribution of $105 million over the past four­-and-­a-­half years, he said. Those funds have been allocated toward an arts district, a campus bus system, student scholarships and faculty hirings.

Chatas said there have been “outstanding” financial results, although he did admit growing pains in managing some of the parking facilities during the culture change.

“We’re trying to think very differently,” Chatas said. “Let’s bring in partners, let them raise the capital and then manage the properties. Let us focus on teaching and learning.”

Tyler Duvall, a partner at McKinsey & Company in Washington, said that the pre­-construction process for national infrastructure projects is “a major problem,” one that can often take between 40­-60 months. This is often due to complex disclosure mechanisms around the environmental review process, leading to more discussions than decisions, he said.

There is no federal government entity that currently exists to accelerate both this process as well as a more effective revenue stream once construction begins. He suggested the federal government create one to have someone accountable for the end­-to-­end process and put the U.S. more on a par with Canada and Australia in terms of their infrastructure success.

The federal government has also been plagued by a lack of a problem statement in the highway area, he added.

“The capital is there and it’s cheaper than ever,” Duvall said. “That’s not the issue. Connecting the capital with projects is the issue.”

Suzanne Shank, chairwoman and CEO of Siebert Cisneros Shank & Co., a municipal investment bank based in New York City and Oakland, Calif., agreed Tuesday that the U.S. has some catching up to do with other countries.

“We’re not making headway and the gap is growing,” she said.

Duvall said the U.S. has “phenomenal” lending programs that need to be tweaked to create better revenue streams, a task he said can be done administratively without legislation.

“It’s all about prioritization,” he said.

Another successful P3 cited by the panel was the $4 billion renovation of LaGuardia Airport in New York, which began in June. Francis Sacr, managing director of infrastructure and transportation project finance for Societe Generale, the corporate and investment bank that served as the financial advisor to LaGuardia Gateway Partners, said it proved complicated because of the multiple financers involved.

Sacr said the project to renovate the dilapidated airport used $1 billion of passenger facility charge revenues from the Port Authority of New York and New Jersey as well as $2.5 billion from special facilities bonds and up to $500 million in taxable delayed­-draw private placement bonds.

As the largest airport financing deal ever done in the U.S., the P3 structure proved especially beneficial because of the cost overruns, he said.

“Finding multiple sources of capital was the most important part of the solution,” Sacr said.

On a macro level, Sacr said an underinvestment in U.S. infrastructure comes partially as a result of what he feels is shortsightedness.

“Infrastructure is a long­-term investment, while politics is a short­-term focus,” Sacr said. “It really does require a long­-term vision from the governments involved.”

The Bond Buyer

By Evan Fallor

September 28, 2016

PHOENIX – The DC Water and Sewer Authority closed on a historic deal Thursday, issuing the nation’s first Environmental Impact Bond (EIB) to fund the initial green infrastructure project in its DC Clean Rivers Project.

The $25 million, tax­-exempt EIB was sold in a private placement to the Goldman Sachs Urban Investment Group and Calvert Foundation, netting DC Water a 3.43% interest rate that is comparable on a cost of funds basis to its historic cost.

The proceeds of the bond will be used to construct green infrastructure to absorb and slow surges of stormwater during periods of heavy rainfall, preventing an overflow of untreated sewage (known as a combined sewer overflow, or CSO) into the Potomac and Anacostia Rivers or their tributaries. The green infrastructure includes absorbent materials and gardens that mimic natural rain absorption processes.

The EIB allows DC Water to attract investment in green infrastructure through an innovative financing technique whereby the costs of installing the green infrastructure are paid for by DC Water, while the performance risk of the green infrastructure in managing stormwater runoff is shared among DC Water and the investors. As a result, payments on the EIB may vary based on the proven success of the environmental intervention as measured by a scientific evaluation of the results.

The structure of the deal includes three “tiers” of performance depending on how well the green infrastructure controls the runoff.

The investors will receive interest payments as typical for bondholders. Depending on the results, an additional payment may be due on the bonds’ mandatory tender date of April 1 2021.

If runoff reduction is greater than 41.3%, a “tier 1” outcome, the investors will receive from DC Water an “outcome payment” of $3 million. In a tier 2 outcome where runoff reduction is 18.6% or better but less than 41.3%, the investors will be due only their normal principal and interest.

In a failed tier 3 outcome where runoff reduction is less than 18.6%, the investors will owe DC Water a “risk share” payment of $3.3 million that the trustee will then factor into future payments. That would net the investors a roughly 0.5% return, and DC Water would abandon green infrastructure for traditional tunnels or “gray” infrastructure.

“This environmental impact bond represents the first time that DC Water has explicitly tied financial payments to environmental outcomes, in this case reducing stormwater runoff, which causes the CSOs that pollute the District’s waterways,” said DC Water chief financial officer Mark Kim.

Kim said the EIB is on DC Water’s subordinate lien, on par with the majority of its debt. DC Water is a regional water authority that provides services to the District of Columbia, as well as to parts of Maryland and Virginia.

“This unique bond offering is the result of DC Water’s relentless commitment to innovate and pursue every available avenue to provide the best service at the best price to our customers and to the greater community we serve,” said chief executive officer and general manager George S. Hawkins.

Kim said that a tier 2 result is thought to be most likely, and that DC Water and its nontraditional muni investors were willing to make a bet together that green infrastructure would be successful.

“We’re thrilled to partner with DC Water to help pioneer this innovative financing mechanism that will not only benefit the community environmentally, but also stimulate local job creation,” said Margaret Anadu, Goldman Sachs managing director who leads the Urban Investment Group. “This first ever environmental impact bond will finance the construction of green infrastructure and support economic development in the District.”

Beth Bafford, investments director for Bethesda, Md. based nonprofit Calvert Foundation said the foundation was excited to test how effective the green infrastructure would be and noted its potential as a national precedent for water utilities.

“This work is critical for residents in our hometown and has national implications for how to finance green infrastructure solutions to combat the effects of extreme weather on aged, vulnerable sewer systems,” Bafford said.

The White House also commented on the potential of the unique deal to create a model for other issuers. The project’s development was aided by a federal Social Innovation Fund Pay For Success Grant.

“In launching a project that is the first of its kind in the nation, DC Water has opened the door for others to follow their example,” said Dave Wilkinson, director of the White House Office of Social Innovation.

Public Financial Management is financial advisor for the deal, with Squire Patton Boggs as bond counsel and the Harvard Kennedy School Government Performance Lab providing technical advice. Quantified Ventures was the Pay for Success transaction coordinator, and Orrick, Herrington & Sutcliffe is investors’ counsel.

The Bond Buyer

By Kyle Glazier

September 29, 2016

Mayor Sylvester Turner is garnering praise for his proposal’s comprehensiveness and balance.

Earlier this month, Houston Mayor Sylvester Turner released his outline for fixing the city’s underfunded pension system, an issue that earned the city a credit rating downgrade in March.

Observers say the plan is the best effort yet at solving a problem that has eluded past city officials. If approved, the proposal would immediately cut Houston’s unfunded liability by $3.5 billion — or nearly in half — while putting Houston on a path to pay off the rest of its pension debt over the next generation.

The proposal has several moving parts, including concessions from city workers, a requirement that the city make its payments going forward and a change in some accounting assumptions as a way of making the system less exposed to the risks of the financial market. It also calls for issuing pension obligation bonds to help plug the funding hole.

What makes the effort even more remarkable is that Turner is less than a year into his first term. But Turner is no ordinary first term mayor.

Prior to being elected, he had already spent 25 years serving a portion of the Houston metro area in the state legislature. It’s his experience and the connections he’s made, both politically and in the business community, that Turner will draw on when he takes the proposal to the city council in early October. The state legislature ultimately has final approval on any changes to the pension system, but most believe that Turner will encounter little resistance there.

“The number one thing is the relationships Mayor Turner has,” said city finance director Kelly Dowe, whom Turner kept on from the previous administration. “When he says, ‘Folks, this isn’t sustainable,’ it’s different from someone else saying it.”

Indeed, Turner’s proposal appears to strike the right amount of give-and-take that’s required for all parties to get on board. First, the city is stepping up in terms of accountability, meaning it would be required to make its pension payment annually.

What’s more, the system would immediately incorporate a more realistic investment rate of return assumption in valuing its pension liabilities. Currently, Houston is an outlier among public plans and assumes its investments will earn 8 or 8.5 percent annually. That’s much higher than the national average of plans and even higher than Houston’s recent investment experience. Turner’s proposal assumes a 7 percent rate of return, which is lower than the national average and bumps up Houston’s total liabilities to a more realistic $7.7 billion (from under $4 billion as reported).

The pension plans would also switch from an open amortization period — which is like refinancing your home every year and never paying off the loan — to a closed one. That change puts the city on a path to fully pay off its pension debt over 30 years.

In terms of employee concessions, Turner is deftly leaving it up to the unions. At a press conference announcing the reform, he said the three plans in the pension system had identified a collective $2.5 billion in cuts. While not specific, that will likely mean some combination of cuts to retirees’ cost-of-living adjustments and their deferred retirement option plans benefits, which allow retirement-age employees to keep earning retirement benefits as they continue to work.

The planned issuance of pension obligation bonds would infuse another $1 billion into the system, bringing down the total unfunded liability to about $4.2 billion. Issuing bonds to plug pension funding holes can be controversial because it doesn’t eliminate debt, it simply moves it from a pension system’s balance sheets to the city’s debt ledger.

City Controller Chris Brown said at a discussion last week hosted by Rice University’s Kinder Institute that he is typically skeptical of issuing pension obligation bonds. But he added he would support the idea as long as the city doesn’t use the bonds as a replacement for making its annual payments and if Houston receives a favorable interest rate on the bonds.

Notably, Turner’s proposal doesn’t call for a new tax as has often been done in other places — such as Chicago — as a way to get a poorly funded pension plan back to health. That aspect has pleased the business community, which has said it wants the city to get its pension costs under control before discussing taxes. But Turner does plan to ask city voters next year to lift Houston’s 12-year-old revenue cap to help reinvest in needed infrastructure and parks projects.

So far, the Houston Municipal Employees Pension System and the Houston Police Officers’ Pension System have signed on to the mayor’s plan. That leaves the Houston Firefighters’ Relief and Retirement Fund, which has yet to endorse Turner’s proposal. The firefighters’ plan is directly controlled by the legislature. That means if they don’t sign on to the reform, they risk “the horrendous challenge” of the legislature making changes to their plan, said Max Patterson, the executive director of the Texas Association of Public Employee Retirement Systems.

“Generally speaking, [employees] should be happy with this,” he said at last week’s event. “Because you have to measure it against the other side of, if I don’t get this, what will I get?”

GOVERNING.COM

BY LIZ FARMER | SEPTEMBER 29, 2016

For years there have been voices writing, speaking and worrying about U.S. unfunded pension liabilities. I, for one, included. Never should investors ever buy pension obligation municipal bonds. Cities, states and counties issue POBs because their pensions are grotesquely under water and they cannot meet their liabilities. The reasons are long, but pretty simple: Poor investment results; demographic shifts due to people living longer; mismanagement; devastating union-negotiated wage and benefit increases; low retirement age; and unrealistic assumed rates of return on assets.

The numbers in many circumstances are unconscionable. California State Teachers Retirement System returned 1.4% in fiscal year end June 30. Their target was actually 7.50%. Springfield, Illinois owes $21 million to pay police and firefighter pensions. That doesn’t sound too bad until you realize the $21 million represents 98% of all property tax revenues. According to Standard & Poor’s, the city of Houston, Texas has racked up pension costs from 2012 to 2015 that rose 48%. What will they do? Issue $1 billion in POBs—a hail Mary pass if ever there was one.

You are probably wondering why pension funds don’t reduce their assumed rates of return to something realistic. Like taking their 7.50% fantasy returns to a more logical 4% to 5% return. The reason is simple. Such target rate of return reductions require real cash infusions to make up the difference.

So we find ourselves at the tail end of an equity bull market that began in March 2009 and a 30-plus year bond bull market. And yet pensions remain woefully underfunded.

The best objective source of research comes from PEW Research. Google PEW Research, unfunded pension liabilities. You’ll find analyses on states and city funding gaps, states in the worst and best shape, data on the 50 state trends, and retiree health care trends. It all adds up to dismal funding for many cities that made promises to pensioners they simply cannot keep.

So why the rant? As the problem gets worse and being we are at the tail end of this credit cycle, general obligation municipal bonds issued by these same states, cities and counties will be severely downgraded. More nails in the coffin that GOs should no longer be the darlings of your municipal bond portfolio .

Connect the dots. As pension funding takes more and more revenue from their general funds, more GO bonds will have to be issued for essential services—schools, roads, welfare, the homeless. All will create a giant revenue sucking sound while essential services deteriorate. The reasons are precisely why revenue bonds—specific revenue bonds—are more desirable than GOs.

Invest in senior airport revenue bonds from major U.S. airports—no local mini airports. Names like Atlanta Hartsfield, Los Angeles International, Dallas Fort Worth, JFK and San Francisco. Major city senior airport revenue bonds are my top pick now.

If you are seeking more yield than airport revenue bonds, then selectively buy hospital revenue bonds. Not your local hospital, but major institutional teaching hospitals like Stanford, Mayo Clinic, Mount Sinai, Cedars-Sinai, University of Colorado Hospital, to name a few.

The weather report declares an unfunded pension tsunami. Please prepare so your portfolio doesn’t drown.

Forbes

by Marilyn Cohen, Contributor

SEP 26, 2016 @ 12:39 PM

Marilyn Cohen is president of Envision Capital Management, Inc., a Los Angeles fixed-income money manager.

Opinions expressed by Forbes Contributors are their own.

New Jersey is on the brink of realizing the American Dream — if the definition is a mega-mall in the middle of a marsh.

A state agency approved $1.2 billion of tax-exempt municipal bonds for Canadian developers Triple Five Worldwide. The company plans to complete a partially built “world-class destination” of shops, restaurants and entertainment attractions in the Meadowlands, 10 miles west of Manhattan, where previous developers ran out of money.

The Sept. 15 decision to float the bonds reignites a debate in New Jersey over the use of government subsidies to foster economic development. Buyers of the bonds won’t pay federal tax on the income, making U.S. taxpayers silent partners in the project. And in addition to paying a lower interest rate than they would on taxable bonds, the developers get a $390 million state grant over time if they reach sales-tax targets.

“It’s essentially crony capitalism,” said Republican State Senator Michael Doherty, who represents a west-central New Jersey district. “Our credit rating is in the crapper and we’re going to triple down by giving more than $1 billion to a private mall developer.” The state has halted non-emergency road improvements for lack of money and faces an $80 billion pension deficit.

Boost Economy

To supporters, American Dream promises to boost New Jersey’s economy, which lagged the U.S. through most of the recovery. The state’s Economic Development Authority estimates it will generate $340 million in state tax revenue over 20 years and create about 11,000 full- and part-time jobs at the complex and 5,800 construction jobs.

“We’ve had false starts,” said James Cassella, mayor of East Rutherford, New Jersey, where the complex sits unfinished. “Hopefully this time is real.”

The 2.9 million square-foot (270,000 square-meter) American Dream, originally called Xanadu, features an indoor amusement park and water park, an 800-foot (245-meter) indoor ski slope, a 300-foot Ferris wheel, aquarium, 1,500-seat performing-arts theater, skating rink and a 1,400-seat movie theater with “wind, rain, snow, fog and scents all synchronized to the on-screen action,” the company says. It will also have 500 stores, restaurants and food shops.

MetLife Stadium

The project broke ground in 2004 across the highway from what is now MetLife Stadium. Construction was abandoned after Mills Corp. and Mack-Cali Realty Corp. and then Colony Capital LLC ran short of funding.

Every day for the last 10-plus years, hundreds of thousands of people pass by what looks to be aging, scattered hunks of metal and concrete, painted in checkerboard shades of pastel blue and orange near the New Jersey Turnpike and within sight of NJTransit commuter trains.

Now construction cranes have appeared again.

Triple Five, run by the billionaire Ghermezian family that also owns Mall of America in Minnesota and West Edmonton Mall in Canada, says it’ll succeed where the others failed. It says the development, slated to open in 2018, will offer plenty to entice an estimated 40 million annual shoppers and thrill-seekers from all over the area and the world.

Tax Dollars

“This will bring much-needed jobs and tax dollars back to our region,” said Rick Sabato, president of the Bergen County Building and Construction Trades Council.

Critics say the development will suck business away from existing enterprises. Paramus, New Jersey, 10 miles north, has three indoor malls, including the 2.1 million square foot Garden State Plaza, owned by Westfield Corp.

The nonprofit New Jersey Alliance for Fiscal Integrity asked a state court last week to stop the project, saying the New Jersey Sports and Exposition Authority, which owns the site, violated state law when it authorized the bonds.

Tax exempt

Tax-exempt bonds are normally used for roads, sewers, schools and bridges.

In order for Edmonton, Alberta-based Triple Five to be eligible, a state or local government must finance the project and the company must pay bondholders what’s called PILOT, or payment in lieu of taxes. Triple Five will pay $800 million of the bond debt in this way.

Triple Five won’t pay property taxes to its host town either. Instead, East Rutherford will receive an upfront payment of more than $20 million from the bond sale and annual payments starting at $750,000 when American Dream opens. Triple Five will also make infrastructure improvements to smooth traffic.

A Brookings Institution report this month found that, since 2000, tax-exempt financing of professional sports stadiums has siphoned $3.7 billion from federal revenue. The report didn’t mention malls.

Rather than sell bonds to the public, the Sports and Exposition Authority will sell them to the Wisconsin Public Finance Authority, which will in turn market its own debt to the public. Tony Armlin, Triple Five’s vice president of development and construction, said the Wisconsin agency charges lower issuance fees.

New Jersey officials have said New Jersey taxpayers won’t be at risk if the bonds default.

Goldman Sachs Group Inc. is managing the tax-exempt bond issue for Triple Five.

Rug Merchant

Don Ghermezian, president of Triple Five, is the grandson of Jacob Ghermezian, an Iranian rug merchant who moved to Canada in 1964. The family built a real estate empire that also includes banking and energy divisions.

Triple Five is investing $300 million in cash and borrowing another $1.5 billion through a construction loan arranged by Deutsche Bank AG.

Triple Five, which says it’s leased 70 percent of the complex, is forecasting $1.5 billion in annual retail sales, even though Bergen County is the last county in the country with a ban on Sunday shopping.

Political Contributions

Bloomberg News reported that members of the Ghermezian family and their employees contributed $40,000 to the New Jersey State Republican Committee in May and $50,000 to the Republican National Committee in June, according to campaign-finance records.

“It’s indicative of a sick economy in New Jersey that you keep having to do these special deals for connected people,” said Doherty, the state senator.

American Dream may end up providing ammunition to critics of the tax-exemption for municipal bonds, said Lisa Washburn, a managing director at Municipal Market Analytics.

New Jersey is “bending over backwards to provide tax-exempt financing along with a whole host of other sweeteners in order to get a non-essential project, benefiting a for-profit company,” Washburn said. “It just doesn’t look good.”

Bloomberg Markets

by Martin Z Braun

September 26, 2016 — 2:00 AM PDT

Investors have plowed money into municipal-bond funds for almost a year, allowing local governments to borrow at near record-low yields. That’s making it easier to ignore the cracks beneath the market’s surface.

This week may mark the 52nd straight one with inflows into state and local-government bond funds, the longest streak since 2010, according to Lipper US Fund Flows. Even with the influx, the securities are headed toward the biggest monthly loss since February 2015 on speculation the Federal Reserve may raise interest rates in December. If investors start yanking money out, that could weigh on prices because securities firms have pulled back from the market.

“There’s this anxiety that’s looming under the surface where people are saying, everything is going really well, there’s all these muni inflows but what happens if that stops suddenly?” said Katie Koster, a managing director in public finance investment banking for Piper Jaffray Cos. in Laguna Beach, California. “How will the markets react? They could seize up quite quickly.”

The municipal market has been whipsawed in the past when mom-and-pop investors dumped their bonds en masse. Prices tumbled in late 2010 amid concern the recession would trigger a wave of defaults, a fear that later proved unwarranted. The securities dropped again in 2013 during the so-called taper tantrum, when then-Fed Chair Ben Bernanke jarred investors with plans to scale back the central bank’s bond purchases.

The influx of cash for the past year has been fostered by stock-market volatility and negative interest rates overseas, which have made even rock-bottom municipal yields attractive by comparison. Foreign buyers, who don’t benefit from U.S. tax breaks tied to the debt, increased their holdings to $89.7 billion at the end of June from $74 billion three years earlier.

 

The streak of cash “shows strong investor demand for an income-producing asset class that has high credit quality, low volatility and continues to act as a diversifier against equity and equity-like risk,” said Sean Carney, head of municipal strategy at BlackRock Inc., which manages about $124 billion of municipal debt. “There’s no indication that flows are about to turn negative, just less robust.”

Municipals have produced a return of 4 percent in 2016, according to Bank of America Merrill Lynch data, thanks to a rally that came as the Fed held off on interest-rate increases that were anticipated this year. The central bank indicated this month that the case for tightening monetary policy has strengthened, and the securities posted a loss of 0.5 percent in September.

Despite the wall of cash that’s allowed even junk-rated borrowers to issue debt, governments continue to deal with mounting pension-fund shortfalls that are exerting a drag on their credit ratings. And the impact of a selloff could be exaggerated by the brokerage industry’s diminished role in the market since new regulations went into effect after the financial crisis: Dealers’ holdings fell to about $20 billion at the end of June, down by half from $40 billion in mid-2011, according to Fed data.

“Investors have to be careful about not lulling themselves into a false sense that this abundant liquidity in the market right now is driven by dealers,” said James Iselin, head of the municipal fixed income team in New York at Neuberger Berman, which oversees about $10 billion. “It’s really driven by investors and asset managers who have pumped a lot of money into the space.”

To prepare, he said investors should buy bonds from highly-rated governments even if they offer less yield than more speculative ones.

“Giving up a little bit more to be more flexible and nimble for an environment that could be less liquid, that’s a trade that investors should certainly think about right now,” he said.

But with the interest rates so low, investors have been doing the opposite, said Piper Jaffray’s Koster. “That could be a problem down the road.”

Bloomberg Markets

by Romy Varghese

September 28, 2016 — 2:00 AM PDT

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

Watch the video.

A group of U.S. senators introduced a bipartisan bill that includes municipal bonds among assets that banks need to hold to weather a financial shock.

Democratic Senators Mark Warner and Chuck Schumer and Republican Mike Rounds introduced a scaled-down version of legislation that passed the House in February that would classify investment grade municipal bonds on par with U.S. agency securities issued by Fannie Mae and Freddie Mac to meet bank liquidity rules.
The Senate measure classifies munis as “Level 2B” assets comparable to certain corporate bonds and stocks.

Level 2B assets are subject to a 50 percent “haircut,” meaning if a bank holds $1 million of a municipal bond, $500,000 counts towards its liquidity buffer. The House bill classifies munis as Level 2A assets, which have a 15 percent haircut. Level 2A and 2B assets can make up no more than 40 percent of total “high quality liquid assets,” with Level 2B assets restricted to no more than 15 percent of HQLA.

“As a former governor, I know firsthand how critical it is for states and municipalities to issue bonds that fund their basic operations, including the construction of schools, roads, and local projects,” Warner said in a news release “We must ensure a continued and reliable access to capital markets for our local governments, and this legislation represents a compromise that achieves that while appropriately balancing concerns for the long term stability of our financial system.”

Local-government officials and securities-industry lobbyists turned to Congress after regulators including the Fed adopted rules that would restrict or bar banks from including munis among high quality liquid assets. State treasurers and city finance officers said the new rules, if not changed, will saddle them with higher borrowing costs eliminating incentives banks have to purchase the bonds.

“Having bipartisan, bicameral legislation is an excellent first step,” said Emily Brock, federal liaison for the Government Finance Officers Association. “It shows a commitment on their part for what we municipal securities to be, which is high quality and liquid.”

Bloomberg Markets

bu Martin Z Braun

September 27, 2016 — 10:07 AM PDT Updated on September 27, 2016 — 1:36 PM PDT

The privately run prison in Walnut Grove, Mississippi, was besieged for years by violence and legal fights over deplorable conditions. Then last month, with local sentencing reforms keeping fewer behind bars, officials shut it down, leaving the state on the hook for $121 million of debt left behind.

“The taxpayers are paying for that building and it’s just sitting there,” said Chip Jones, an alderman for the 1,600-person town about 63 miles (101 kilometers) east of Jackson, the state capital.

The closing is part of a shift taking place nationwide among states and local governments that have sold $30 billion of bonds to build prisons and jails, some of which were leased to for-profit operators. With officials re-evaluating tough-on-crime laws that caused inmate populations to soar and the federal government moving to jettison its use of private prisons, the reduced need for such facilities is rippling through a niche of the $3.8 trillion municipal-securities market.

On Friday, a Texas prison that serves as a U.S. detention center had its credit rating cut to junk by S&P Global Ratings, joining half a dozen others that were downgraded below investment grade by the company since federal officials in August announced plans to phase out for-profit facilities. About $300 million of tax-exempt debt issued for almost two dozen prisons has already defaulted, and investors are demanding higher yields on other securities amid speculation the distress will spread.

“At any point there are only so many prisoners out there to fill the private prison beds,” said Matt Fabian, managing director for Municipal Market Analytics Inc. “It creates unequal distribution and you have prisons competing against one another.”

The number of Americans behind bars has been on a steady decline. After peaking at 1.62 million in 2009, the state and federal prison population dropped over the next five years, reducing it by 54,000, or 3 percent, by 2014, the most recent year for which figures are available, according to the U.S. Bureau of Justice Statistics.

It’s not certain that such reductions will continue, said Daniel Hanson, an analyst who follows the municipal-bond market for Height Securities in Washington. Even with the decrease, some federal prisons are still over capacity and states may already have done much of what they can to keep non-violent offenders out of their penal systems, he said.

“The low hanging fruit of criminal-justice reform is already done,” said Hanson.

At the federal level, the impact is poised to trickle down. The Department of Justice on Aug. 18 said it will cancel or scale back the scope of private prison contracts after the number of federal inmates fell by about 25,000 over the past three years. About two weeks later, the U.S. Department of Homeland Security, which houses immigration detainees in privately run facilities, said it will review whether to curb their use too.

Such a step would jeopardize the repayment of local-government bonds issued for prisons, which are typically repaid with revenue from leasing them instead of with taxpayer money. Since August, S&P has lowered to junk debt issued by, among others, the Washington Economic Development Financing Authority, the Garza County Public Facility Corp. in Texas, and the La Paz County Industrial Development Authority in Arizona.

The prices of some securities have tumbled, pushing up the yields as investors demand higher compensation for the risk. The yield on bonds issued for the Reeves County detention center in Pecos, Texas, which mature in 2021 and were among those downgraded, rose to as much as 6.4 percent last month from 4.6 percent in early August.

Additional closures could spread the impact. In Florence, Arizona, a 31,000-resident town southeast of Phoenix, the seven prisons — four of which are privately-run — are a major employer, said Jess Knudson, town spokesman. One of them is an immigration facility that could be hit if Homeland Security follows Justice’s lead.

“Our ability to influence that decision doesn’t exist,” Knudson said.

The Mississippi Department of Corrections closed the Walnut Grove prison because of budget constraints and the number of inmates, with the annual average population dropping by about 10.5 percent between fiscal 2011 and 2016, bond documents show.

The decline was driven in part by the passage of criminal-justice reform that gave judges more discretion over sentencing, according to the Pew Charitable Trusts, which partnered with a state task force to push the 2014 law. The measure is projected to save the state $266 million over 10 years while also “safely reducing” the number of inmates, the group said.

With less need for prison beds, Mississippi chose to shut down a facility that had a troubled history under former operator Geo Group. After it was sued by inmates, the Justice Department faulted it in 2012 for widespread staff misconduct and deliberate indifference to the welfare of the young offenders housed there.

A federal judge said the description of life inside painted “a picture of such horror as should be unrealized anywhere in the civilized world.”

Mississippi said it has been pleased with Management and Training Corp., the for profit company that took over Geo Group after the Justice Department investigation.

The prison was closed last month and its 900 inmates were moved to other facilities. Mississippi still owes $121 million of debt for Walnut Grove, which the department of corrections has an “absolute and unconditional” obligation to pay off, according to bond documents. There state is considering using the emptied prison for another purpose.

“Anything’s better than nothing,” said Jones, the local alderman. “The taxpayers are paying for that building, and it’s just sitting there.”

Bloomberg Markets

Amanda Albright and Darrell Preston

October 3, 2016 — 2:00 AM PDT Updated on October 3, 2016 — 7:45 AM PDT

Fitch Ratings-New York-03 October 2016: Growth for the remainder of 2016 will remain healthy for all three U.S. major transportation sectors (airports, ports and toll roads) albeit at a slightly lower rate than the first half of the year, according to Fitch Ratings in a new report.

Fitch expects passenger traffic growth to increase around 3% for the second half of 2016 (2H16), with the bulk of air passenger growth coming from international hub airports. All but one major U.S. carrier has seen positive traffic growth through the first part of 2016, though a wide range of performance continued. JetBlue (12.1%) and Southwest Airlines (7.8%) led the way with strong increases in revenue passenger miles while increases among American Airlines (1.9%) and United Airlines (-0.1%) were more marginal.

Ports nationwide will continue to benefit from a stronger dollar driving imports, with 20-foot equivalent units (TEUs) growing at a level above GDP for the 1H16. A primary focus for ports remains “big ship readiness”. That said, shippers, logistics providers and ports will be keeping close watch over the expanded Panama Canal, which opened for commercial traffic this year. While large-scale shifts in cargo are not expected, some adjustments are possible.

As for toll roads, low fuel prices have boosted growth in traffic (6.3%) and revenue (7.0%) for the 1H16. The Southeast and Southwest U.S. have and will continue to lead in traffic performance. The higher rate of growth in revenues is reflective of typical inflationary toll rate increases, which Fitch expects to average roughly 2% over time.

A degree of uncertainty always remains for the long-term direction of the broader economy.

The Transportation Trends report includes an expanded data set in its appendices, including six-month year-to-date 2016 volume and revenues, six-month percentage change year-over-year for volume and revenue, 2015 full year volume and revenues, 2010-2015 five-year compounded annual growth rates, and recessionary peak-to-trough data. ‘U.S. Transportation Trends’ 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 at www.fitchratings.com.

Fitch Ratings-New York-22 September 2016: Despite balance sheet contractions, State Housing Finance Agencies (SHFA) have increased overall equity, according to a Fitch Ratings report.

In FY 2015, aggregate adjusted equity rose 2.6% from FY 2014 levels and increased 15.9% from FY 2010 levels.

Marking the fifth straight year of across-the-board declines, aggregate SHFA assets decreased by 0.8%; aggregate debt fell by 2.9%; and aggregate loans declined by 1.8%. Albeit at a reduced rate of decline compared with recent fiscal years, these decreases are reflective of the economic and mortgage-lending environments during that period and the shift in SHFAs’ business model in response.

“FY 2015 contained the same challenges for SHFAs as the past several years. Low interest rates continued to suppress investment income and low conventional mortgage rates decreased the volume of SHFA-issued debt for originating new whole loan mortgages,” said Ryan Pami, Associate Director.

“SHFAs sought other ways to remain profitable, such as originating loans through the to-be-announced market, utilizing direct sales of MBS and issuing MBS pass-through instruments. Despite the challenging environment, FY 2015 results demonstrated that SHFAs are financially sound, as median ratios, such as Net Interest Spread, Net Operating Revenue and Debt-to-Equity (DTE), continued to trend positively.”

Leverage ratios continued to improve as the median adjusted DTE ratio declined to 3.1x in FY 2015 from 3.4x in FY 2014. This is significantly lower than the five-year average median and the FY 2010 median, which were 3.9x and 5.5x, respectively, and now stands as the lowest median DTE ratio in the past decade.
For more information, a special report titled “State Housing Finance Agencies – Peer Study” is available on the Fitch Ratings web site at www.fitchratings.com.

Contact:

Ryan J. Pami
Associate Director
Fitch Ratings, Inc.
+1-212-908-0803
33 Whitehall Street
New York, NY 10004

Ronald McGovern
Senior Director
+1-212-908-0513

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

Additional information is available at ‘www.fitchratings.com’.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM’. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

WASHINGTON — A bipartisan group of senators is pushing to include municipal bonds in bank-safety rules, the latest wrinkle in a continuing fight over how safe—and salable—the debt of states and localities would be in another financial crisis.

Sens. Mark Warner (D., Va.), Charles Schumer (D., N.Y.) and Mike Rounds (R., S.D.) are set to introduce legislation on municipal bonds this week, according to Senate aides. The bill aims to open the door for big U.S. banks to count municipal bonds as liquid assets under rules completed in 2014 that were designed to ensure Wall Street firms have enough cash during a crisis to fund their operations for 30 days.

The Senate legislation would place municipal bonds on the lowest rung of the “high quality liquid assets” category. That means they would be treated on par with corporate bonds, but not as favorably as under related legislation approved by the House early this year.

“We must ensure a continued and reliable access to capital markets for our local governments,” Mr. Warner said in a written statement. “This legislation represents a compromise that achieves that while appropriately balancing concerns for the long term stability of our financial system.”

The rules, slated to go into effect next year, are aimed at making banks hold more cash or securities that are easy to sell. The Federal Reserve and two other bank regulators had originally decided debt issued by states and localities didn’t make the cut—prompting a backlash from banks, lawmakers and states and localities who warned the move would make the bonds less attractive and raise borrowing costs for municipalities.

The Fed completed amendments in April to allow some investment-grade municipal bonds to qualify. But the two other regulators involved in the rules—the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.—haven’t followed suit.

Aides to Senate lawmakers say their bill was scaled back from the House version to gain broad support for it in the Senate, though it is unclear if there is sufficient time in the remaining year to advance the bill.

Sen. Richard Shelby (R., Ala.), chairman of the Senate Banking Committee, indicated earlier this year that he was reluctant to second-guess banking regulators that originally excluded municipal bonds when they wrote the rules in 2014. But an aide to Mr. Shelby said he wouldn’t object to the coming bill as it incorporates changes the Fed already adopted in its version of the rules.

Banks underwrite muni bonds, buy them as investments and sell them to clients. Lenders have played an increasingly central role in the thinly traded, $3.7 trillion market and are now the biggest buyers of municipal debt, according to Municipal Market Analytics Inc., a research firm.

Municipal officials have generally applauded the Fed’s willingness to make changes to the rules but say legislation is necessary, largely because banking firms typically hold municipal debt in units that are overseen by the other policy makers involved in the rules, particularly the OCC, which regulates national banks.

Officials at the OCC remain dismissive of including the municipal bonds in the rules and don’t believe the debt is sufficiently liquid, according to people familiar with their thinking. The FDIC is waiting until the rules go into effect next year before considering amending its version, according to people familiar with that agency.

While the Senate bill would rank municipal debt similarly to the Fed’s amended rules—allowing the banks to count 50% of the bonds’ face value when including them in their funding buffers—the legislation would allow banks to include more types of municipal bonds, a Senate aide said.

These include revenue bonds, or securities backed by a specific revenue stream, that comprise the bulk of debt issued by states and local governments but that are kept out of the current Fed version of the rules.

The House bill, meanwhile, is broader than both the Senate bill and the Fed’s version of the rules, allowing banks to count 85% of the bonds’ face value.

To date, banks have by and large continued to hold lots of municipal bonds despite the rules, in part because they are seen as less risky than corporate debt and are priced competitively to other types of debt, according to bank officials. If interest rates rise this year, banks are expected to begin to pare their muni holdings.

Corrections & Amplifications:
An aide to Sen. Richard Shelby (R., Ala.), chairman of the Senate Banking Committee, said he wouldn’t object to the coming municipal bond legislation. An earlier version of this story said an aide to Mr. Shelby said he would support the bill. Also, these comments were made by an aide to Sen. Shelby. Due to an editing mistake, an earlier correction to this story erroneously cited Sen. Shelby for these remarks.

THE WALL STREER JOURNAL

By ANDREW ACKERMAN

Updated Sept. 27, 2016 10:27 a.m. ET

Write to Andrew Ackerman at andrew.ackerman@wsj.com

J.P. Morgan, Nuveen invest in school board’s bonds at big profit

The Chicago school system needed money—fast. Two Wall Street players saw an opportunity to invest.

J.P. Morgan Chase & Co. and Chicago-based Nuveen Asset Management have made realized and paper profits exceeding $110 million on purchases this year of $763 million in Chicago Public Schools bonds. The school system has said it needed the money to replenish its dwindling coffers before the new school year and to build and repair facilities.

The terms of the bond sales highlight the choices the school district faces after years of pension shortfalls and relying heavily on borrowing. The 397,000-student school district struggled to sell municipal bonds in February until Nuveen bought about one-third, and the district decided in July to borrow directly from J.P. Morgan for fear that investors might balk again, a spokeswoman for the Chicago Board of Education said.

“CPS did not have the luxury of waiting longer to demonstrate to the market that the progress we were making was real,” said Ronald DeNard, the school district’s senior vice president of finance, in an emailed statement about the bonds purchased in July by J.P. Morgan.

J.P. Morgan, the country’s largest bank by assets, made a 9.5% profit on $150 million in bonds it bought in July and sold in September, or 82% annualized. Nuveen, an investment firm managing $160 billion, has bought $613 million in bonds since February for a total return, including price gains and interest payments, of about 25%. That is almost 50% on an annualized basis, an especially large gain at a time of near-zero interest rates.

The school system’s bonds are a favorite for John Miller, Nuveen’s co-head of fixed income, who said the firm bought when the market feared a default, a concern he called overblown. “At the end of day, this school system is critically important to Chicago—to the whole country really,” he said.

Its bonds are rated B3 by Moody’s Investors Service and traded as low as 73 cents on the dollar in March before rebounding to about 90 cents in September. CPS said the bond sales facilitated much-needed fixes like lead abatement and classroom construction, though they increased the school system’s already heavy debt load and its annual interest payments.

“We took a period of market risk on behalf of our client when they needed it most and the market has recognized their improved financial position,” a J.P. Morgan spokeswoman said.

Chicago’s school district operates on a budget of $5.5 billion with a below-investment-grade, or junk, credit rating on nearly $7 billion of bonds. Its teachers union is threatening to strike, in part, over proposed changes to its pension plan, which has a nearly $10 billion funding gap. The school system’s rainy-day fund is nearly empty and relies on short-term borrowing.

“J.P. Morgan and Nuveen are taking advantage of a distressed school district at the expense of our most vulnerable students,” said Jackson Potter, staff coordinator at Chicago Teachers Union.

Nuveen held few Chicago Public School bonds in recent years but has been watching its prices closely since May 2015, when Moody’s cut its credit ratings of the school board and the city of Chicago to junk.

The investment company, which now owns about $806 million of the school district’s bonds, dedicated an analyst to cover the district full time to better understand its capacity to increase revenue and the likelihood of a bankruptcy filing.

Prices of outstanding Chicago school bonds were hit in 2013 and 2015 after defaults by Detroit and Puerto Rico. Illinois Gov. Bruce Rauner called for a state takeover of the school system and for a potential bankruptcy filing over the past year and prices fell below 75 cents on the dollar.

Nuveen determined that the default risk was far lower than that implied by the bond prices. When J.P. Morgan was struggling to find buyers of $725 million in bonds in February, the fund manager agreed to buy about 36% of the issue at about 84 cents on the dollar.

Mr. Miller continued buying after and now owns 60% of the bonds, making it the single largest investment in the $15 billion Nuveen High Yield Municipal Bond Fund. Nuveen has made unrealized gains of about $103.3 million on all the CPS bonds it owns, a company spokeswoman said.

Demand for Chicago Board of Education debt grew over the summer as investors gained confidence that the school board could plug much of its 2017 budget gap with budget cuts, state aid and new tax revenues. Market conditions also improved significantly, sending prices of municipal bonds with junk credit ratings up and pushing their yields down to about 4.6% in early July, a 17-year low, according to the S&P Municipal Bond High Yield Index.

Still, when the school district turned to J.P. Morgan for more money in July, it decided to sell the bonds directly to the bank to avoid the risk that investors would reject it. Instead, demand for the bonds rose throughout the summer, and J.P. Morgan sold all of the debt for a $12 million profit in September, Wall Street Journal analysis of data from the Municipal Securities Rulemaking Board shows.

“You’ve gone from having maybe two to three people being interested in these deals to all of a sudden having 20 investors interested,” said Mr. Miller of Nuveen.

J.P. Morgan committed to hold the $150 million in bonds it purchased for about six weeks until the board of education prepared documentation allowing them to be sold to institutional investors.

The certainty J.P. Morgan provided came with a high price: The bank paid 91 cents on the dollar for the debt at a yield of 7.25%, much higher than the approximately 6% yield on the school board’s outstanding bonds at the time. It sold the debt at prices as high as 102 cents on the dollar in early September and its trading profits, plus a $1.2 million purchaser’s fee, amount to the 9.5% return in six weeks.

J.P. Morgan has a longstanding relationship with Chicago Public Schools and is the top underwriter of its bonds over the past 10 years, according to data from Thomson Reuters. The bank views the school board as a high-priority client that it understands well and is willing to support its short- and long-term capital needs, the bank spokeswoman said.

THE WALL STREET JOURNAL

By MATT WIRZ and HEATHER GILLERS

Updated Oct. 2, 2016 11:31 p.m. ET

—Aaron Kuriloff
contributed to this article.

Write to Matt Wirz at matthieu.wirz@wsj.com and Heather Gillers at heather.gillers@wsj.com

CHICAGO — Bonds sold by U.S. states, cities, schools and other issuers in the municipal market could be held as liquid assets by banks under legislation introduced on Tuesday in the U.S. Senate, bolstering the case for purchasing the debt while helping financial institutions weather market crises.

The bipartisan measure would classify high-quality municipal bonds at the same level as corporate debt, allowing banks to use munis to comply with new 30-day federal liquidity requirements.

Federal rules approved in 2014 and effective next year are aimed at ensuring big banks will be able to access sufficient cash during a financial crisis. But the rules excluded muni bonds from the types of securities that count as high quality liquid assets, or HQLAs.

Muni debt issuers fear the exclusion would deter banks from buying muni debt, hurting their ability to fund everything from schools and bridges to water treatment plants and hospitals.

“If banks retreat from the muni-bond market, it could choke off a critical source of investment on which our cities and localities rely. This bill protects the stability of our markets while providing continued access to muni bonds for local governments,” Senator Chuck Schumer, a New York Democrat, said in a statement.

Schumer, along with Senators Mark Warner, a Virginia Democrat, and Mike Rounds, a South Dakota Republican, led a group sponsoring the legislation.

Putting munis on par with corporate debt “would be acceptable,” according to Washington State Treasurer James McIntire, president of the National Association of State Treasurers (NAST), which has been pushing for the inclusion of munis under the rules.

A House bill would also allow banks to count munis toward banks’ liquidity but at a higher face value, 85 percent, versus 50 percent in the Senate bill, according to NAST.

By REUTERS

SEPT. 27, 2016, 6:39 P.M. E.D.T.

(Reporting by Karen Pierog; editing by Daniel Bases, Bernard Orr)

The NFMA Disclosure Committee released the draft Recommended Best Practices in Disclosure: Charter School Disclosure (Primary Offering & Continuing Disclosure).

Comments will be taken through November 30, 2016.

To view the paper, click here.

To read the press release, click here.

GFOA’s Resiliency Task force has produced numerous articles, case studies, and other resources on Financial Resilience.

Access the Resiliency Resource Center.

Wells Fargo & Co. may be forced to leave the municipal-debt underwriting business for a short period of time because of the backlash from the bank’s mishandling of client accounts, according to Court Street Group, a New York-based research and consulting firm.

• No consideration of leaving the business, Wells Fargo spokesman Gabriel Boehmer says in an e-mail response
• “We believe the long-term prospects for Wells Fargo in municipal finance remain very promising. We expect to continue to work closely with our clients in municipal finance and remain committed to the industry as a department and as a firm,” Boehmer says
• Impact of California’s ban of Wells Fargo in bond deals may exceed that of UBS Group AG exiting muni underwriting, says report by Court Street’s Matt Posner, Bob Donahue and Joseph Krist
• Other states may follow suit and bar Wells Fargo from managing bond deals, report says
• Firm sees less demand for high-grade general obligations from states as the bank pulls back, report says
  
  Bloomberg Markets

by Romy Varghese

September 30, 2016 — 11:40 AM PDT Updated on September 30, 2016 — 2:24 PM PDT

Chicago Treasurer Kurt Summers plans to divest $25 million the city has invested with Wells Fargo & Co. after the company admitted to opening potentially millions of bogus client accounts, joining state officials who have pulled business from the bank because of the scandal.

Summers, whose office manages the city’s $7 billion investment portfolio, plans to “unwind these assets as expeditious as possible in a fashion that is prudent and will protect taxpayer money,’’ according to a statement from his office sent to Bloomberg News.

“The City Treasurer is proud to stand with working families from Chicago and across the nation by divesting in Wells Fargo & Co.,’’ according to the e-mailed statement. “Chicago deserves better.’’

The move comes amid mounting pressure on Wells Fargo, which is facing a national furor over the fake accounts debacle. After California’s treasurer barred the bank from bond and investment deals last week, Illinois Treasurer Michael Frerichs said he plans to take similar steps. On Monday, he said he’s suspending $30 billion in investment activity from Wells Fargo, which won’t be a broker dealer for the state for at least a year.

Illinois won’t be using Wells Fargo on any new bond sales until further notice, according to Governor Bruce Rauner’s administration, which hasn’t done any bond business with the bank.

Council Measure

“We are very sorry and take full responsibility for the incidents in our retail bank,” said Gabriel Boehmer, a spokesman for Wells Fargo. “We have already taken important steps, and will continue to do so, to address these issues and rebuild the city’s trust.”

Chicago may take further steps to sever relations with the bank. Alderman Edward Burke, chair of the city council’s finance committee, introduced a measure on Sept. 30 that would bar Chicago from doing business with Wells Fargo for the next two years. The plan, which will be considered at a finance committee meeting on Oct. 5, would prevent Chief Financial Officer Carole Brown, the comptroller and treasurer from using Wells Fargo as a municipal depository, bond underwriter, trustee in loan agreement, investment broker or financial adviser, according to a statement. The plan would also “encourage” pension funds to divest their Wells Fargo investments.

Chicago has paid Wells Fargo more than $19 million since 2005, according to Burke’s office.

Bloomberg Markets

by Elizabeth Campbell

October 3, 2016 — 7:06 AM PDT Updated on October 3, 2016 — 9:20 AM PDT

California, the nation’s largest issuer of municipal bonds, is barring Wells Fargo & Co. from underwriting state debt and handling its banking transactions after the company admitted to opening potentially millions of bogus customer accounts.

The suspension, in effect immediately, will remain in place for 12 months. A “permanent severance” will occur if the bank doesn’t change its practices, State Treasurer John Chiang said Wednesday. The state also won’t add to its investments in Wells Fargo securities. Chiang already replaced Wells Fargo with Loop Capital for two muni deals totaling about $527 million that will be sold next week.

“Wells Fargo’s venal abuse of its customers by secretly opening unauthorized, illegal accounts illegally extracted millions of dollars between 2011 and 2015,” Chiang said in a news conference in San Francisco. “This behavior cannot be tolerated and must be denounced publicly in the strongest terms.”

The move by California is the latest to punish the bank, which is facing a national furor over the fraudulent accounts. San Francisco, the home of Wells Fargo, last week removed it from a banking program for low-income residents. Authorities including the U.S. Consumer Financial Protection Bureau fined Wells Fargo $185 million on Sept. 8 for potentially opening about 2 million deposit and credit-card accounts without authorization. Chief Executive Officer John Stumpf has forfeited $41 million in pay.

Connecticut decided last week to add Morgan Stanley to serve as lead underwriter with Wells Fargo on a state bond issue planned for next month to help ensure a successful sale, according to the state treasurer’s office. Connecticut is reviewing its relationship with the bank. New York’s Metropolitan Transportation Authority voted to hold off on approving Wells Fargo as a underwriter until the agency completes its analysis of the company’s practices, according to an online broadcast of a board meeting Wednesday.

Federal prosecutors in New York and San Francisco have opened criminal inquiries, a person familiar with the matter has said. Wells Fargo already faces a raft of lawsuits by fired or demoted workers, customers and investors.

Chiang, a Democrat who’s running for governor in 2018, oversees about $2 trillion in banking transactions a year and manages a $75 billion investment pool that includes $800 million in Wells Fargo securities. Chiang said the effect on the bank is “significant” since he targeted the most profitable lines of business. Wells Fargo made $1.7 million from underwriting three bond deals, according to his office.

Gabriel Boehmer, a spokesman for Wells Fargo, said the bank has “diligently” worked with the state for the past 17 years.

Underwriter Rankings

“We certainly understand the concerns that have been raised. We are very sorry and take full responsibility for the incidents in our retail bank,” Boehmer said in an e-mailed statement. “We have already taken important steps, and will continue to do so, to address these issues and rebuild your trust.”

Wells Fargo was the second-largest underwriter of municipal debt in California in the first half of the year, according to data compiled by Bloomberg. The firm, which trailed Citigroup Inc., handled sales of $3.9 billion in securities, or 11 percent of total issuance.

The bank ranked fifth in overall municipal-bond underwriting this year through June, selling $13.7 billion in debt, for 5.9 percent market share.

Chiang, who called for the resignation of Stumpf, said other state treasurers should also withhold business from the company. “Those that have the financial wherewithal, those who have the courage, I think they ought to follow suit,” he said.

Bloomberg Markets

by Romy Varghese

September 28, 2016 — 11:40 AM PDT Updated on September 28, 2016 — 5:11 PM PDT

Illinois is joining California in suspending Wells Fargo & Co. from handling “billions” of dollars in investment work and the underwriting of state debt after the company admitted to opening potentially millions of bogus customer accounts.

Treasurer Michael Frerichs said in a statement the he will announce details of the ban during a news conference in Chicago on Monday. The suspension includes municipal-bond underwriting, according to Greg Rivara, a spokesman for the treasurer.

“In isolation, Illinois is not as significant as California, but its part of a mosaic that’s starting to take form,” Charles Peabody, a managing director at Compass Point Research LLC, said in a telephone interview, noting that it’s surprised industry watchers that the cross-selling scandal has begun to impact Wells Fargo’s corporate bank. “And the mosaic that’s being built out does not paint a bright picture for 2017 earnings.”

The pullback comes as pressure builds on Wells Fargo Chief Executive Officer John Stumpf and the bank’s board to resign because of the fake-account debacle. Stumpf told Congressional lawmakers this week that the San Francisco-based bank was working to help any customers who where hurt by its actions and is “deeply sorry” that Wells Fargo broke clients’ trust. Stumpf has forfeited $41 million in pay.

“We certainly understand the concerns that have been raised,” said Gabriel Boehmer, a spokesman for Wells Fargo. “We are very sorry and take full responsibility for the incidents in our retail bank. We have already taken important steps, and will continue to do so, to address these issues and rebuild trust with the State of Illinois.”

Authorities including the U.S. Consumer Financial Protection Bureau fined Wells Fargo $185 million on Sept. 8 for potentially opening about 2 million deposit and credit-card accounts without authorization. Federal prosecutors in New York and San Francisco have opened criminal inquiries, a person familiar with the matter has said. Wells Fargo already faces a raft of lawsuits by fired or demoted workers, customers and investors.

California Treasurer John Chiang suspended Wells Fargo for one year on Wednesday and called for Stumpf to quit. Connecticut decided last week to add Morgan Stanley to serve as lead underwriter with Wells Fargo on a state bond issue planned for next month to help ensure a successful sale. Other states such as Alaska and Oregon said they’re maintaining business with Wells Fargo.

Wells Fargo wasn’t ranked among the top four underwriters of municipal debt in Illinois during the first half of 2016, according to data compiled by Bloomberg. The company was the second-largest underwriter in California during that period, handling sales of $3.9 billion in securities, or 11 percent of total issuance.

The bank ranked fifth in overall municipal-bond underwriting this year through June, selling $13.7 billion in debt, for 5.9 percent market share, according to data compiled by Bloomberg.

Bloomberg Business

by Katherine Greifeld and Elizabeth Campbell

September 30, 2016 — 2:49 PM PDT Updated on September 30, 2016 — 5:11 PM PDT

SAN FRANCISCO — The California State Treasurer’s Office said it replaced Wells Fargo & Co as the lead underwriter on two bond sales that had originally been for scheduled for Tuesday, a day before the state announced sweeping sanctions against the company.

Management of the two sales, totaling nearly $730 million, was replaced by Jefferies LLC in one sale and by Loop Capital Markets LLC and Raymond James & Associates, Inc in the other.

On Wednesday, State Treasurer John Chiang announced the suspension of Wells Fargo as a managing underwriter on state negotiated bond sales for the next 12 months. California is the nation’s largest issuer of municipal debt.

Wells Fargo agreed on Sept. 8 to pay $190 million to settle a case by California prosecutors and federal regulators over what were potentially more than 2 million unauthorized credit card and deposit accounts opened by branch employees scrambling to meet sales quotas. The bank said it fired 5,300 employees over the issue.

Tuesday’s postponed bond sale had consisted of $200 million of general obligation index floating rate bonds. The state replaced Wells Fargo with Jefferies LLC as the senior manager, and the sale is now scheduled for Thursday.

The second sale was nearly $528 million of lease revenue refunding bonds from the State Public Works Board, issued to refund certain outstanding debts. Loop Capital and Raymond James will now manage the sale, which is scheduled to take place on Oct. 5.

Chiang, who oversees nearly $2 trillion of California’s annual banking transactions and manages a $75 billion investment pool, called for the state on Wednesday to suspend Wells Fargo’s “most highly profitable business relationships with the state of California.”

Over the past 21 months, Wells Fargo had served as senior manager in three California deals, resulting in $1.7 million of profits, according to the Treasurer’s Office.

By REUTERS

SEPT. 28, 2016, 7:21 P.M. E.D.T.

(Reporting by Robin Respaut; Additional reporting by Dan Freed in New York; Editing by Peter Cooney)

CHICAGO — Wells Fargo & Co faces possible bans from doing business with the city of Chicago and the state of Illinois in the wake of its sales scandal that erupted earlier this month.

Alderman Edward Burke, who heads the Chicago City Council’s finance committee, introduced an ordinance on Friday that would suspend the bank from acting in several capacities, including as a municipal depository, bond underwriter and financial adviser.

“The city council should not engage in any business for the next two years with this institution that has deceived, defrauded and duped its customers,” Burke said in a statement.

Illinois Treasurer Michael Frerichs set a Monday news conference to announce “plans to suspend billions of dollars in investment activity with Wells Fargo,” according to an advisory from his office on Friday.

Wells Fargo staff opened checking, savings and credit card accounts without customer say-so for years to satisfy managers’ demand for new business, according to a $190 million settlement with regulators reached on Sept. 8. The bank said it fired 5,300 employees over the issue.

On Wednesday, California State Treasurer John Chiang announced a sweeping suspension of the state’s business relationships with Wells Fargo for the next 12 months. The bank is also under pressure from Oregon’s treasurer to reform its management structure and executive compensation.

U.S. lawmakers called on Thursday for Wells Fargo chief John Stumpf to resign and a top House Democrat demanded the bank be broken up because it is too big to manage.

Chicago’s finance committee is scheduled to take up the proposed ordinance on Wednesday. The city has paid Wells Fargo $19.45 million in fees since 2005, according to the committee.

The bank served as senior underwriter on five Chicago bond issues totaling nearly $969 million since 2006, according to Thomson Reuters data.

Wells Fargo made the list of 15 senior underwriters tapped by Illinois this month for bond sales over the next three years. A spokeswoman for Governor Bruce Rauner declined to comment on whether his office is rethinking Wells Fargo’s selection.

By REUTERS

SEPT. 30, 2016, 5:42 P.M. E.D.T.

(Reporting by Karen Pierog; Editing by Matthew Lewis)

Citing Wells Fargo’s “venal abuse of its customers,” the California treasurer took the unusual step on Wednesday of suspending many of its ties with the San Francisco bank as it continues to reel from the scandal over the creation of as many as two million unauthorized bank and credit card accounts.

The state treasurer, John Chiang, said he was suspending Wells Fargo’s “most highly profitable business relationships” with the state for at least a year, including the lucrative business of underwriting certain California municipal bonds.

On Tuesday alone, he said, he had pulled Wells Fargo off two large municipal bond deals.

“How can I continue to entrust the public’s money to an organization which has shown such little regard for the legions of Californians who placed their financial well-being in its care?” Mr. Chiang wrote in a letter on Wednesday to the bank’s chairman and chief executive, John G. Stumpf, and the bank’s board members.

Mr. Chiang said he was also suspending making any additional investments in Wells Fargo securities and would suspend the bank’s work as a broker-dealer hired to buy investments on the treasurer’s behalf.

The suspensions will last for one year, Mr. Chiang said, or longer if he finds evidence that Wells Fargo has “re-engaged in the same behavior” or failed to abide by the terms of a consent order it signed with the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency.

The move could cost Wells millions of dollars in banking fees because California is the largest issuer of municipal debt in the country. A state official said the suspension did not affect Wells Fargo’s role in every municipal bond deal, but it would cut them out of a significant portion. In addition to overseeing bond deals, the state treasurer also manages $75 billion worth of investments.

But more than anything the move is symbolically hurtful for Wells, which has a large presence in California, particularly in San Francisco, where its top executives work and live.

Mr. Chiang, a Democrat who is running for governor in 2018, said his office had “long relied on Wells Fargo, our oldest California-based financial institution, as a partner to meet the state’s investment and borrowing needs.”

So far this year, California has sold about $50 billion in municipal debt out of total of about $318 billion issued nationwide, according to Municipal Market Analytics, a research firm.

Mr. Chiang noted that he sits on the board of the state’s giant public pension funds, Calpers and Calstrs, which have a combined $2.3 billion invested in Wells Fargo stock and debt securities. He said he would use his position on the pension boards to push for governance changes at Wells Fargo, including separation of the chairman and chief executive roles. Currently, Mr. Stumpf holds both positions.

In a statement, the bank responded: “Wells Fargo has diligently and professionally worked with the state for the past 17 years to support the government and people of California. Our highly experienced and proven government banking, securities and treasury management teams stand ready to continue delivering outstanding service to the state.”

Separately, on Thursday, Mr. Stumpf is scheduled to testify in Washington before the House Financial Services Committee, having already appeared last week before the Senate’s banking panel. The responses he gave to the Senate committee investigating the bank’s misdeeds were widely viewed as a disaster. Nevertheless, according to a copy of his prepared remarks, he plans to stick with the same script he used last week.

His planned testimony, which was obtained by The New York Times, is a nearly word-for-word repetition of the introduction he prepared for last week’s Senate hearing, with just one notable difference: Hastening a policy change, Mr. Stumpf plans to say that Wells Fargo will eliminate sales goals for its retail bankers by Oct. 1, three months earlier than it had planned.

Those aggressive sales goals, which pushed Wells Fargo employees to open as many accounts as possible for customers or risk losing their jobs, have been blamed for the scandal now engulfing the bank, where myriad banking and credit card accounts may have been opened without the customers’ authorization.

“We decided that product sales goals do not belong in our retail banking business,” Mr. Stumpf will say, according to the testimony.

As he did at the Senate hearing, Mr. Stumpf plans to say he is “deeply sorry” and will “accept full responsibility for all unethical sales practices.”

Under fire over the unauthorized accounts, Wells Fargo’s board announced on Tuesday that it was stripping Mr. Stumpf of unvested stock awards valued at $41 million. He will also forgo his bonus this year and a portion of his $2.8 million base salary.

The clawback of both Mr. Stumpf’s compensation and that of Carrie L. Tolstedt, who until recently ran Wells Fargo’s retail banking division, was a move that members of the Senate panel suggested last week. The fact that the board decided to do so right before the House hearing does not seem coincidental.

And the move to retract a portion of Mr. Stumpf’s lavish compensation — at the time of Wells Fargo’s latest annual disclosure, he held shares and options valued at around $247 million — has not appeased some senators who criticized Mr. Stumpf last week.

“This is a small step in the right direction, but nowhere near real accountability,” Senator Elizabeth Warren, Democrat of Massachusetts, said in a statement.

She again called for Mr. Stumpf to resign, to “return every nickel he made while this scam was ongoing” and to face a criminal investigation.

On Wednesday, in what felt a bit like a warm-up for Mr. Stumpf’s appearance on Thursday, the House Financial Services Committee grilled the Federal Reserve chairwoman, Janet L. Yellen, about the handling of the Wells Fargo scandal. Some lawmakers called for tougher punishment of big banks and their executives when they run afoul of the law.

“Will you at least seriously consider breaking up Wells Fargo?” asked Representative Brad Sherman, Democrat of California.

Ms. Yellen responded that regulators would hold financial institutions to “exceptionally high standards of risk management, internal controls, consumer protection.”

Others on the committee continued to press the issue.

“How long does this stuff have to go on before you get outraged and take action?” asked Representative Michael Capuano, Democrat of Massachusetts. He said that the $185 million fine against Wells Fargo, which has $1.9 trillion in assets, “is barely a footnote in their annual report.”

Ms. Yellen said that regulators had already begun a review of practices at all of the largest banks.

“We are undertaking a look comprehensively, not only in the consumer area but compliance generally, because there has been a very disturbing pattern of violations,” she said.

And regulators are working to complete a long-pending rule on executive compensation designed to limit excessive risk-taking at financial firms, Ms. Yellen said. “I will do everything that I can at the Federal Reserve to be ready to act on this as soon as possible,” she added.

Wells Fargo has been in crisis mode since it acknowledged this month that its employees had, over the course of several years, opened as many as 1.5 million bank accounts and 565,000 credit card accounts that may not have been approved by customers. The company has fired 5,300 employees for ethics violations.

Mr. Stumpf’s efforts to minimize these actions did not play well at last week’s Senate hearing. Facing a barrage of criticism about Wells Fargo’s leadership and what ex-employees describe as a toxic sales culture of relentless pressure to meet unrealistic goals, Mr. Stumpf maintained that the problem did not extend beyond rogue employees whose activities “did not honor our culture.”

Banking analysts were not enthusiastic about the idea of him continuing that line of argument at Thursday’s House hearing.

“Given the nearly universal assessment that Mr. Stumpf’s Senate appearance was lackluster, sticking with the script may prove imprudent,” Isaac Boltansky, an analyst at Compass Point Research & Trading, wrote in a note to clients after reading the prepared remarks.

One big question facing Mr. Stumpf is whether he will remain at the helm of the bank. Some analysts who follow the bank are beginning to openly speculate about Mr. Stumpf’s possible ouster.

“Our support for the C.E.O. is now wavering,” Mike Mayo, a banking analyst at CLSA, wrote in a research note on Monday. “His actions have been reactionary versus leading.”

THE NEW YORK TIMES

By MICHAEL CORKERY and STACY COWLEY

SEPT. 28, 2016

The Exposure Draft, Certain Debt Extinguishments, is out for public comment through October 28, 2016.

Let us hear from you!

This article explores the Omnibus Exposure Draft, the Leases project, and the forthcoming Statement on fiduciary activities.

The GASB is working toward the issuance of an initial document for public comment in its project reexamining the financial reporting model. The Invitation to Comment will seek feedback from stakeholders on elements of the existing model that the GASB’s research identified as areas of potential improvement. This article previews what the Board is preparing for issuance at the end of 2016.

Unlike other due process documents, which contain proposals from the Board for new or amended standards, an Invitation to Comment is a neutral document that seeks stakeholder input on a variety of alternatives before the Board develops a position on them.

It is important to note that the feedback received during the initial pre-agenda research indicated that much of the financial reporting model has been effective in providing information that is useful for making decisions and assessing accountability. Therefore, the Board decided that the approach of the financial reporting model reexamination will be to make improvements to the existing model, rather than start over with a clean slate.

TARGETED AREAS OF POTENTIAL IMPROVEMENT

The Invitation to Comment is expected to present a number of targeted areas of potential improvement to governmental fund financial statements, including:

• Recognition approaches
• Format of the governmental funds statement of resource flows
• Specific terminology
• Reconciliation to the government-wide statements, and
• For certain recognition approaches, a statement of cash flows.

The Board plans to consider other areas identified for potential improvement during the research in future due process documents.

MAPPING OUT THE INVITATION TO COMMENT

Chapter One

The first chapter will make the case for why the Board is exploring recognition approaches for governmental funds—to improve the effectiveness of governmental fund information, develop conceptual consistency, and provide a basis for establishing guidance for complex transactions.

Chapter Two

This chapter will introduce three alternatives that fall on a continuum for recognition approaches for governmental fund financial statements:

• Near-term financial resources
• Short-term (working capital) financial resources, and
• Long-term (total) financial resources.

For each of these three recognition approaches, the document will describe:

• The messages that financial statements using the recognition approach would be trying to communicate
• The assets, liabilities, deferrals, and inflows and outflows of resources that would be reported under the recognition approach, and
• Potential benefits and challenges to the recognition approach.

Stakeholder input will give the Board additional insight as to which recognition approach yields the most understandable and useful information about the governmental funds.

Chapter Three

This portion of the document will consider a statement of cash flows for governmental funds for the short-term (working capital) financial resources and long-term (total) financial resources recognition approaches.

A cash flows statement presents a government’s receipts and disbursements into different categories—operating activities, noncapital activities, capital and related financing activities, and investing activities—based on the nature of the transaction. Currently, cash flows statements are required in the proprietary funds (funds reporting activities for which a government generally charges a fee for goods or services).

This document will seek input on whether there would be a need for a cash flows statement if the governmental funds were to use either of the recognition approaches other than near-term financial resources. It also would consider which cash flows categories are most relevant.

The chapter also will consider two presentation format alternatives for the resource flows statement for governmental funds:

• The first would retain the existing format (the statement of revenues, expenditures, and changes in fund balances).
• The second would be a current activities and long-term activities format.

Input on these very different formats will assist the Board in evaluating which provides financial statement users with the most understandable and useful information.

We welcome your input once the Invitation to Comment has been issued in December 2016.

Los Angeles – Municipal bond pros at the 26th annual Bond Buyer California Public Finance Conference expect interest rates to have the biggest impact on issuance next year.

In a live market survey Wednesday 50% of the audience said rates will have the biggest effect on the market, 25.8% picked new money, and 22% chose refunding activity.

A panel of municipal bond market influencers at the conference in Los Angeles, which attracted a record number of attendees, commented on results as the audience responses were tabulated. Led by moderator Jessica Matsumori, analytical leader, education team for S&P Global Ratings, the panel was comprised of Bill Lockyer, counsel for Brown Rudncik LLP and former Treasurer of the State of California, Andy Nakahata, managing director and head of new business development for the western region at National Public Finance Guarantee and Rep. Loretta Sanchez, D-Calif., a candidate for the U.S. Senate.

“It’s such a great way to get the pulse of the market,” Matsumori said.

The audience was nearly split about whether it matters if the Federal Reserve raises interest rates by less than 100 points, as 56.9% said yes and the remaining 43.1% said no. This question was especially timely, as it was announced Wednesday that the Fed will hold rates where they are now.

“Even if they did something in December, it would be a small move up. I think the question is, is the government going to step and build more infrastructure? These are issues that are hard to grapple with in Congress,” Sanchez said.

Defaults have been a hot topic, so it was surprising to see that 60.5% of the audience said that muni defaults have not affected the market.

“On an absolute rate level that is correct,” Nakahata said. “Credit spreads are so thin — but on the other hand, it has affected how certain people look at certain types of credits.”

Pensions are another popular topic and one that won’t be going anyway anytime soon. When asked what will happen if investment assumptions prove to be too optimistic for CalPERS pension returns, 43.5% said that employer/employee contributions will be increased, 20.1% said benefits will be cut for future employees, 1.3% said benefits will be cut for current employees and 35.1% said all of the above.

“Given the magnitude of the issue, it would be great to come up with a solution that is all of the above, where everyone would share a little bit of the pain, but I don’t see a clear path to achieve a solution like that,” Nakahata said.

Green bonds were also a topic of conversation, in the midst of a record year for their issuance. A whopping 50.9% of the audience said that green bonds are purely a marketing ploy and part of a fad that won’t last. Still, 31.3% said that the designation makes some difference to investors, 13.5% said they have the potential to drive serious environmental change and 4.3% said greenness is “The wave of the future – will soon be a requirement for most bonds.”

“It is going to take some time and I do think we have to wait and see what happens, but part of that will be if there is a greater definition of what exactly truly is a green bond. In order for it to be meaningful, there has to be a common [definition] which everyone subscribes to or … my cup of coffee could be a green bond,” Nakahata said.

The Bond Buyer

By Aaron Weitzman

September 21, 2016

US local governments are facing a jump in short-term borrowing costs in the latest example of how the reform of Wall Street’s $2.7tn money market industry is rippling through the financial system.

A key interest rate used to set the coupon payments on some short-dated municipal debt has moved up from what was in effect zero in March to 70 basis points this week.

“It’s huge,” said Jon Mondillo, portfolio manager at Alpine Funds, which invests in municipal bonds. “It’s been a double barrelled shot in the face for issuers.”

State governments and other public institutions that tap the municipal bond market in the US — which is tax exempt for domestic investors — have been beneficiaries of the long period of low interest rates.

The increase in the Securities Industry and Financial Markets Association (Sifma) rate catapults it above one week Libor, a global benchmark indicative of the cost of unsecured bank borrowing.

“It is a bit startling given where we have been the last seven or eights years,” said Tim Schaefer, deputy treasurer for the state of California. “Not unexpected I might add . . . It creates concern. But by no means should it cause us to give up on the market.”

The jump in Sifma’s rate will hit the $175bn market for variable rate demand notes (VRDNs), or shorter-dated debt carrying a floating interest rate that resets weekly. New York, California and Texas are some of the largest state issuers, according to Sifma data.

The upward move in borrowing costs stems from US regulators’ reform of money market funds, which invest in short-term debt sold by companies, banks as well as public borrowers such as states. The reforms allow fees to be imposed on investors pulling money out of funds during periods of financial stress and, in some instances, stop investors withdrawing money altogether.

Although the reforms do not take effect until next month, they have already prompted investors to move money out of so-called prime and tax-exempt funds, which buy debt sold by US municipalities.

Assets in tax exempt funds assets have fallen from $266bn at the start of 2016 to $143bn, according to data from the Investment Company Institute. That is the lowest level since the ICI began compiling records in 2002.

A drop in appetite to invest in such funds pushes up the cost of borrowing for municipal borrowers.
Karen Mills, treasurer for the Town of Cary in North Carolina, said the sharp move was a concern but that 70bp was still a cheap rate to issue debt at. “We are looking into it, trying to understand if the market will settle back to normal or if we should move the issuance [of VRDNs] into fixed-rate money,” she said.

Financial Times

September 16, 2016 7:32 pm

Joe Rennison in New York

Read the Report.

Cities are experimenting with ways to meet the goals of affordable housing while still reaping the benefits of the sharing economy.

Home-sharing services like Airbnb are creating an awkward dilemma for cities and counties, especially in areas where housing costs are high. Municipalities are struggling to balance the economic boost from the growth of home-sharing services with the pressing need for affordable housing.

Before we go any further, let’s put the considerable growth of such services into perspective. One study found that 400,000 Airbnb guests who visited New York City in 2012 and 2013 spent $632 million, supporting 4,580 jobs. As compared to tourists staying in hotels, Airbnb guests tended to stay two days longer and spent nearly $200 more at local businesses during their visit.

But in New York as in other cities and counties, this new revenue comes with a hitch: Home-sharing services take apartments off the long-term rental market and are a factor in driving up rents to unaffordable levels. Airbnb alone has 1.5 million listings in 34,000 cities.

The problem is particularly acute in New York City, despite a state law that prohibits residential properties with three or more units from being rented for less than 30 days unless the permanent resident is present. According to a report released in June by a consortium of housing activists, 55 percent of the 51,000 Airbnb listings in New York City violate that law. (This June the New York Legislature passed a law barring the listing of such units on a home-sharing site; violators could be fined up to $7,500.)

The report contends that the number of vacant and available apartments in New York City would increase by 10 percent if “commercial profiteer” listings — listings that are booked several times per month and listed for at least three months per year by someone who advertises multiple apartments on Airbnb — were returned to the rental market. Presumably, rents would drop by an offsetting amount, making for significantly more affordable shelter for low- and moderate-income families.

The study showed that rents had risen fastest in the New York City neighborhoods where Airbnb is the most popular — including gentrifying, predominantly minority neighborhoods like Bedford-Stuyvesant. It’s only fair to note that the report was commissioned by affordable housing advocates who have long been critics of Airbnb.

New York is not alone in trying to deal with its home-sharing dilemma. Municipal leaders around the globe are increasingly torn between how to balance the goals of affordable housing and still reap the vitality and revenue from the so-called sharing economy.

In Chicago, city aldermen passed an ordinance in June, backed by Mayor Rahm Emanuel, that imposes a 4 percent surcharge on short-term rentals — that is, in addition to Chicago’s 17.4 percent hotel tax. The surtax will be used to help fund services for the homeless.

San Francisco, where rents are infamously high, requires short-term rental sites to take down any rental listing not registered with the city or be subject to fines for each one. Airbnb is attempting to block the ordinance by suing the city in federal court. It claims the city is violating the Communications Decency Act, which prevents governments from holding Internet platforms liable for content created by their users.

Meanwhile, several cities are tapping into home-sharing as a revenue stream — ignoring, for now, the issue of affordable housing. In a recent deal worth about $5 million a year to Los Angeles, Airbnb will collect lodging taxes from rental hosts who are supposed to, but often do not, pay the same kind of lodging taxes as hotels. L.A. tax officials have struggled to track down hosts and make sure they pay. Now they’ll get some help from Airbnb itself.

“There is going to be a lot of debate about how this industry is regulated,” Miguel Santana, L.A.’s top budget official, told the Los Angeles Times. “We just want to make sure that while that conversation is taking place, the city is not missing out on millions of dollars in revenues.”

GOVERNING.COM

BY FRANK SHAFROTH | SEPTEMBER 2016

School districts are under continuous pressures to provide a high quality education to their students with ever tighter budgets. GFOA has developed the Best Practices in School Budgeting and numerous related resources and supports in order to help school districts better align their limited resources with their student outcome and achievement goals.

Step 1. Plan and Prepare.  The planning and budgeting process begins with mobilizing key stakeholders, gathering information on academic performance and cost structure, and establishing principles and policies to guide the budget process.

Step 2. Set Instructional Priorities.  The budget needs to be rooted in the priorities of the district. Intentionally created instructional priorities provide a strong basis for developing a district’s budget and strategic financial plan, as well as presenting a budget document.

Step 3. Pay for Priorities.  Current resources and expenditures must be thoroughly analyzed in order to find capacity to pay for top instructional priorities.

Step 4. Implement Plan.  The “strategic financial plan” is the long-term road map for implementing the district’s instructional priorities. A “plan of action” describes how the strategic financial plan will be translated into coherent actionable steps.

Step 5. Ensure Sustainability.  The planning and budgeting process should be one that can be replicated in the future in order to ensure the district remains focused and plans accordingly for reaching its student achievement goals.

The Best Practices in School Budgeting incorporate research proven practices into a cohesive budget process that is centered on aligning resources with student outcomes through strong collaboration of academic and finance staff. The following provides more information on the Best Practices and how to incorporate this process in your district.

A corner of the municipal-bond market that has quietly enjoyed near-zero borrowing costs for more than six years has seen interest rates spike by nearly 7,000 percent since February as investors flee tax-exempt-money-market funds.

And it may soon get worse with investors starting to price in higher benchmark rates in recent weeks. While the Federal Reserve isn’t seen tightening at this week’s policy meeting, U.S. central bankers may still boost rates as soon as December, futures contracts indicate.

“If the Fed hikes, you could see higher short-term rates,” said Anthony Valeri, fixed income strategist for LPL Financial in San Diego. Investors in munis with yields that reset periodically “will see higher yields,” he said.

Since the Fed raised interest rates in December for the first time since 2006, municipal-bond investors have enjoyed strong returns as most state and local governments have seen borrowing costs drop as inflation remained subdued. While another Fed hike could once again benefit the $3.7 trillion municipal-bond market, variable-rate borrowers are being hit with higher yields as investors bail out of municipal-money-market funds in advance of new regulations taking effect Oct. 14.

Since August, 10-year municipal bond rates have risen 13 basis points to 1.56 percent, already the biggest monthly increase since May 2015. The Federal Open Market Committee “appears to be split” on whether to raise rates when it’s next meeting winds up Sept. 21, Citigroup Inc. said in a report Sept. 12.

Municipal money-market assets have shrunk $110 billion year-to-date, according to Bank of America Merrill Lynch data. They’re now at the lowest since 1999 as investors shifted money into funds that buy only government debt, which are exempt from the new Securities and Exchange Commission rules that require floating net-asset values and impose liquidity fees and redemption suspensions under certain conditions.

Since the first of the year, the yields as measured by the SIFMA Municipal Swap index, a measure of tax-exempt debt with rates that reset every week, have risen to about 0.7 percent from 0.01 percent, the rate at which it had been near for about six years.

“The fact that SIFMA has increased by 70 basis points is pretty incredible,” said Matt Posner, principal with Court Street Group LLC in New York. “That’s primarily the result the the new regulations.”

The spike has made it difficult for issuers of short-term debt with rates that reset “to take advantage of lower rates” in the municipal-bond market, said Rob Novembre, chief executive officer of Clarity BidRate Alternative Trading System, a division of Arbor Research & Trading LLC that is being created to handle remarketing of such debt.

“Issuers of VRDOs are losing their ability to take advantage of low rates because they’re trading at taxable levels,” said Novembre.

Municipal issuers with short-term debt tied to swaps also have seen no benefit in the rise of short-term rates as the drop in long-term borrowing costs has flattened the yield curve, leaving issuers still owing large sums to unwind the hedge agreements many entered a decade or so ago. They “all are so deep underwater it’s horrible,” said Andrew Kalotay, a specialist on debt management and derivatives.

“Long-term rates have come down since the Fed increased rates,” said Bryan Kern, managing member of KPM Financial LLC, a swaps adviser based in Charlotte, North Carolina. “For a lot of folks with swaps on their books the liability has grown.”

Bloomberg Markets

by Darrell Preston

September 19, 2016 — 2:00 AM PDT

The $1.9 trillion shortfall in U.S. state and local pension funds is poised to grow as near record-low bond yields and global stock-market turmoil reduce investment gains, increasing pressure on governments to put more money into the retirement systems.

With the Federal Reserve deciding to hold interest rates steady at its meeting Wednesday, the funds will continue to be squeezed by rock-bottom payouts on fixed-income securities just as stocks fall overseas and post only modest U.S. gains. As a result, pensions in Illinois, Missouri and Hawaii this year have moved to roll back the assumed rate of return on their investments, joining the dozens that have taken that step over the past two years.

“There’s little light at the end of the tunnel as far as pension funding is concerned,” said Vikram Rai, head of municipal-bond strategy at Citigroup Inc. in New York. “I expect funded ratios will drop further. It’ll require increased pension contributions on the part of the states and local government, but most state and local governments don’t have the ability to do so.”

Pensions count on annual investment gains of more than 7 percent to cover much of the benefits that come due as workers retire. But public plans had a median increase of 1 percent for the year ended June 30, the smallest advance since 2009, when they lost 16.2 percent, according to the Wilshire Trust Universe Comparison Service.

The chief investment officer of the California State Teachers’ Retirement System, the nation’s second-biggest public pension, on Tuesday said it posted similar returns, falling short of its target for a third straight year.

When investments lag expectations, governments and employees can be called upon to increase annual contributions to make up for the shortfall that’s left behind. The decision by the Illinois Teachers’ Retirement System in August to cut its annual return forecast may increase the state’s pension bill by nearly half a billion dollars.

A reversal of fortune doesn’t seem imminent. The Fed Wednesday opted to hold the benchmark lending rate between 0.25 percent and 0.50 percent, which will keep yields low on mortgages, corporate bonds and other fixed-income securities.

“If there’s a real storm cloud on the horizon, then this is it,” said Dan Heckman, a senior fixed-income strategist at U.S. Bank Wealth Management, which oversees $133 billion. “The municipal-bond market at some point in time down the road will suffer from concerns over this level of underfunding. This is going to continue to be a source of problems for many municipalities, both at the state and local level.”

The decision to adopt more modest expectations from their portfolios has been welcomed by credit-rating companies, given than it will prod public officials to put more cash away instead of waiting for windfalls from the next bull run. S&P Global Ratings has praised the moves as positive, though it may lead to cutbacks in other types of spending.

“We continue to see states trying to balance their budgets and address growing long-term liabilities — which are a fixed portion of their budget — and the need to grow other areas,’’ said S&P’s John Sugden. “Some of these fixed costs are crowding out spending on some other pro-growth investment areas like transportation and education.”

The unfunded liabilities of U.S. public pensions — which measures how much more they need to cover all the benefits that have been promised — are already rising. The obligations stood at $1.95 trillion at the end of June, an increase of $510 billion since the end of 2013, according to the Fed’s figures.

The resulting strain has led to credit-rating cuts to New Jersey, Kentucky and Chicago, which in 2015 was cut to junk by Moody’s Investors Service. Illinois, the lowest-ranked state, has been downgraded twice by S&P since 2013 and three times by Moody’s.

In places like Chicago, where the pensions are short a combined $34 billion, the dwindling returns may diminish efforts to pull them out of the hole.

Mayor Rahm Emanuel last week pushed a plan through the city council to raise water and sewer levies to fund the municipal workers’ pension, its most underfunded. Chicago will now pay about $2 billion more to that pension than previously planned over the next six years.

But that doesn’t take into account the impact if investment performance falls below target. The municipal fund assumes returns of 7.5 percent, while only earning 1.8 percent in the year ended in December, according to actuaries. That’s left it at risk of running out of money, despite the injection of taxpayer money.

“If markets are flat or negative in upcoming years, we will continue to lose principal at a double digit rate,” Jim Mohler, executive director of the fund, told lawmakers in Chicago on Monday. “The projected insolvency for the fund will escalate.”

Bloomberg Markets

by Elizabeth Campbell

September 21, 2016 — 2:00 AM PDT Updated on September 21, 2016 — 11:06 AM PDT

When the Federal Reserve gets around to raising interest rates, bond buyers may find some shelter in a mainstay of the municipal market.

Investors should consider purchasing high-coupon state and local debt that governments have the right to buy back at face value in the future, Alan Schankel, a managing director at Philadelphia brokerage Janney Montgomery Scott, wrote in a report released Monday. While the securities are trading well above par — exposing holders to losses if they’re forced to sell them back for 100 cents on the dollar — the higher interest payments mean the bonds won’t fall as much as others when the central bank moves.

Such debt, known as cushion or kicker bonds, typically pays periodic interest at a rate of 5 percent, a level Schankel said has because “almost ubiquitous.” When the price is factored in, that leaves a yield of 2.14 percent for securities that are called in 9 years, amost half a percentage point more than benchmark 9-year debt, according to Schankel.

“The potential for higher yields combined with the defensive nature of cushion bonds make them worthy of consideration for most municipal-bond portfolios, especially with tax-free interest rates hovering near a 50-year low,” Schankel wrote.

Investors are expected to have time to prepare their defense. The futures market predicts there’s only a 20 percent chance that the Fed will lift its overnight lending rate when it meets on Wednesday. Policymakers have held the benchmark steady since December, when it was raised for the first time since 2006.

Bloomberg Markets

by Romy Varghese

September 19, 2016 — 10:21 AM PDT

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

Watch the video.

September 22, 2016

Fitch Ratings-New York-15 September 2016: The volume of public power and water utility bond refundings remains high and has provided considerable budget flexibility in recent years, as debt-service expenditures have dropped, says Fitch Ratings. However, we forecast that long-term US interest rates will rise over 100 bps by year-end 2018. In our view, a rise of that magnitude could reduce refunding volume and limit the budget headroom from which utilities have benefitted.

According to “The Bond Buyer,” which utilizes Thomson Reuters data, refunding again represents the largest use of debt proceeds so far this year. Of the $33 billion of issuance by municipal power and water utilities during first-half 2016, over $16.8 billion of the proceeds, or 51%, were used exclusively for refunding. Moreover, $7.5 billion in proceeds, or 23%, were classified as combined-use, suggesting that some portion was also used for refunding. In 2010, only 21% of issuance proceeds were used exclusively for refunding.

The replacement and refunding of debt at lower rates has allowed public power and water utility issuers to reduce interest expense, thereby creating headroom to recover increasing costs related to environmental compliance, demand-side management initiatives, resource acquisitions and the replacement of aging infrastructure, while limiting rate increases for service.

Lower debt service expenditures have also helped water issuers to address budget shortfalls and recover fixed costs, as consumption patterns have stagnated due to greater appliance efficiencies and drought curtailments. Difficulties in recovering all costs stem from rate structures that traditionally have generated the bulk of revenues from customer usage, while the vast majority of utility costs are fixed in their nature. Together, the trends of declining debt service and greater revenue flexibility have broadly resulted in sustained improvement in financial medians in recent years.

Going forward, the benefits of refunding could decline if a rise in interest rates materializes. Fitch expects the Fed to raise rates once this year and twice in 2017, and our forecast is for 10-year US Treasury yields to reach 2.2% by year-end 2017 and 2.8% by year-end 2018. These increases are manageable and would result in rates that are still low by historical standards; however, we believe the gains from refunding are finite and that even a small rise in interest rates could retard recent improvements and result in additional upward pressure on electricity and water rates.

Contact:

Dennis Pidherny
Managing Director
US Public Finance
+1 212 908-0738

Douglas Scott
Managing Director
US Public Finance
+1 512 215-3725

Rob 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.

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.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM’. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

ENDORSEMENT POLICY – Fitch’s approach to ratings endorsement so that ratings produced outside the EU may be used by regulated entities within the EU for regulatory purposes, pursuant to the terms of the EU Regulation with respect to credit rating agencies, can be found on the EU Regulatory Disclosures page. The endorsement status of all International ratings is provided within the entity summary page for each rated entity and in the transaction detail pages for all structured finance transactions on the Fitch website. These disclosures are updated on a daily basis.

View and download data from SIFMA’s new interactive database, Capital Markets in Your State, including top municipal, corporate and equity issuers, securities industry employment and more.

Click here to view the database.

New York, September 13, 2016 — Moody’s Investors Service, at the request of the New York City Municipal Water Finance Authority, has reviewed a proposed change to supplemental resolutions for its variable rate demand bonds.

The change will eliminate the requirement that successor remarketing agents be rated. Remarketing agents are often capital markets subsidiaries of banks and often are not themselves rated.

Moody’s has determined that the change, in and of itself and as of this time, will not have an adverse effect on the long term credit quality of the Authority’s bonds, currently rated Aa1 (first and second resolutions) with a stable outlook, and therefore will not result in reduction or withdrawal of Moody’s ratings. Moody’s does not express an opinion as to whether the change has, or could have, other non credit-related effects.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Nicholas Samuels
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State and local governments are trying unconventional ways to fund their pension liabilities, such as offering lump-sum cash payments to employees.

When it comes to chipping away at pension liabilities, there aren’t a lot of options. In some places, lawmakers can freeze cost-of-living increases to pension payments or move back retirement dates for existing employees. But that’s not legal everywhere. So the majority of pension reforms in the past decade have targeted new employees and focused on controlling the growth of future liabilities.

But some places are getting more creative.

In Philadelphia, where the municipal pension plan is less than half-funded, Controller Alan Butkovitz is pushing a buyout of sorts aimed at the city’s most expensive workers. In exchange for taking an upfront cash payment based on their estimated lifetime benefits, the employee or retiree would accept a reduced level of pension benefits going forward. The benefits would be equivalent to what newer Philadelphia public employees are receiving now.

“We’ve settled on benefits right now that everyone agrees are reasonable and humane,” said Butkovitz. “Their survival and living standard is protected. If you’re going to give them a lump sum of money, behaviorally, people prefer that approach.”

The buyouts would be offered to 31,000 city retirees and 2,500 active employees who are members of Plan 67, the city’s oldest and most generous pension plan in which employees can receive up to 100 percent of their final salary in retirement. Plan 67 is responsible for $5 billion of the city’s roughly $6 billion in unfunded liabilities.

If every eligible plan member takes the buyout, it would reduce Philadelphia’s unfunded liability by $1 billion, according to an independent audit. And, the idea goes, those who opt for the lump-sum payment could use it as an opportunity to pay off debt or a mortgage, or start a new business.

Philadelphia isn’t the only place where hamstrung officials are considering unconventional solutions for their pension plans.

In Illinois, where courts have ruled against any changes to retirees’ payments, lawmakers have contemplated lump-sum payouts to reduce their unfunded pension liability. The state’s public employees plan is currently 34 percent funded.

In Connecticut, Gov. Dannel Malloy is pushing a plan that would split its troubled state employees’ pension fund into two, as a way of isolating the unfunded liability.

Experts say the main difficulty with these approaches is that they tend to be more complicated than they are effective. The proposal in Connecticut doesn’t reduce the actual amount the government owes its retirees — it merely pays for the more expensive pension benefits directly out of the state’s annual budget so the liabilities are not on the pension fund’s balance sheets.

“The split is a helpful accounting exercise, but it really comes down to: Are you really putting in today what you need for the future?” said Greg Mennis, director of The Pew Charitable Trusts’ public-sector retirement systems project.

Connecticut, he added, has a history of not paying its pension bills, which is why the system is so underfunded. S&P Global Ratings said last year that the split could worsen the state’s unfunded liabilities and warned it could downgrade Connecticut if it moved ahead with Malloy’s proposal.

“There are no panaceas,” said Mennis.

Pension buyouts have worked in the corporate sector where employees have taken a lump-sum payment at a slight haircut. But they haven’t been done in the public sector, thanks to the different accounting rules for public pensions that make their liabilities appear lower than comparable corporate-sector plans, said Josh B. McGee, senior fellow at the Manhattan Institute and vice president of public accountability at the Laura and John Arnold Foundation.

That can mask what a government would actually owe an employee who wants to cash out today. Indeed, an initial analysis of Bukovitz’s original idea of a straight pension buyout proved to be too expensive for the city.

The optics are also a challenge, said McGee. “Politically, you’re saying you’re going to cash out and give someone a lump sum. The public perception of that is not that great.”

As for what’s next, Butkovitz said the pension board this month is discussing a number of issues it would like to address via a member survey, including the minimum threshold for participation, the age range of people opting in and whether those who take a lump-sum payment would also agree to financial management classes.

GOVERNING.COM

BY LIZ FARMER | SEPTEMBER 15, 2016

New Census data shows some cities have a lot of residents who consume more public services than they contribute in taxes. That can cause fiscal problems down the road.

Demographic data can say a lot about who lives in a city. It can also be an indicator of that city’s finances.

Generally speaking, if a city has a high number of residents who consume more public resources than they contribute to the tax base, there will more likely be potential problems for that city’s fiscal outlook.

New 2015 estimates from the Census Bureau’s American Community Survey published Thursday provide an updated demographic snapshot for localities. We’ve compiled data on a few key measures — poverty, aging populations and employment status — for the 500 largest cities, showing places facing steeper demographic hurdles.

Continue reading.

GOVERNING.COM

BY MIKE MACIAG | SEPTEMBER 15, 2016

The use of private financing to develop microgrids — alternative sources of power generation for use when the energy grid goes down — is on the rise and a growing level of investment is occurring through P3s.

Although 90 percent of microgrid projects had been financed entirely by their private users from 2010 to 2014, the amount of mixed investment in such projects is expected to reach 38 percent this year. Partners will include utilities and public agencies, according to an article in the Aug. 30 issue of Utility Dive.

The use of microgrids to distribute power produced diesel generators solar arrays, combustion turbines and other equipment, is increasing rapidly as well, possibly due to the infrastructure damage caused by serious weather events, such as hurricanes and western wildfires. Interest in microgrids surged in 2012 in the wake of Hurricane Sandy, for example. As a result, U.S. microgrid capacity is expected to reach 4.3 gigawatts in four years, a 116 percent increase in annual installed capacity, according to a report on microgrids published by GTM Research (paywall).

The Port of Los Angeles is also teaming up with Pasha Stevedoring & Terminals L.P. the private company that runs the port, to replace its aging electrical system by installing a $27 million rooftop solar photovoltaic system that will be supplemented by a 2.6 megawatt battery storage system, PV Magazine reported. The Green Omni Terminal Project will be a scalable model that can be used to upgrade the port’s other 26 terminals and others nationwide.

The California Air Resources Board is also providing $14.5 million for the project, which is designed to help the port meet the state’s strict air quality requirements and will incorporate electric vehicles and cargo handling equipment into port operations.

In addition to its environmental benefits, building a microgrid to distribute the energy produced could help the port keep functioning during a disaster or an attack and save a great deal of money. It has been estimated that total service disruption at the port could cost the national economy a billion dollars a day.

Examples of small-town supplemental energy P3 projects — which could lead to microgrid development — are starting to sprout up as well. The village of Minster, Ohio, which owns a local electricity distribution network, negotiated a power purchase agreement with energy and financing company Half Moon Ventures. The company financed the construction of a 3-megawatt solar array and a 7-megawatt lithium-ion energy storage system. The agreement sets electricity fees at prices comparable to those charged by the regional utility and will allow the city to store energy to prevent power disruptions to key businesses in the area should the primary power grid fail, another Utility Dive article said. The project’s success has caused Minster to begin considering building its own microgrid.

Although the ability to build a microgrid may be beyond the reach of many small communities — especially those that do not have access to private financing — large companies, such as Walmart and Ikea could benefit from the existence of this infrastructure through which they could buy renewable energy through power purchase agreements negotiated with alternative energy producers.

NCPPP

September 12, 2016

WASHINGTON – Money market mutual funds’ holdings of municipal bonds fell by nearly $42 billion dollars between the second quarter of this year and the same period last year, a change that is partially the result of soon-to-become-effective rule changes from the Securities and Exchange Commission.

The recorded drop was part of the municipal data the Federal Reserve Board released on Friday in its quarterly Flow of Funds report.

The total amount of money market fund municipal securities holdings in the second quarter of 2016, $216.2 billion, is roughly 16% less than the $257.9 billion the funds held in the same quarter last year. It is a 30% drop from the $309 billion in munis the funds held at the end of 2013.

The decline occurred in the months before a new SEC money market rule is set to take effect on Oct. 14. The rule requires certain money market funds offered to institutional investors to change their method of calculating their net asset value (NAV), or the value per share, to floating from fixed. The rule is designed to prevent investors from getting out of money market funds on a large scale, which happened to the Reserve Primary Fund during the financial crisis in 2008.

Matt Fabian, a partner with Municipal Market Analytics, said that while the SEC rule played a role, the decline can largely be attributed to the trouble tax-exempt rates have had competing with the rising LIBOR. This has happened in the case of retail money market funds, which are not subject to the SEC rule changes but are also seeing large declines.

“In my mind, a big part of the [LIBOR] increase is going to be temporary because the market doesn’t know what is going to happen on Oct. 14 when the new [SEC] rule gets fully unrolled,” Fabian said.

He added that cash managers are reallocating away from money market funds until then, but that once Oct. 14 comes, as long as “the world doesn’t end,” he expects some assets would go back into the funds while a significant portion of the allocations away from the funds will remain permanent.

In all, according to Fabian, money market fund muni holdings have decreased to just over $140 billion as of Sept. 14 from more than $500 billion in 2008.

The flow of funds data also showed the general trend of a decrease in household ownership of munis coupled with an increase in U.S. bank ownership of the securities continued in the second quarter of this year. Household holdings of munis were down 5.2% year over year, falling to $1.64 trillion in 2016 from $1.73 trillion in the same quarter last year. Over that same period, bank holdings increased 10%, rising to $524.1 billion from $474.6 billion the year before.

Household ownership of munis is now down 10.3% from its $1.83 trillion of holdings in 2013 and U.S. bank ownership of munis is up 25% from its $418.9 of muni holdings that same year.

The SEC’s Investor Advocate Rick Fleming recently addressed the narrowing of household ownership of munis in a speech he delivered at the Municipal Securities Rulemaking Board’s Securities Regulator Summit on Aug. 25. He said that data as current as December 2015 showed individuals owned approximately 70% of munis either directly or indirectly through mutual funds or other pooled investment vehicles, but added that “if you drill beneath those statistics, some interesting – and some might say troubling – patterns emerge.”

Fleming said that the wealthiest one-half percent of U.S. households now own roughly 42% of all munis. The bottom 90% of households hold less than 5%. Additionally, only 2.4% of households hold any municipal debt, he said.

The Bond Buyer

By Jack Casey

September 16, 2016

In 2015, 13 states didn’t allocate any private activity tax-exempt bond (PAB) cap to affordable rental housing, according to the Council of Development Finance Agencies (CDFA). Meanwhile, also in 2015 $65 billion in available PAB cap went unused, $54.5 billion of which was carried forward to 2016. And from about 30 states according to the CDFA, an aggregate $10.5 billion could not be carried forward and was abandoned last year. A rough estimate indicates this lost resource just in one year could have made possible 80,000 more affordable apartments. At a time when affordable housing needs throughout the United States are so great, now is the time to review how to unleash this bond cap so more affordable rental housing can be built.

Continue reading.

Novogradac & Company LLP

Published by Michael Novogradac on Monday, September 12, 2016 – 12:00am

Executive Summary:

• Negative rates among the developed world have helped bolster demand for positive yielding U.S. taxable municipal bonds, a smaller $622 billion segment of the $3.7 trillion municipal bond market.
• Less robust liquidity and more limited credit diversification remain key challenges.
• Growing U.S. infrastructure spending should lead to increased taxable municipal issuance, further expanding the investment opportunity and trading activity.
• In Standish’s opinion, an investment allocation to U.S. infrastructure via U.S. taxable and tax-exempt municipal bonds would help to maximize yield, liquidity and diversification in high quality assets.

Continue reading.

by Christine Todd, CFA – President of Standish and Head of the Tax-Sensitive and Insurance Strategies

September, 2016

Summary

• Appropriation backed municipal bondholders do not have the right to seek repayment in court.
• Investors are willing to buy appropriation bonds because they understand that failure to make an appropriation for P&I would have a large negative impact on creditworthiness of the appropriating entity.
• Appropriation bonds are issued by localities to fund delinquent retirement contributions. They have played a leading role in precipitating almost every municipal bankruptcy going back to and including the Orange.

The description, versus the definition of appropriation bonds is a contradiction in terms. In a financial context, bonds imply the existence of debt. There are lenders and a borrower who is legally obligated to repay the debt under terms of a contract. If violated, bondholders have the right to seek repayment in court.

Appropriation backed municipal bondholders do not have the right to seek repayment in court. The entity that is the source of the appropriation for P&I has no legal obligation to make that appropriation resulting in near immediate monetary default.

Appropriation bonds are issued by a large number of state corporations of the most populous states. Those states have authorized many local governments to issue them as well. All to circumnavigate limits and restrictions on the issuance of legally enforceable debt.

Ironically, it is precisely the voluntary non-mandatory nature of the P&I appropriation that makes their issuance legal – the bonds do not constitute debt within the meaning of constitutional law or statute.

To the uninitiated, the above facts might seem hard to believe, but there is a rational for their large presence since first being introduced in the early 1980’s by the New York State Municipal Assistance Corporation. Originally, they were referred to as “moral obligation” bonds.

Investors are willing to buy appropriation bonds because they understand that failure to make an appropriation for P&I would have a large negative impact on creditworthiness of the appropriating entity

This is undoubtedly true, as long as the appropriating entity, most are states, does not fall on hard times or mismanage its debt or both. In either case, appropriation bonds are the first to go unpaid because the issuer has no legal obligation to repay them.

The U.S. municipal bond market is the only debt market where appropriation backed bonds exist. They account for approximately 20% of the $3.5 outstanding, or $700 billion.

States and municipalities that partake in appropriation financings aren’t the issuers of this kind of “debt”. Instead, they are the appropriating entities that support P&I, not the bond issuers. Governments create state and municipal corporations to be the issuers of all outstanding appropriation backed bonds.

There is simply no legal authorization for any state or municipality to directly issue appropriation backed bonds.

Unfortunately, standard nomenclature to identify appropriation risk does not exist. Not all state corporations issue appropriation bonds. Many constitute government sponsored essential service enterprises. Their bonds are secured by user charges and fees, not by appropriation or general taxation.

To determine whether the bond has appropriation risk, look for phrasing like the following on the cover page of the issue’s official statement.

“The obligation of the State to make financing agreement payments is subject to the State Legislature making annual appropriations for such purpose and such obligation does not constitute or create a debt of the State, and the State has no continuing legal or moral obligation to appropriate money due under any financing agreement.”

Disclosure may instead refer to pledged revenue under a lease or other form of payment agreement. Currently, certificates of participation and pension funding obligations are descriptions commonly used by localities issuing appropriation bonds.

The description of appropriation bonds can be very misleading. The above referenced disclosure quote was taken from an issue of Dormitory Authority of the State of New York Sales Tax Revenue Bonds Series 2015B. There is a high likelihood that bondholders think their investment is secured by a continuing claim on the State’s sales tax. But in fact, payment of P&I rest on voluntary annual appropriations

Appropriation bonds are issued by localities to fund delinquent retirement contributions. They have played a leading role in precipitating almost every municipal bankruptcy going back to and including the Orange County, California default in the 1980’s.

Detroit’s $1.5 billion appropriation pension funding bonds were settled under Chapter 9 at 14 cents on the dollar.

The bonds had a security interest in additionally gaming taxes that generated 14% of P&I. Had it not been for the fact the bonds had a real security interest in other revenues, a recovery value of zero cents on the dollar can be seen. I cannot see why appropriation bondholders even deserve standing in Chapter 9 proceedings. It may evolve to that.

The presence of these non-debt debts is largely the result of constitutional constraints on the issuance of enforceable state and local debt. Unlike enforceable bonds, they can be issued for any purpose and in any amount the issuer chooses and the market will accept. There is potential for misuse.

All but a handful of U.S. states are limited to the issuance of general obligation bonds by their constitutions. GO authorization requires voter approval which is not always forthcoming. That leaves appropriation bonds as the only alternative source of capital improvement funding.

From the investor point of view, I see two solutions, constitutional amendments giving states more flexibility to issue enforceable debt, or providing investors with significantly higher rates on appropriation debt to compensate for the additional risk. Personally, I would stay away from a locally issued appropriation bonds.

Seeking Alpha

Sep. 19, 2016 2:25 AM ET

Carl Dincesen

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

When one of the tiniest pension funds imaginable — for Citrus Pest Control District No. 2, serving just six people in California — decided last year to convert itself to a 401(k) plan, it seemed like a no-brainer.

After all, the little fund held far more money than it needed, according to its official numbers from California’s renowned public pension system, Calpers.

Except it really didn’t.

In fact, it was significantly underfunded. Suddenly Calpers began demanding a payment of more than half a million dollars.

“My board was somewhat shocked,” said Larry Houser, the general manager of the pest control district, whose workers tame the bugs and blights that threaten their corner of California citrus country. It is just a few miles down the road from Joshua Tree National Park.

It turns out that Calpers, which managed the little pension plan, keeps two sets of books: the officially stated numbers, and another set that reflects the “market value” of the pensions that people have earned. The second number is not publicly disclosed. And it typically paints a much more troubling picture, according to people who follow the money.

The crisis at Citrus Pest Control District No. 2 illuminates a profound debate now sweeping the American public pension system. It is pitting specialist against specialist — this year in the rarefied confines of the American Academy of Actuaries, not far from the White House, the elite professionals who crunch pension numbers for a living came close to blows over this very issue.

But more important, it raises serious concerns that governments nationwide do not know the true condition of the pension funds they are responsible for. That exposes millions of people, including retired public workers, local taxpayers and municipal bond buyers — who are often retirees themselves — to risks they have no way of knowing about.

“One of the first things I think you should do is publish that number for every city,” said William F. Sharpe, professor emeritus of finance at Stanford University’s Graduate School of Business who won the Nobel in economic science in 1990 for his work on how the markets price financial instruments. He is also a California resident who voluntarily helped his city, Carmel-by-the-Sea, crack the secret pension code — figuring out the market value of its debt to its retirees in 2011 before Calpers resolved to start divulging the information later that year.

“We just about nailed it, which made us feel very good for ourselves — but very bad for the city,” Professor Sharpe said. On a market basis, the city turned out to be $48 million short of what it owed retirees, or four times what the official numbers showed.

The two competing ways of valuing a pension fund are often called the actuarial approach (which is geared toward helping employers plan stable annual budgets, as opposed to measuring assets and liabilities), and the market approach, which reflects more hard-nosed math.

The market value of a pension reflects the full cost today of providing a steady, guaranteed income for life — and it’s large. Alarmingly large, in fact. This is one reason most states and cities don’t let the market numbers see the light of day.

But in recent years, even the more modest actuarial numbers have been growing, as populations age and many public workers retire. In California, some struggling local governments now doubt they can really afford their pension plans, and have told Calpers they want out.

In response, Calpers has calculated the heretofore unknown market value of their pension promises — and told them that’s the price of leaving, payable immediately. Few have that much cash, so it’s welcome to the Hotel California: You can check out anytime you like, but you can never leave.

Calpers says it must bill departing governments for every penny their pensions could possibly cost because once they cash out, Calpers has no way of going back and getting more money from them if something goes wrong. Calpers keeps that money in a separate “termination pool.”

Things went differently for Citrus Pest Control District No. 2. It withdrew first, before realizing the shortfall. Then, four months later, it got the unexpected bill from Calpers.

“I was opening the mail and thinking, ‘Can this be right?’ I thought they put an extra zero on it,” said Tim Hoesterey, one of the district’s two employees.

The bill came just as the district was building up a war chest to fight a virulent new citrus blight, a disease that had already devastated groves in Florida. The directors had armed themselves by raising a growers’ tax per acre fivefold. Suddenly, paying Calpers would wipe out the whole citrus blight reserve.

Some wondered if they should just declare bankruptcy.

“There are people selling their farms, trying to get out of the business, because they can’t make a profit anymore,” Mr. Hoesterey said. He called Calpers to see if the district could get a break, an extended due date, or even stay with Calpers after all. Calpers said no. It was a done deal.

A Calpers spokeswoman, Amy Morgan, said such questions suggested “a misunderstanding of the purpose of Calpers.”

“Calpers does not exist to make money,” she said. “Calpers exists to fully pay out benefits that are promised to its members.” She said the law required Calpers to perform a complete valuation after the termination date had passed, and to recover all the money needed to ensure that the retirees would be paid in full.

Today in California, both the market values and the actuarial pension values for many places are available on a website run by the Stanford Institute for Economic Policy Research. But for the 49 other states, the market numbers remain unknown.

The market-based numbers are “close to the truth of the liability,” Professor Sharpe said. But most elected officials want the smaller numbers, and actuaries provide what their clients want. “Somebody just should have stopped this whole charade,” he said.

For years, people have been trying to do just that. In 2003, the Society of Actuaries, a respected professional body, devoted most of its annual meeting to what was called “the Great Controversy” — the notion that the actuarial standards for pensions were fundamentally flawed, causing systemic underfunding and setting up a slow-moving train wreck when baby boomers retired. It drew a standing-room-only crowd.

The problem reaches far beyond pensions, and into the $3.7 trillion municipal bond market. The reason is that municipal bond ratings take into account the strength (or weakness) of government pension plans. If those numbers have been consistently wrong, as dissidents argued, then actuaries were helping mislead the investors buying municipal bonds.

Arguably, the flawed standards worsened the problem with each passing year: Actuarial values determine the annual contributions that states and local governments make to their pension plans, so if the target numbers are too low, the contributions will always be too small. Shortfalls will be compounding, invisibly.

Much of the debate surrounded the routine practice of translating future pension payments into today’s dollars, which is called discounting. The tiny pension plan at Citrus Pest Control District No. 2 shows clearly what the problem is.

With everybody either retired, or about to be (Mr. Houser will retire later this year), there is no guesswork in determining everybody’s pensions. The actuaries at Calpers project each of the future monthly payments due to Mr. Houser and the other five retirees, assuming they will live to age 90. (Mr. Hoesterey is not included because his retirement benefit is the new 401(k) plan.) Then, they translate all those future payments into today’s dollars with a rate — often called a discount rate. This is exactly how a lender would calculate a home mortgage.

The problem is, which rate should be used? An economist would say the right rate for Calpers is the one for a risk-free bond, like a Treasury bond, because public pensions in California are guaranteed by the state and therefore risk-free. And that’s what Calpers does when it calculates market values. It used 2.56 percent when it calculated the bill for the pest control district, producing a $447,000 shortfall.

But the rest of the time, Calpers and virtually all other public pension funds use their assumed annual rate of return on assets, now generally around 7.5 percent. Presto: This makes a pension appear to have a much smaller liability — or even a surplus.

That was the case with the pest control district for years. And since there seemed to be a surplus, Calpers said the district owed no annual contributions. Calpers’s numbers hid it, but the six members’ pensions were going unfunded.

“Every economist who has looked at this has said, ‘It’s crazy to use what you expect to earn on assets to discount a guaranteed promise you have made. That’s nuts!’” Professor Sharpe said.

But what he calls crazy is enshrined in the actuarial standards. And since adhering to the standards makes public pensions look affordable, there is a powerful incentive to preserve those standards.

“Actuaries shamelessly, although often in good faith, understate pension obligations by as much as 50 percent,” said Jeremy Gold, an actuary and economist, in a speech last year at the M.I.T. Center for Finance and Policy. “Their clients want them to.”

Mr. Gold was also a ringleader of that stormy professional meeting in 2003. Since then, there have been more conferences, monographs, speeches, blue-ribbon panels and recommendations — to say nothing of an unusual spate of municipal bankruptcies and insolvencies in which ailing pension plans have played starring roles. And yet little has changed.

Even as Citrus Pest Control District No. 2 was scrambling to find the cash to pay its unexpected bill this year, another fight broke out within the American Academy of Actuaries, which represents the profession in Washington, over the same issues.

An academy task force had commissioned a paper on how financial economists would measure public pensions. But during the peer review process, the opus was spiked, the task force disbanded and the four authors — Mr. Gold among them — barred from publishing the work elsewhere.

Accusations of censorship flew. The four authors said the academy’s copyright claims were false. The academy’s president, Thomas F. Wildsmith IV, said in a statement to members on the academy’s website that the paper “could not meet the academy’s publication standards.”

In a separate email message to The New York Times he said the academy was committed to helping the public understand the different measurements, and provided a position paper concluding that both measures are useful, but for different purposes.

Then the Society of Actuaries, which handles the education and testing of actuaries, joined the fray. It posted the suppressed paper on its own website, albeit with the authors’ names removed. It claimed to hold the copyright jointly with the academy. It also added a statement that the paper did not reflect the position “of any group that speaks for the profession” but called the authors “knowledgeable.”

The society’s president, Craig W. Reynolds, sent an email message citing other efforts “to develop strong funding programs that are responsive to a rapidly changing environment.”

The four authors then issued a revised version of their paper, with their names on the front — and a claim that they held the copyright. The paper, which runs 19 pages, says in brief: Use market values for public pensions.

Professor Sharpe noted that Calpers’s market-based method was “virtually the precise approach advocated in this paper.”

Almost, but not entirely.

At Citrus Pest Control District No. 2, Mr. Hoesterey said Calpers added a final twist. It took so long to calculate the district’s final payment that the bill arrived four months after the district’s withdrawal date — and then it charged four months’ interest, at 7.5 percent, on the late payment.

Ms. Morgan, the spokeswoman, said the four-month lag was “unfortunate but unavoidable.”

Mr. Hoesterey said Calpers should have warned the district well in advance how big the bill might be, to give it time to find the money. “I kept asking: ‘Does this seem fair to you? What other organization conducts business like this?’” he said.

Seeing no way out, the district paid the whole thing.

THE NEW YORK TIMES

By MARY WILLIAMS WALSH

SEPT. 17, 2016

Kate Boatright discusses some prison rating changes, in light of recent DOJ memo, and Carol Spain provides an update on the status of OPEB liabilities at the state level.

Listen to the podcast.

Sep. 14, 2016

In this CreditMatters TV segment, Larry Witte, Senior Director with Global Fixed Income Research, discusses findings for the second quarter of 2016, which was the 15th straight to see more ratings upgrades than downgrades in U.S. public finance.

Watch video.

Sep. 16, 2016

Voters will have more than Donald Trump and Hillary Clinton to consider at the polls in November; they’ll be weighing whether to approve spending for over $200 billion for roads, transit systems, schools and other projects.

For the first time since 2008, voters will see more than half a dozen so-called mega infrastructure projects on ballot measures, including $120 billion in Los Angeles; $53.8 billion in Seattle; $4.7 billion in southeastern Michigan and $2.5 billion in Atlanta. In California, voters will decide on funding housing for the homeless, $9 billion of school-facility bonds and to further finance San Francisco’s transit system. Colorado ballot measures contain $4 billion of bonds for schools in various districts.

Officials are banking on voters giving them authority to tap into near record-low municipal bond interest rates to address a backlog of projects estimated at $3.6 trillion, according to the American Society of Civil Engineers in Washington.

“Everyone’s been talking for years that interest rates are low and it’s a good time to borrow,” said Natalie Cohen, managing director for municipal-securities research with Wells Fargo Securities LLC in New York. “Lower interest rates are with us now, but there’s some expectation they will go up.”

The long list of projects is viewed as a sign of renewed confidence in many state and local governments that a stronger economy has restored revenues and made it possible to focus on new spending to address the backlog of needs including road and highways, transit systems and sewer and water works. The need for such spending has been injected into the U.S. presidential campaign, with both Clinton and Trump promising hundreds of billions of dollars for the country’s fraying infrastructure.

“What we’re seeing going on at the ballots is state and local governments acknowledging they have an infrastructure problem and are now showing a willingness to do something about it,” said Brian Pallasch, managing director government relations and infrastructure initiatives at the civil engineers society. “This problem has been building for years.”

Overall the financial health of many state and local governments continues to improve after suffering setbacks after the financial crisis that began in 2008. S&P Global Ratings said in July that increased consumer spending and housing market expansion have helped improve the credit conditions. And state spending has surpasses pre-recession peaks even as growth continues to lag and pressure state finances, BlackRock Inc. said in a report last month.

Municipalities across the country have already sold more than $294 billion of bonds this year, on pace to surpass 2010’s record amount of bond issuance. More of the bonds are going to fund new infrastructure rather than refinancing higher cost debt sold in previous years, a sign that officials are trying to catch up on needs neglected after the worst recession since the 1930s.

Projects oriented toward improving transportation got a boost this year after Congress and the president approved a $305 billion highway bill that will provide funding over five years, said Wells Fargo’s Cohen, the first long-term surface transportation legislation in a decade. The program creates matching opportunities for local projects. Transportation is the largest need of the civil engineers group’s list.

In Los Angeles, municipal officials are pushing for a new half-cent sales tax and the extension of an existing levy that could raise $120 billion for transportation infrastructure over the next four decades. The plan calls for funding transit projects, road and highway construction as well as walking and biking routes.

“We believe that we will settle once and for all the transportation challenges” in Los Angeles, Phillip Washington, chief executive officer of the Los Angeles County Metropolitan Transportation Authority, said Monday during a conference call on transportation projects.

In general, voters have shown a willingness to approve bond and tax issues. Integrated Market Systems, a San Diego company that tracked 295 bond issues on the ballots during primaries before May 25, found that 77 percent were approved by voters. In March, North Carolina voters approved $2 billion of bonds for new buildings at the University of North Carolina and community colleges, local water and sewer systems, parks and other projects.

“The success of funding ballot measures is very high,” said Michael Likosky, infrastructure principal at 32 Advisors, a New York firm that advises on investments. “Governments are getting stabilized and asking for infrastructure funding again.”

Bloomberg Markets

by Darrell Preston

September 13, 2016 — 2:00 AM PDT

New York’s transit agency is cashing in on the massive development rising from an industrial landscape on Manhattan’s far west side.

The Metropolitan Transportation Authority, which typically uses fare-box revenue and bridge and tunnel fees to secure its debt, raised $1.06 billion Wednesday by selling its first bonds backed by real-estate. The securities will be repaid from money the agency receives from leasing land in Hudson Yards, a 26-acre site whose development has triggered a surge of construction in residential towers, office space and retail near the riverside west of Eighth Avenue.

Goldman Sachs & Co., the lead underwriter on the deal, priced the bonds — which have 5 percent coupons and mature in 2046, 2051 and 2056 — at yields of 1.88 percent, 2.38 percent and 2.63 percent, respectively, according to data compiled by Bloomberg.

“People like larger names in high-tax states that are unique in their credit story,” said Sean Carney, head of municipal strategy at BlackRock Inc., which manages about $124 billion of municipal debt.

The Hudson Rail Yards Project, developed by affiliates of Related Cos and Oxford Properties Group, is transforming Manhattan’s largest tract of undeveloped land. When completed by 2029, it will have three office towers, nine residential buildings, 1 million square feet of retail anchored by Neiman Marcus, a luxury hotel, 15 acres of public space and a cultural center. Monthly rent payments will cover the bonds. Time Warner Inc., KKR & Co. and Wells Fargo & Co. are among the future occupants.

The new bonds, called Hudson Rail Yards Trust Obligations, may be a draw to New York investors looking to diversify their portfolios, said Scott Richman, chief investment officer at Whitehaven Asset Management, which oversees $110 million of assets, the bulk of which is municipal debt.

“For the mutual funds, this entity will count as a different name and for better or worse a different name is actually worth a lot in the municipal market,” Richman said. “So even though it might have a similar credit backing to a much larger issuer, that will create demand within the space.”

The sale comes amid strong demand for municipal bonds that has kept yields — which move in the opposite direction as price — near record lows. The MTA’s most actively traded securities — revenue bonds with a 4 percent coupon that mature in 2036 — changed hands Wednesday at an average yield of about 2.6 percent, down from a 2.67 percent yield when they were first sold on June 23, according to data compiled by Bloomberg.

MTA’s rail yards run from 30th to 33rd streets and between Tenth and 12th Avenues. The MTA leased the airspace above the above the rail yards to Related and Oxford. The developers are almost finished building a platform over the eastern half of the site and will do the same on the western half.

The rail yards are the center of a larger rehabilitation of the once-decrepit area, called the Hudson Yards District. A new 7 subway line station, financed by $2 billion of city bonds, opened on the site a year ago to connect the area to midtown Manhattan. To the south is the High Line, a landscaped promenade on a former elevated rail line that extends from Greenwich Village through part of Chelsea.

The MTA’s real estate consultant Jones Lang LaSalle Americas, Inc. has valued the Western Rail Yards at $3.2 billion to $3.7 billion, according to bond documents.

“With this transaction MTA is taking advantage of significant value of the Hudson Rail Yard assets and low interest rates to monetize the ground leases on the Eastern and Western Rail Yards,” Pat McCoy, the agency’s finance director, said in an e-mail.

The bulk of the bond proceeds will repay notes the MTA sold to finance capital projects ahead of the sale, according to McCoy. In the event a tenant defaults on lease payments, the agency agrees to pay interest on the bonds for up to seven years, according to McCoy. The MTA also has the option to take over a defaulted lease and make the full payments.

Moody’s Investors Service rates the bonds A2, its sixth-highest investment grade and one step below MTA’s transportation revenue bonds, citing the stability provided by the escalating ground rent payments, given the high value of the real estate. Kroll Bond Rating Agency assigned its A- rating, one step lower.

The bonds may be redeemed early if Related and Oxford elect to prepay their leases, which could leave debt due in 2056 paid off by 2026, under one scenario.

“All of a sudden you don’t have a long bond in your portfolio, you have a 10-year security,” said Robert Amodeo, head of municipals in New York for Western Asset Management Co., which holds $25 billion of the securities.

There’s also a risk that development of the Western Rail Yards may fall behind schedule and real estate values could fall, he said.

Those risks are offset by the structure of the lease payments, which are senior to mortgage payments paid by Related and Oxford and the MTA’s willingness to step in to pay interest payments if there’s a default. The developers and lenders have a strong motivation to avoid default, said Rachael McDonald, a Moody’s analyst in New York.

“Given the high potential value of the properties once completed, we believe there are strong incentives in place for the tenants to pay,” McDonald said.

Bloomberg Markets

by Michelle Kaske and Martin Z Braun

September 14, 2016 — 2:00 AM PDT Updated on September 14, 2016 — 11:16 AM PDT

Following a weak July, companies and municipalities were ready to dip their toes back in the markets for stocks and bonds last month, judging by the number of requests for unique securities codes known as CUSIP numbers that are used to identify securities.

U.S. and Canadian companies, for example, asked for 12% more CUSIPs in August than in July, although through August the requests were down 8.6% from the same period last year, according to a report from CUSIP Global Services, which administers the system.

Municipal bond requests were up 7% for the month and are up 3.4% year to date through August. CUSIPs are issued to help facilitate ordering, trading and clearing, and are required by exchanges for the listing of most public and private securities.

“We did see a slower issuance after Brexit,” said Gerard Faulkner, director of operations for CUSIP Global Services, in an interview. Issuance is often softer in the beginning of the year and picks up as the months progress, but there is no hard and fast rule. “It’s hard to say if there’s always a pattern or trend,” he said.

Companies and municipalities are sensitive to interest-rate fluctuations, Mr. Faulkner said, particularly in the bond markets.

“If market rates are coming down, we do see an uptick in corporate bond issuance,” he said.

Bond issuers often act when market sentiment is strongly predicting a Federal Reserve move at its next meeting.

Among state bond issuers, Texas is leading the way with 1,414 new CUSIP requests this year, followed by New York and California with 1,093 and 836, respectively.

“Based on the August data, we expect to see a sustained pace of new security issuance through the next several months,” Mr. Faulkner said in a statement that accompanied the report.

The U.S. market for initial public offerings has been lackluster this year, but August indicates that activity may pick up. Domestic corporate equity CUSIP orders soared to 1,078 last month, the highest monthly tally since April 2015, CGS said.

CUSIP stands for Committee on Uniform Security Identification Procedures.

THE WALL STREET JOURNAL

By MAXWELL MURPHY

Sep 14, 2016 7:10 am ET

GASB Chair David A. Vaudt recently announced the appointment of a consultative group to assist with the Board’s development of implementation guidance relating to the accounting and financial reporting standards for other postemployment benefits (OPEB). The members of the consultative group are:

• John Bartel, President, Bartel Associates, LLC
• Bruce Eastes, Compliance and Reporting Specialist, California Public Employees Retirement System
• Joan Fontes, Deputy Director, Department of the State Treasurer, State of North Carolina (for issues related to OPEB plan reporting)
• Jodie Hartman, Finance Director, Village of Lake Zurich, IL
• Staci Henshaw, Director of Reporting and Standards, Auditor of Public Accounts, Commonwealth of Virginia
• Daniel Jaroche, Accounting Manager, Office of Financial Management, State of Michigan
• Frederick Lantz, Partner, Sikich, LLP
• Preeta Nayak, Senior Accounting and Financial Management Advisor, Department of the State Treasurer, State of North Carolina, (for issues related to employer reporting of OPEB)
• Jun Peng, Associate Professor, University of Arizona
• Heather Ricard, Chief Financial Officer, Municipal Association of South Carolina
• James Rizzo, Senior Consultant and Actuary, Gabriel, Roeder, Smith and Company
• David Showalter, Partner, Vavrinek, Trine, Day & Co., LLP
• Jenny Starr, Chief Financial Officer, Ohio Public Employees Retirement System
• Sean Walker, Partner, CliftonLarsonAllen, LLP
• Jim Whelpley, Consulting Actuary, Rael & Letson

ABOUT THE PROJECT

The implementation guidance developed in this GASB project will address the standards contained in Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans; Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions; and related pronouncements. The GASB expects to issue two drafts for public comment—one containing proposed implementation guidance for OPEB plans and governments applying Statement 74 (fourth quarter of 2016) and the other proposing implementation guidance for governments applying Statement 75 (third quarter of 2017).

WHAT DO CONSULTATIVE GROUPS DO?

The GASB assembles consultative groups at the discretion of the GASB Chair for projects expected to lead to implementation guidance. Consultative groups serve as a sounding board, providing suggestions and feedback to the GASB staff as materials are developed. As part of this process, consultative group members review drafts of materials prepared by GASB staff, commenting as appropriate.

HOW ARE PARTICIPANTS SELECTED?

Consultative groups are officially appointed by the GASB Chair after consultation with the other GASB members and GASB staff. Consultative group members typically have a particular expertise or experience with the standards being addressed and also are capable of articulating the views of other, similar constituents.

Members primarily are identified from the GASB’s database of stakeholders, including persons who have indicated a willingness to volunteer for a consultative group. In general, the GASB attempts to maintain an appropriate balance of financial statement preparers, auditors, and users on each consultative group. However, consultative groups related to the development of implementation guides generally are composed primarily of preparers and auditors because they are consulting on relatively technical accounting matters. Consultative groups for projects related to postemployment benefits also include actuaries and employee benefit consultants.

Within each group, the GASB seeks to include a variety of types of stakeholders, such as finance officers from governments, as well as employee retirement systems, and auditors in government and private practice. The GASB also tries to balance other factors that may be relevant, such as governments of various sizes and from geographic areas of the country.