This week there was a
four-hour hearing before a Congressional panel on the role the federal
agencies played in the credit crisis. During the hearing, former
Federal Reserve Chairman Alan Greenspan referred to recent economic
events as a “Credit Tsunami.” So where was Christopher Cox, chairman of
the Securities and Exchange Commission, during the Tsunami? He was
“Missing in action” according to the Bloomberg article “Cox
‘Asleep at Switch’ as Paulson, Bernanke Encroach.”
Cox wasn’t missing in action,
he was working on his major initiative for the coming year – more municipal
disclosure. Even though municipal bonds default far less than corporate bonds
(less than 1% for general obligation and utility revenue bonds) as early as
March 2007 Cox began pushing for more municipal disclosure rules including the
possibility of repealing the Tower Amendment. (Under the Tower Amendment that
was adopted in 1975 as an amendment to the Securities Exchange Act of 1934, the
SEC is essentially prohibited from regulating municipal bond issues.) Although
Cox was missing during many meetings relating to the recent bailout initiatives put in place by
Federal Reserve Chairman Bernanke and Treasury Secretary Paulson, he was present
at the October 23 Congressional hearing. At the hearing, Cox urged Congress to
give the SEC authority over municipal bond disclosure so that the SEC can
require municipal borrowers to provide the same kind of disclosure as corporate
borrowers. While more disclosure may by desirable, doesn’t the SEC have more
pressing issues to address?
In Bloomberg’s September 26, 2008 article “Muni
“Hydra” Bites Denver as Rates Hit Record; New York Pays 9%", Michael
McDonald and Jeremy R. Cooke, wrote “The worst year on record for U.S. state and
local government borrowers is getting worse.”
These guys must be a lot
younger than me. Does anyone remember the 80s?
Yes the bond market has gone wild. For the past two
weeks, yields on Aaa municipal bonds ranged from 113% to as much as 120% of US
Treasury Bond yields, the highest ratio in history. There is an absence of
institutional buyers and approximately $10 billion of issues have been
postponed. The market is horrendous, but hardly the worst in history.
On January 14, 1982
the 20 Bond Buyer Index was 13.44% compared to 5.23% this week. Although
there were sporadic weekly yield declines, from November 3, 1977 until January
14, 1982 yields increased from 5.51% until reaching the 13.44% record high. Yes things may improve, but they could get much worse; consider
that in 1982 yields had increased over a period of more than 4 years before they
began to decline.
Timing to the market is a gamble. For many bond issues, there are
still bond buyers and a postponement is not required. Finding underwriters or
buyers for bonds is more difficult now. To get bonds sold, issuers may have to consider
establishing new relationships with financial advisors and underwriters with
whom they have not previously worked; however, consider the possibilities; isn’t this
the year when the public is demanding change?
Bond Buyer Index-1970 to Present. [9/28/2008]
In 1995 State Auditor
Margaret Kelly released the study "Special Review of Bonds Issued by Political Subdivisions."
In 2001 State Auditor Claire McCaskill released the study "Audit of
General Obligation Bond Sale Practices" and a follow-up study by Ms.
McCaskill’s office was just released. Each study (along with other
national and regional studies) has demonstrated that competitive bond
sales result in lower total financing costs. In spite of these
findings, 87% of Missouri’s general obligation bonds are sold through
negotiation. The Auditor’s 2005 follow-up study and recent articles in
the St. Louis Post Dispatch and Bloomberg suggest that many public
officials prefer the negotiated sale method because they are not fully
informed of the competitive sale approach or they believe a competitive
sale will result in a heavier workload. In response to the Auditor’s
2005 follow-up study, on January 6, 2006 Bloomberg’s municipal bond
columnist Joe Mysak wrote "Municipal bond issuers are lazy, when they
aren't entirely clueless."
To inform public officials of the ease of utilizing the
competitive bond sale approach as well as the savings associated with
competitive bidding, WM Financial Strategies has offered to host sessions titled
"Competitive Bond Sales - Is Saving Taxpayers' Money Too Much Work?" at upcoming
conferences of several Missouri associations that represent cities and schools.
WM Financial Strategies is also available to meet with small groups, including
school boards and city council members, to discuss this topic.
For additional information regarding the auditor's report and Bloomberg's
commentary, see "News and
Commentary" on this site. For additional information regarding competitive and
negotiated bond sales see Bond
Sale Methods on this site. [1/08/2006]
Too Many Economic Development
On November 26, 2005 the St.
Louis Post Dispatch published the article "For schools, TIF is fight". The
article suggests that although there are Tax Increment Financing areas that have
favorable outcomes many result in a needless loss of revenues to school
Barely mentioned in the
November 26th article is the proposed $62 million Tax Increment
Financing in Sunset Hills.
In this continuing saga, the City of Sunset Hills approved proceeding with the
TIF after the project failed to receive approval by the Tax Increment Financing
Commission. Now owners of more than 250 residences wait for the planned buyout
in the midst of the developer’s inability to obtain financing. Homeowners may
find themselves in a TIF purgatory where they are unable to sell there homes to
the developer and unable to sell in the open market (who would want to move into an area
scheduled for demolition).
Not mentioned in the November
26 article is the fact that often a large portion of the Tax Increment revenue is from
municipal sales taxes. (In general, 50% of the increase in sales tax after the TIF is formed). That represents a big tax loss to cities, assuming a
development could be enticed to the community without TIF.
What is mentioned in the
November 26 article is the Book “The Great American Jobs Scam: Corporate Tax
Design and the Myth of Job Creation”, by Greg LeRoy that was released in July.
description of the book with excerpts.)
Also mentioned is the Senate Interim Committee on Tax Increment Financing that
is now studying Missouri Tax Increment Financing including the definition of
"blight," Tax Increment Financing impacts, potential abuses, and the
implementation of TIF in relation to the original intent of the legislation. The committee plans to issue a report and make recommendations to the general
assembly for legislative action no later than January 20, 2006.
Maybe the answer to the Tax
Increment Financing controversy is not a matter of new legislation but rather
restraint and caution by municipalities.
(Note: On February 14, 2006 the City of Sunset Hills terminated its proposed Tax
Increment Financing. Prior to that date, a circuit court judge ruled that
certain actions taken by the City in connection with the TIF were invalid.
Like many states, Missouri presently prohibits the expenditure of public
funds to support elections. While local governments may educate the public
on a referenda, Section 115.646 of the
Missouri Revised Statutes prohibits the expenditure of public funds to advocate,
support, or oppose any ballot measure. Underwriters and bond counsel
firms are also precluded from offering contributions to support bond
elections under Section 409.107 of the Missouri Revised Statutes.
Section 409.107 states "No investment firm, legal firm offering bond
counsel services, or any persons having an interest in any such
firms shall be involved in any manner in the issuance of bonds
authorized by an election in which the firm or person made any
contribution of any kind whatsoever to any campaign in support of
the bond election."
Over the past several years, the Municipal Securities Rulemaking Board has
adopted rules to prohibit "Pay-to-Play" practices (inappropriate practice
whereby a broker-dealer or bank makes political contributions in order to be
selected as bond underwriter). In 1992, the
Missouri General Assembly recognized that
contributions to bond elections is a Pay-to-Play
activity and appropriately
adopted legislation prohibiting such contributions. (See May 22, 2003
Interpretive Opinion – Matt Blunt File No. 2003-00438; IO-07-03).
In spite of recent national efforts to prohibit
Pay-to-Play activities, in 2006 the Missouri General
Assembly considered Senate Bill 1035 to
ease the ban prohibiting issuers from hiring companies that contribute to
bond issue campaigns.
On its surface, the bill
appeared to be innocuous since it would preclude "any direct financial
contributions." If adopted, the bill would have permitted indirect contributions including
"promotional materials" thereby opening the Pandora’s box for Pay-To-Play
activities. Activities that equate to
Pay-To-Play, whether direct or indirect, increase bond issuance fees and interest costs
and undermine public trust. Permitting local governments to engage
underwriters based on election contributions has the following effects:
Reduce competition. Competition is reduced when an underwriter is selected based on the best bond election campaign rather than
selected through competitive bidding.
2) Increase bonding costs. Bond costs are
increased when an underwriter is engaged based on election campaign contributions
(whether direct or indirect) rather than
based on ability to provide lowest fees and interest rates.
To insure the lowest interest costs and best financial terms
for a bond issue, political subdivisions should select the parties to the
transaction that have demonstrated the highest
level of financial or legal expertise rather than firms with the deepest pockets
for election campaigns.