Weekly Market Brief

The Bond Buyer 20-Bond Index for municipal bonds decreased by 9 basis points to 4.53% for the seven day period ended May 15.   For the week, the yield on ten-year US Treasury bonds decreased by 8 basis points. This week's economic releases included Retail Sales which declined by .2% which was better than expected; the Consumer Price Index which rose .2%; Industrial Production which fell .7% and Housing Starts which indicated that single-family starts declined by 1.7%.  Also released was the University of Michigan's consumer sentiment which declined to 59.5 from 62.6 last month.   See Economic Indicators and Rate Graphs.  [5/16/2008]
 

 
Auction Rate Securities

Auction rate securities, relatively new to the municipal market, may already be obsolete.  Like variable rate obligations, issuers were promised the benefit of lower short-term rates on their long-term obligations.  Interest rates were reset periodically (e.g. every 7 days) through an auction process and were supported by bond insurance.  With rating downgrades of insurers, auctions began to fail. According to Bloomberg more than 60% of auctions have failed in the past two months. In a failed action the interest rates are set by the securities' documents and in some cases have been as high as 20%. For investors, the failed auction has made their investment illiquid. As a result, securities investigations are now underway for both issuers and investors.  [See the Bloomberg article "Auction-Bond Probes Widen as Cuomo Subpoenas 18 Firms" and the Kansas City Star article "Missouri investigating auction-rate securities."] [4/19/2008] 
 

Lindbergh School District Saves Big with 17 Bond Bids

WM Financial Strategies, as financial advisor to Lindbergh R-8 School District Missouri, recently completed the sale of $8,410,000 of General Obligation Refunding Bonds.  The refunding was projected to result in savings in the range of $250,000.  Excellent timing, a Aa2 bond rating and a competitive sale with 17 bids resulted in savings of $617,445. [See the Article from the local press.] [1/20/2008] 
 

Florida Local Government Investment Fund Frozen

Florida officials suspended withdrawals from an investment pool today.  The pool was designed to provide local governments with a low-risk investment option for funds. The suspensions follow an investigation of the fund by Bloomberg.  According to Bloomberg " The $27 billion Florida pool, the largest in the U.S., has invested $2 billion in SIVs and other subprime-tainted debt, state records show. About $725 million of these holdings have already defaulted." The findings led to a run on the fund with withdrawals exceeding $10 billion, or one third of the fund assets, in the past few weeks.  The fund's trustees (Governor Charlie Crist, Chief Financial Officer Alex Sink and Attorney General Bill McCollum) rejected making a withdrawal exception for payrolls. According to an article by MSNBC "the suspension of withdrawals will stay in effect until December 4 when the board meets to consider how to shore up the pool."  (See the Bloomberg article "Florida Halts Withdrawals From Local Investment Funds.")  [11/29/2007] 

Late last week Florida's fund trustees hired BlackRock Inc. to develop a plan for the fund.  Yesterday, the fund's trustees agreed to the plan which included splitting the fund and isolating downgraded and defaulted investments that comprised approximately 14% of the pool investments. Local government investors will be permitted to withdraw the greater of 15% or $2,000,000 of their investments.  Additional withdrawals will be at a fee that is expected to be reduced as the fund stabilizes.   [12/05/2007] 

The Florida Local Government Investment Pool (LGIP) reopened on December 6. Local governments withdrew more than $1.7 billion on Thursday and Friday.  According to documents at the LGIP website, there will be no restrictions on withdrawals of new deposits and restrictions on current investments are expected to eventually be eliminated, however no date or conditions are indicated.
[12/09/2007] 
 

Subprime Lending Impacting Muni-Bonds

For several months the municipal bond market has experienced volatility (significant changes in yields on a day-to-day basis) due to the subprime lending crisis.  The subprime lending crises has raised concerns that there could be global credit tightening, two million home foreclosures and a further deterioration of the housing market (new construction, sales and market value).  The entire economy could be affected and speculation continues as to whether the Federal Open Market Committee will continue to reduce the Federal Funds Rate.

In November, yields on ten-year Treasury bonds declined by 21 basis points while the yields on 10 year municipal bonds rose by approximately 11 basis points. The widening of the spread between tax-exempt and Treasury bonds is being blamed on concerns that the credit of AAA bond insurers' has weakened due to subprime loan exposure (see "Municipal Bond Insurance" below). Among the ramifications of downgraded insurers would be the sale of bonds from municipal bond funds that hold AAA rated bonds and a decline in the value of downgraded insured bonds. Bloomberg has reported that there are $2.4 trillion of insured bonds.
[12/15/2007 - update]

Subprime Lending Impacting Municipal Bond Insurance

The Municipal Bond Insurers' credit ratings are under review due to subprime lending exposure.
 
In a press release dated November 5, 2007, Fitch Ratings announced that it is updating its analysis of structured financial collateralized debt obligations  (SFCDOs) insured by the financial guaranty industry (bond insurers).  The analysis relates to SFCDOs exposure to subprime residential mortgage backed securities. The analysis could result in insurers being placed on "Rating Watch Negative" and rating downgrades. [11/06/2007]

ACA Capital has been placed on Standard & Poor's "Credit Watch" with negative implications. The action follows ACA's reported $1 billion quarterly loss this week primarily due to unrealized mark-to-market losses on the Company's portfolio of Structured Credit transactions.  In its press release, ACA stated that "These unrealized losses were a direct result of the ongoing turmoil in the residential mortgage-backed securities market and the resulting depressed market valuations." [11/09/2007]

On November 8, 2007, Moody's announced that it will be evaluating the financial guarantors. In its press release Moody's indicated that it will be re-estimating capital adequacy ratios to reflect deterioration in the expected performance of credits in the guarantors’ insured portfolios, as well as updating Moody’s previous stress testing by determining the impact of higher subprime loss assumptions on the guarantors’ exposures to residential mortgage-backed securities and collateralized debt obligations of asset-backed securities.

On Thursday, November 22, it was announced that the French companies Banque Populaire and Caisse d'Epargne will buy out Natixis bank's bond insurer CIFG.  In addition, the firms will provide an estimated $1.5 billion capital injection to CIFG in order for the bond insurer to retain its AAA Fitch rating. [11/25/2007] 

On Friday, December 14, 2007, Moody's completed its evaluation of the ratings of financial guaranty companies.  As noted in their press release "The following actions are the result of that evaluation. The Aaa ratings of Financial Guaranty Insurance Company and XL Capital Assurance Inc. were placed on review for possible downgrade. The Aaa ratings of MBIA Insurance Corporation and CIFG Guaranty were affirmed, but the rating outlooks changed to negative. The Aaa ratings of Ambac Assurance Corporation, Assured Guaranty Corp, and Financial Security Assurance Inc. and the Aa3 rating of Radian Asset Assurance were all affirmed with a stable outlook."  For the companies under review, Moody's will assess the effectiveness of the companies' capital remediation plans and risk management strategies over the next few months to determine whether to confirm or downgrade ratings.   [12/15/2007] 

On December 19, 2007, Standard & Poor's completed its evaluation of the ratings of financial guaranty companies.  Standard & Poor's took the following actions: ACA Financial Guaranty was downgraded from A to CCC, Ambac Assurance Corp was rated AAA/Negative, Financial Guaranty Insurance Co. was rated AAA/WatchNegative, MBIA Insurance Corp. was rated AAA/Negative, XL Capital Assurance Inc. was rated AAA/Negative, Assured Guaranty was rated AAA/Stable, CIFG Guaranty was rated AAA/Negative, Financial Security Assurance Inc. was rated AAA/Stable and Radian Asset Assurance Inc. maintained its rating of AA/Stable.  [12/20/2007] 

On December 20, 2007, Fitch Ratings placed MBIA Insurance Corp. on negative watch. Fitch indicated that in the next four to six weeks MBIA's rating would be returned to a stable outlook if the company obtains further capital or puts into place reinsurance or other risk mitigation measures. Earlier this week MBIA disclosed that it has a $30.6 billion exposure to collateralized debt obligations potentially tied to subprime mortgages. The CDOs include various CDO-squared securities.
[12/21/2007] 

On December 21, 2007, Fitch Ratings placed AMBAC Assurance Corp. on negative watch. Fitch indicated that in the next four to six weeks AMBAC's rating would be returned to a stable outlook if the company obtains further capital or puts into place reinsurance or other risk mitigation measures. Fitch indicated that in its model, AMBAC has approximately a $1 billion capital shortfall and that without the additional capital Fitch would expect to downgrade the rating to AA+. [12/26/2007] 

Warren Buffett's Berkshire Hathaway Inc. is starting a new bond insurer.  The insurer, Berkshire Hathaway Assurance Corp received a license on Friday. [12/29/2007] 

On Wednesday, Fitch Ratings affirmed MBIA's AAA rating with a stable outlook.  In contrast, today Moody's Investors Service placed MBIA on review for a possible rating downgrade. In addition, Moody's placed AMBAC on review for a possible rating downgrade yesterday. Also on January 16, 2008, Standard & Poor's announced that it is reexamining all bond insurers after determining that losses from subprime mortgages will be worse than anticipated. [1/17/2008]

On January 18, 2008, Fitch Ratings downgraded AMBAC's rating to AA while continuing to leave the company on Negative Rating Watch.  In its release, Fitch stated that the decision to downgrade the rating by two notches and the continuation of the Negative Rating Watch "reflects the significant uncertainty with respect to the company's franchise, business model and strategic direction; uncertain capital markets and the impact of Ambac's recent decisions on future financial flexibility; the company's future capital strategy; ultimate loss levels in its insured portfolio; and the challenges in the financial guaranty market overall." AMBAC abandoned plans this week to raise $1 billion in capital after a 70 percent decline in its shares during the prior two days. [1/20/2008]

On January 24, 2008, Fitch Ratings downgraded XL Capital Assurance's rating to A while continuing to leave the company on Negative Rating Watch.  In its release, Fitch stated that the decision to downgrade the rating came after its parent company Security Capital Assurance announced that it would not raise additional capital at the present time. [1/25/2008]

On February 5, 2008, Fitch Ratings placed MBIA and CIFG Financial Guaranty on Rating Watch Negative. The action comes less than a month after Fitch had confirmed MBIA's rating as stable.  Fitch also released an announcement regarding the next phase of its analysis of financial guarantors.  In its announcement, Fitch indicated that "in light of consensus movement towards a view of increased loss projections for U.S. subprime residential mortgage backed securities (RMBS) that is now held by various market participants and observers, including Fitch, that the agency will be updating certain modeling assumptions in its ongoing analysis of the financial guaranty industry. Fitch believes it is possible that modeled losses for structured finance collateralized debt obligations (SF CDOs) could increase materially as a result of these updated projections. The need to update loss assumptions at this time reflects the highly dynamic nature of the real estate markets in the U.S., and the speed with which adverse information on underlying mortgage performance is becoming available." Fitch also indicated that "A material increase in claim payments would be inconsistent with 'AAA' ratings standards for financial guarantors, and could potentially call into question the appropriateness of 'AAA' ratings for those affected companies, regardless of their ultimate capital levels." [2/05/2008]

As bond insurance ratings continue to be reviewed, New York Governor Elliot Spitzer and other witnesses testified on the insurance problem before Congress today.  Spitzer suggested that the bond insurance problem could become a "financial tsunami" that causes damage throughout the economy.  [2/14/2008]

On February 22, 2008 Moody's Investors Service placed CIFG under review for a possible rating downgrade.  Moody's indicated that "The rating action reflects the weakened capital profile of the group as a result of its mortgage and mortgage-related CDO exposures, as well as uncertainty over CIFG's future strategic direction."  Moody's also indicated that although CIFG increased capital by $1.5 billion in December, the company's capital is no longer adequate at the Aaa level due to continued deterioration of the mortgage markets.  [2/22/2008]

On February 25, 2008 Standard & Poor's Rating Services announced several rating actions which included lowering the rating of Financial Guaranty Insurance Co. to 'A' and lowering the rating of XL Capital Assurance Inc. to 'A-'.  [2/25/2008]

On March 6, 2008 Moody's Investors Service downgraded CIFG Guaranty's rating from Aaa to A1 with a stable outlook. CIFG is the smallest and most recent entrant to the financial guaranty sector. In its release, Moody's said "Although capitalization is not currently a constraint on the rating, Moody's believes that, short of a major strengthening in the firm's operations, meaningful gains in franchise value, and long term support from strong and committed parents, CIFG is unlikely to establish a credit profile consistent with a higher rating in the near term." 

Also this week, Ambac Financial Group raised $1.5 billion in a sale of shares and convertible units.  On March 5, 2008, Moody's indicated that "Moody's believes a "successful equity offering, in combination with Ambac's other capital strengthening activities and risk management initiatives, would likely result in the confirmation of Ambac's Aaa insurance financial strength rating."  [3/07/2008]

On Friday, March 7, Fitch Ratings downgraded CIFG Guaranty's rating from Aaa to AA- while retaining a negative watch. Also last week, MBIA requested to have its Fitch rating withdrawn. MBIA indicated that "Fitch's ratings process differs in many significant respects from those of the other rating agencies, which affects how investors assess value."  [3/09/2008]

On March 12, several actions were taken on insurers' ratings. Fitch Ratings affirmed Ambac Assurance Corp.'s AA rating with a negative outlook, Standard & Poor's downgraded CIFG Guaranty's rating from Aaa to A+ while retaining a negative watch, and Moody's Investors Service confirmed Ambac's Aaa rating with a negative outlook.  Congressional hearings are now underway addressing the current status of bond insurers and the current turmoil in the municipal market.  [3/13/2008]

On March 24, 2008, Standard & Poor's placed Financial Guaranty Insurance Co. (FGIC) on CreditWatch with negative implications.  This action follows several rating downgrades from AAA to A. On March 17 FGIC announced that it had stopped writing new financial guaranty business in an effort to preserve capital.  The company has also told New York regulators that it may spit into two units: a unit with subprime-exposed structured finance and a municipal bond insurance unit.  [3/24/2008]

On March 26, 2008, Fitch Ratings downgraded Financial Guaranty Insurance Co. ("FGIC") to BBB, with a negative outlook, from AA.  In its release, Fitch noted that "FGIC's $5 billion claims paying resources as of Sept. 30, 2007 is commensurate with capital guidelines for a 'BBB' IFS rating."  Also on March 26 Fitch downgraded XL Capital to BB, with a negative outlook, from A.  [3/27/2008]

On March 31, 2008, Fitch Ratings downgraded CIFG Guaranty. to A-, with a negative outlook, from AA-.  In its release, Fitch noted that "The downgrade of CIFG and its affiliates is based on Fitch's updated assessment of CIFG's capital position, a review by Fitch of CIFG's updated business plan, consideration of various qualitative ratings factors, and an update on Fitch's current views of U.S. subprime related risks."  Also on March 31, Moody's downgraded FGIC to Baa3 while retaining it on review for possible downgrade.  [4/01/2008]

On April 4, 2008, Fitch Ratings downgraded MBIA Insurance Corp. to AA, with a negative outlook, from AAA.  In its release, Fitch noted that "This action follows Fitch's placement of MBIA's ratings on Rating Watch Negative on Feb. 5, 2008, and is based on Fitch's current views on capital adequacy, the company's updated business plan, consideration of various qualitative ratings factors, an update on Fitch's current views of the portfolio quality of MBIA's insured portfolio, and an analysis of MBIA Inc.'s investment management service (IMS) operations and holding company activities."  [4/05/2008]

Financial Security Assurance Inc. (FSA), one of only two bond insurers to remain AAA rated by Fitch, Moody's and Standard & Poor's, announced a first quarter loss of $421.6 million today. Moody's announced that it will reassess FSA's mortgage exposure risk.  According to Moody's "The company incurred significant losses during the first quarter, with $333 million of loss reserve charges on direct home equity lines of credit and closed-end second lien residential mortgage-backed securities."  [5/14/2008]

What's in Your Money Market?

In October 2007, Bloomberg published the article "Unsafe Havens" noting that U.S. money market funds have invested $11 billion in subprime debt. The investments consist of commercial paper (short-term debt) from structured investment vehicles (SIVs) that hold subprime mortgages. Bloomberg also noted that "As a sign of stability, money market funds never allow their share price to rise above or fall under $1 for each dollar invested." When necessary fund managers typically provide capital support to their money markets to prevent a drop below $1.00 per share, known as "breaking the buck".  Prior to this week, investors have not lost money on a US money market fund since 1994 when investors were paid 96 cents a share by Community Bankers Mutual Fund of Denver and the fund was liquidated. You may not have heard the "breaking the buck" alarm go off this week when the General Electric bond fund (GEAM Trust Enhanced Cash Trust) returned money to investors at 96 cents on the dollar.  An estimated $200 million value had been lost on mortgage-back securities.  [11/18/2007]
 

The Davis Case - Municipal Bond Tax Exemption

A case involving state taxation of municipal bonds will be heard during the fall term of the US Supreme Court that begins Monday (November 5, 2007). The case (Davis v. Department of Revenue of Kentucky) involves whether interest income on non-Kentucky municipal bonds can be taxed while exempting interest on bonds issued within the state.  Because the majority of states have similar rules regarding the taxation of municipal bonds (see the tax table at www.investinginbonds.com), the Supreme Court's ruling could have far reaching implications. In Kentucky, the state court sided against George and Catherine Davis, the couple that filed a class-action lawsuit in 2003, a state appellate court reversed, finding that Kentucky's law violates the constitutional dormant Commerce Clause, and Kentucky's Supreme Court declined to take the case. Many legal experts believe the Supreme Court will allow states to continue to tax out-of-state bonds while exempting their own obligations. Precedent was recently set in United Haulers v. Oneida-Herkimer which gave states and localities the ability to regulate solid waste disposal (See The Bond Buyer article). In the event the Supreme Court upholds the appeals court decision states will either have to tax all municipal bonds or make all municipal bonds tax-exempt.  In either case the value of municipal bonds would be affected.    [11/04/2007]

On Monday, Supreme Court justices heard arguments in the Davis case. Several of the justices signaled that they support the Kentucky law, that is the ability of the State to tax out-of-state municipal bonds while exempting bonds issued in Kentucky. (See the transcript of proceedings.) A decision is expected by the end of June.   [11/06/2007]

Today, in a 7 to 2 decision, the US Supreme Court overturned the Kentucky appellate court ruling.  As a result, a state can tax interest on out-of-state municipal bonds and exempt the interest on bonds issued within the state. [5/19/2008]

NFMA Issues White Paper on Municipal Securities Laws

Shrewsbury's Capital Appreciation Bonds Sold Competitively

On July 24, Shrewsbury completed the sale of $2,060,000 of General Obligation Capital Appreciation Bonds.  This was the first capital appreciation bond issue sold by competitive bidding in the State of Missouri.  See the article "City Completes First Competitive Bond Sale."  [7/24/2007]

Consumer Confidence Index

The Consumer Confidence Index for April declined to 63.2 compared to 65.9 in March (1985=100).  The Expectations Index was 50.1 compared to 49.4 in March.  The Present Situation Index, decreased to 80.7 from 90.6 in March. The index is at its lowest level in the past five years. Lynn Franco, Director of the Conference Board Consumer Research Center, said "This continued weakening suggests that not only has the feeble level of growth in the first quarter spilled over into the second quarter, but that economic conditions may have slowed even further. And, not only are lackluster business and job conditions eroding confidence, but rising gasoline prices are undoubtedly heightening concerns. Consumers' inflation expectations continue to rise and this measure now matches the all-time high reached in the aftermath of Hurricane Katrina."  [5/02/2008] 

Premium Callable Bonds

A popular trend in the bond market is structuring callable bonds with premium pricing.  As reported in The Bond Buyer, on June 6, 2007, bond purchasers like this structure because it offers an additional yield or "kick." (See the article "A Little 'Kick' in Yields.") As reported on this website on March 23, 2007 in the article "The Problem With Premium Pricing" that "Kick" is costly to issuers.
[6/08/2007] 

Missouri Supreme Court Grants Collective Bargaining

Overturning a 1947 ruling, on May 29 the Missouri Supreme Court determined that teachers and other public employees have the right to engage in collective bargaining.  Prior to Tuesday's ruling the courts had determined that employees had only the right to "meet and confer."  The ruling also overturned a 1982 decision by making work agreements binding. See the ruling. [5/30/2007] 

Lindbergh School District Bonds Sold Competitively

On March 13, Lindbergh School District, Missouri, sold $32,000,000 of general obligation bonds by competitive bidding.  Competitive bidding was selected to insure the lowest financing costs and, in this case, the difference between the high and low bid equated to almost $700,000.  In addition to insuring favorable financing costs, the competitive sale was selected because it provides a completely objective basis for selection of the underwriter. Competitive sales are viewed favorably by taxpayers that pay for the bonds as well as by the media.  See the article "Lindbergh taxpayers save nearly $700,000 in Prop R bond sale - School district saves by seeking competitive bids for bonds instead of negotiated sale."  [3/21/2007]

GFOA Questions GASB's Role

At its December 2006 meeting the Government Finance Officers Association (GFOA) voted to reassess the role of the Governmental Accounting Standards Board (GASB) as the accounting authority for state and local governments. GASB was established more than 20 years ago to create a financial reporting model. GFOA believes that role has been accomplished and that GASB now continues to make changes that unnecessarily complicate financial reporting.  Among GASB's proposed future changes is the development of economic condition reporting.  GFOA is exploring whether government accounting standards should be transferred to the Financial Accounting Standards Board (FASB) and is requesting the assistance of other state and local governments to assist in its efforts to reassess the role of GASB.  [3/17/2007]

This week, at a meeting in Los Angeles, Christopher Cox, Chairman of the Securities and Exchange Commission (SEC), indicated that he wants GASB to have more authority and to provide the SEC oversight control. Presently, the SEC has no authority over GASB and compliance with GASB's accounting rules is voluntary by State and local governments. Cox indicated that he will ask Congress to consider giving the SEC oversight authority over GASB. [7/21/2007]

On July 26, Christopher Cox, sent members of the Senate Banking Committee and House Financial Services Committee a letter and 12-page white paper requesting additional municipal bond disclosure and SEC oversight authority over GASB.   [7/28/2007]

MSRB's Gift Giving Rules

This week, the Municipal Securities Rulemaking Board ("MSRB") published a notice reminding broker-dealers of the gift-giving limits under Rule G-20. In general,
Rule G-20 prohibits dealers from giving any thing of value including gifts and entertainment in excess of $100 per year to any person.  The MSRB noted that frequent or excessive gift giving could raise questions of propriety and could be a violation of rule G-17 which relates to fair business practices.  The MSRB also noted that Rule G-17 and the application of gift-giving under Rule G-20 are "designed to avoid conflicts of interest and to promote fair practices in the municipal securities market."  The MSRB made reference to the National Association of Securities Dealers' recently published guidance to the NASD's Rule 3060 (relating to personal gifts/exclusions;  promotional items; aggregation of gifts; valuation of gifts; gifts incidental to business entertainment; and supervision and recordkeeping) noting that "this guidance applies as well to the comparable provisions of MSRB Rule G-20."  For further information, see the MSRB's January 29, 2007 Notice and the NASD's Guidance On Gifts and Gratuities. [1/31/2007]

Disclosure Rules for Municipal Bonds May be Changed

At a recent meeting for the Institute of International Bankers, Christopher Cox, chairman of the Securities and Exchange Commission (SEC), indicated that he is planning to propose changes to the municipal securities disclosure rules.  The SEC may propose changes to Rule 15c2-12 or, as an alternative, the SEC may seek legislative changes and repeal 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 issues.  [3/09/2007]

This week, at a meeting in Los Angeles, Christopher Cox, Chairman of the Securities and Exchange Commission (SEC) indicated that he will ask Congress to change disclosure rules for municipal bonds. Cox said there is an urgent need to improve information investors receive. Read the entire speech. [7/20/2007]

On July 26, Christopher Cox, sent members of the Senate Banking Committee and House Financial Services Committee a letter and 12-page white paper requesting additional municipal bond disclosure. Cox reiterated his belief that municipal investors deserve more disclosure and timely disclosure.  [7/28/2007]
 

MSRB Proposes Amending Rules for Official Statement Dissemination

The MSRB is seeking comments on a proposed new rule that would establish a disclosure system for new issues of municipal securities and allow the dissemination of official statements electronically.  The system would be modeled in part after the Securities and Exchange Commission's "access equals delivery" model for prospectus dissemination.  Under the proposal, a centralized web site would be created where municipal securities dealers could post official statements and that investors could access for free.  Paper copies would continue to be made available to investors requesting one.  Once the rule is approved, the system could be operating as early as the end of 2008. For further information see http://www.msrb.org/msrb1/whatsnew/2007-05.asp [1/26/2006] 

Switching Role from Financial Advisor to Underwriter

Rule G-23 of the Municipal Securities Rulemaking Board ("MSRB") prohibits broker-dealers (underwriters) from serving as both underwriter and financial advisor for the same transaction. Subject to certain restrictions, however, Rule G-23 permits a broker-dealer serving as financial advisor to terminate this role and then serve as underwriter for the same transaction. Last year the National Association of Independent Public Finance Advisors (an association of financial advisors that do not underwrite bonds) recommended that changes be made to Rule G-23 to limit this practice. The MSRB (a self-regulatory agency whose board is comprised primarily of broker-dealers) made no changes to the rule. In March 2006, the Government Finance Officers Association ("GFOA") responded with a statement titled "MSRB's Rule G-23: Who's Protecting Whom" that suggested that the MSRB may not have adequately reviewed the adequacy of Rule G-23 as presently written.  According to "The Bond Buyer," on January 18, 2007 the GFOA's governmental debt management committee decided to address the issue through a future revision to its recommended practice called "Selecting and Managing the Method of Sale of State and Local Government Bonds". "The Bond Buyer" also reported that some of the GFOA members said the draft should "urge issuers not to allow dealers to switch roles in the same deals, state that issuers should not decide on the method of sale based solely on the underwriter's recommendation, acknowledge that issuers and underwriters have competing interests and state that the issuer’s overall objective should be getting the lowest cost of funds for taxpayers."   [1/22/2007]

Once again, the National Association of Independent Public Finance Advisors is requesting that the MSRB consider changes to Rule G-23.  The request was made public last week with the release of a letter and exhibits. The National Association of Independent Public Finance Advisors has requested that the amendments to Rule G-23 include the following: a broker-dealer that switches from an advisory role to underwriter must (i) disclose that conflicts of interest do exist, (ii) must obtain explicit approval from policy makers to make the change, and (iii) completely terminate its role as financial advisor to the issuer.  [6/09/2007]

Martha Mahan Haines, Chief of the Securities and Exchange Commission's Office of Municipal Securities, warned dealers to comply with Rule G-23 when switching roles from financial advisor to underwriter. The statements were made this week, at the annual Fixed Income Legal and Compliance Conference in New York. In a June 14 article in The Bond Buyer, Haines was quoted as saying, with respect to issuers, that "they are the seller, the underwriter is the buyer, and like any other sales transaction, the buyer is not representing the seller".  [6/14/2007]

The Government Finance Officers Association (GFOA) is developing a new recommended practice regarding competitive and negotiated bond sales.  The document, approved by the debt committee on June 9th, includes recommendations on the use of financial advisors including that financial advisors should not be broker/dealers.  In a June 15 Bloomberg column, Joe Mysak discusses the recommended practice. [6/15/2007]

Municipal Market Investments Investigated

GIC Bid Rigging

On January 7, 2005, The Bond Buyer reported that the Internal Revenue Service and Securities and Exchange Commission were investigating possible bid rigging practices involving guaranteed investment contracts (GICs) in the municipal market. 

This week Bloomberg reported that as many as 30 firms are now under investigation by the Justice Department and the Securities and Exchange Commission and have been served with subpoenas. The Justice Department is seeking evidence on how GICs relating to municipal bonds are awarded.

GICs are sometimes used as the investment vehicle for bond proceeds.  When the proceeds are yield restricted, the issuer must obtain three or more bids. When a GIC is used as the investment vehicle, an issuer generally selects its GIC provider through a competitive bidding process, often hiring a GIC broker to conduct the bidding.  On January 7, 2005, The Bond Buyer reported that "bid rigging can occur when only one of the firms vying to provide the GIC submits a financially viable, bona fide bid and the other two firms submit courtesy bids that are unrealistic and that virtually guarantee the company with the viable bid will win the bidding process." The rigging takes place in exchange for undisclosed kick-backs or fees.  Another practice under investigation, as reported in The Bond Buyer on November 17, 2006, is when the bidding process is structured to allow the provider to underpay for a GIC and then over pay for other investment agreements and remarketing fees, effectively diverting arbitrage back to the GIC broker or underwriter. For additional information see the 11/16/2006 article at Bloomberg.com.  [11/18/2006]

Investigation of Other Investments

On November 21, 2006, The Bond Buyer reported that the Justice Department's and Securities Exchange Commission's investigations extend beyond GICs. Dozens of firms have been subpoenaed for information relating to "virtually every investment product or derivative they have brokered, provided, or otherwise been involved with in connection with the municipal bond transactions over the past six to 14 years." According to The Bond Buyer the Justice Department's investigation includes forward supply, purchase or delivery agreements, repurchase agreements, swaps, options, and swaptions. The SEC has requested information regarding guaranteed investment contracts, repurchase agreements, flexible repurchase agreements, collateralized certificates of deposit, forward delivery agreements, forward supply agreements, put agreements, interest rate swaps, and basis swaps. [11/22/2006]

Continuing Developments In Municipal Investment Investigation

Market participants continue to speculate which firms have been subpoenaed, what will be found in the investigation and what will be the outcome.  See the 12/7/2006 article at Bloomberg.com  [12/08/2006]

Disclosures are now being made by the firms that have been subpoenaed.   See the 5/18/2007 article at Bloomberg.com  [5/22/2007]

According to The Bond Buyer, in an article published February 11, the Securities and Exchange Commission has notified at least three firms that it is planning to bring securities fraud charges against them. [2/17/2008] 

According to The Bond Buyer, in an article published today, two class action suits have been filed by seven issuers against 37 firms for alleged bid-rigging and price-fixing in the municipal market.  Earlier this month The Wall Street Journal reported that Federal authorities are preparing to charge more than two dozen people and a handful of financial firms over bid-rigging. See the article "Charges Near In Investigation of Muni Cash." [3/14/2008]  

Voters Approve Bond Issues

According to the Bond Buyer, Ipreo LLC reported that in 2007 $39.7 billion of bonds in 745 propositions were approved.  This equated to an approval rate of almost 78% of the 1,152 total propositions. Of the 62 Illinois propositions reported by the Bond Buyer, 36 propositions were approved or approximately 57%.  Of the 11 Missouri propositions reported by the Bond Buyer, 8 were approved or 85%.   [2/17/2008]   
 

St. Peters, Missouri Receives Rating Upgrade

This week St. Peters' general obligation bonds were upgraded from A1 to Aa3.  The rating makes St. Peters one of only 16 Missouri cities that have ratings ranked Aa3 or higher. The following were among the reasons stated by Moody's for assigning the rating: "the city's financial position will remain strong due to solid management, the presence of sound reserves and the financial flexibility provided by revenues generated by the sale of land for the 370 Redevelopment Plan" (A planned development area created by the City.) The general obligation rating was assigned in conjunction with the City's upcoming sale of approximately $24.5 million of Certificates of Participation which are rated A2.  WM Financial Strategies, as financial advisor to the City, assisted in the rating process and is financial advisor to 6 of the 16 Missouri cities rated Aa3 or higher.  [9/16/2006]   
 

NABL Proposes Changing "Issue Price" Definition

The National Association of Bond Lawyers ("NABL") is proposing a change to the definition of "issue price".  The recommendation was outlined in a 14 page paper submitted to the Treasury Department last week.  "Issue price" is used in several municipal bond computations including the computation of bond yield. Under current tax rules the "issue price" is the price at which a substantial amount (not less than 10%) of each maturity of bonds is sold to the public.  NABL's paper was prompted by a study released in June that indicated that some underwriters are failing to meet the 10% tax rule requirement and that between 5.4% and 15.9% of issues are not sold at or below the reoffering price. A safe harbor rule is being recommended by NABL under which the "issue price" would be the offering price that the underwriter shows prospective investors.  [9/02/2006]   
 

Municipal Broadband

Telecommunications legislation in pending in the Senate that includes provisions permitting municipalities to build broadband networks. Similar legislation was passed by the house in June 2006. The legislation gives preferential treatment to municipalities whereby they can provide broadband service within their community even if private telecom firms are willing to provide identical or better service.  The legislation also prohibits states from preventing municipalities from offering broadband services.  There has been a growing interest by cities to provide wireless and wire delivered broadband internet access for the same reasons that cities offer other utility services. Broadband is of interest to public finance professionals since bonds or lease obligations may be required to finance the broadband infrastructure.    [6/30/2006] 

The Government Finance Officers Association, National League of Cities and other organizations representing local government are asking for assistance to defeat the passage of "The Advanced Telecommunications Opportunities Reform Act" (H.R. 5252).  The organizations believe the bill will harm consumers, cities and counties.  The following link is to their position statement: www.gfoa.org/documents/ActionAlert0731.pdf   [9/16/2006]  
 

S&P Reports on Missouri Schools

On May 1, 2006, Standard & Poor's issued a report on Missouri Schools titled "Missouri School District Ratings Continue to Exhibit Stable Trend."  In its report, S& P indicated that "since 2000, no district rating has been lowered, while eight have been raised."  The trend remained intact even when the State's economy was sluggish and state aid to districts was cut in the 2003 fiscal year. S&P noted that Missouri's new state aid formula that will be phased in over seven years, beginning with the 2006-2007 school year, is not expected to affect school district ratings, although it could have a positive rating impact on some districts receiving additional aid.   [5/06/2006]  
 

Taxpayers Pay More for Negotiated Bond Sales

Study by Missouri State Auditor

On January 3, 2006, Missouri State Auditor Claire McCaskill released a study comparing the cost of bonds sold through negotiation to bonds sold through competitive bidding. The study confirmed the findings of a 2001 study by Ms. McCaskill's office that negotiated bond sales cost more.  The study demonstrated that during the one-year period ending May 31, 2005, the additional cost was $11.2 million for the 144 Missouri bonds sold by negotiated sale.

Among the other findings and recommendations in the study were the following:

  87% of Missouri general obligation issues were sold through negotiation compared to a national average of 46%.

  Without an independent financial advisor, issuers are not always well informed about bond issue options. 

  Taxpayers could avoid paying unnecessary interest costs if issuers sell general obligation bonds competitively and use independent financial advisors.

The study included a numerical analysis of 161 Missouri bond issues totaling $1.2 billion prepared by the University of Connecticut's Mark Robbins and William Simonsen. In an interview with Bloomberg, a leading global provider of data, news and analytics, Mr. Simonsen indicated that the failure to take bids cost Missouri issuers at least 19 basis points (0.19%) more a year.

(See the 2001 Study, the 2005 Follow-Up Study and services offered by WM Financial Strategies, independent financial advisor, for competitive general obligation bond sales).  [1/04/2006]

Bloomberg Columnist States "Municipal Bond Issuers Are Lazy"

The 2005 bond follow-up study indicated that some issuers use negotiated sales because they believe it is easier and more convenient. In the January 4, 2006 Bloomberg article "Missouri Lawmakers May Seek Bids on Bonds After Audit", it was reported that Roger Kurtz, associate director of the Missouri Association of School Administrators in Jefferson City, stated that schools favor negotiated sales because they believe they require less time and work of superintendents and other administrators.  On January 6, 2006 Bloomberg's municipal bond columnist, Joe Mysak begins his column regarding the 2005 bond study with "Municipal bond issuers are lazy, when they aren't entirely clueless." (See "Missouri Bond Study Shows Dim Issuers, Mad Bankers") [1/06/2006]


"Auditor spots a red herring in her bowl of vanilla ice cream"

On January 15, 2006 the St. Louis Post-Dispatch published a column, with the title above, relating to the recently released Missouri auditor's report on bond sale practices. Columnist David Nicklaus pointed out the irony of Missouri bond sales in that a school superintendent must seek competitive bids to buy new school buses but may "call a single investment banker and negotiate a price" for the sale of a multimillion-dollar bond issue.  With respect to issuers' argument that negotiated sales are "easier and more convenient," Nicklaus points out that financial market expertise can be obtained by hiring an independent financial advisor as an alternative to negotiated bond sales. [1/15/2006]

Also see the commentary "Competitive Bond Sales - Is Saving Taxpayers' Money Too Much Work?" on this site.
 

Competitive vs. Negotiated Bond Sales

Bloomberg Writes Series of Articles on Sale Methods

Bloomberg L.P., an industry leader in financial news, market data, and analysis, is running a series of articles on competitive versus negotiated sales of municipal bonds.  The first article "States, Cities Shun Finance Competition, Victimizing Taxpayers", originally published on January 3, 2005, includes quotes from Missouri State Auditor Claire McCaskill's 2001 report "General Obligation Bond Sale Practices" and commentary relating to Missouri bond sales from A.G. Edwards, L.J. Hart, McLiney & Co., George K Baum and Piper Jaffray.  The second article,
"Citigroup 'Double-Dipped' Louisiana Taxpayers With No-Bid Bond" was originally published on February 24, 2005.  Both articles are published on this site with the permission of Bloomberg. [5/28/2005]

States, Cities Shun Finance Competition, Victimizing Taxpayers
Citigroup 'Double-Dipped' Louisiana Taxpayers With No-Bid Bond  


Philadelphia Sells Bonds Competitively

Last week Philadelphia sold $218 million in general obligation bonds by competitive bidding.  The sale was the first competitive bond sale by the City in three decades. The sale follows the conviction of former City treasurer, Corey Kemp, in a pay-for-play case last year. (Underwriters were selected for negotiated sales based on political contributions.) For additional information regarding the case and commentary relating negotiated sales from Joe Mysak, columnist for Bloomberg, see Its Time for Philly to Try a Bond Sale Auction. [7/21/2005]  

Recently published was "The Bond Buyer's Annual 2006 InStatistics."  Included in The Bond Buyer's Year-End Review, are underwriting spreads over the past twenty years.  With only one exception, the average weighted gross underwriting spread for negotiated issues exceeded the spread for competitive issues every year since 1987. For 2006 the average spread for negotiated sales was $5.64 per $1,000 of bonds compared to $4.82 per $1,000 of bonds for competitive bond sales. [2/26/2007]

Tax Increment Finance

National TIF Coalition Being Formed

According to the Council of Development Finance Agencies (CDFA), forty-two states currently permit the use of Tax Increment Financing.  CDFA is in the process of establishing itself as national clearinghouse that would offer education, resources, networking and information sharing in the Tax Increment Financing industry. For more information see the Tax Increment Finance Coalition
("TIFC") overview.  [10/16/2005] 

GFOA Adopts Recommended Practice for Tax Increment Financing

The Government Finance Officers Association (GFOA) approved three new recommended practices in February 2006.  One of the new recommended practices pertains to the use of "Tax Increment Financing as a Fiscal Tool." In particular, GFOA recommends that local governments adopt a Tax Increment Financing policy that includes statements regarding when Tax Increment Financing is appropriate. The GFOA's recommended practices including the practice relating to Tax Increment Financing are available at the GFOA's website. 

Legislation to Restrict Tax Increment Financing in Missouri

Last year several bills proposing changes to the Missouri Tax Increment Financing statutes were introduced in the Missouri General Assembly that were all defeated.  Once again legislation is being introduced that would restrict the use of TIF.  Three bills have been introduced that contain various restrictions ranging from more stringent definitions of blight to voter approval of TIFs when a petition is filed to do so.  The bills are S.B. 20, S.B. 176 and H.B. 103.   [1/20/2007] 

Peculiar Predicament With Chapter 100 Bonds

A ruling on October 4, 2005, by the Missouri Court of Appeals-Western District invalidated bonds issued by the City of Peculiar under Chapter 100 of the Missouri Revised Statutes (the "Act").  The bonds, issued to finance an electric power plant, had been sold to Aquila, Inc, the company that constructed the plant.

Under the Act, municipalities can issue bonds, without voter approval, to finance industrial development projects. The Act defines industrial projects as, the purchase, construction, extension and improvement of warehouses, distribution facilities, research and development facilities, office industries, agricultural processing industries, service facilities which provide interstate commerce, and industrial plants, including buildings, fixtures, and machinery.  The municipality holds title to the bond-financed property and leases the property to a corporation. As a result, corporations are exempt from property taxation on the bond-financed property.

Last year, a citizens group, StopAquila.Org, filed a law-suit with the Cass County Circuit Court to halt the sale of the bonds to Aquila, Inc., StopAquila argued that the bonds could not be issued under the Act and required voter approval under the Missouri Constitution. The Circuit Court ruled in favor of the City rather than StopAquila.  The appellate court reversed the ruling. 

In its ruling, the Appellate Court determined that the bonds could not be issued under the Act because the power plant is not an industrial development project that can be financed under the Act.  (See the full Court Opinion.)  [11/03/2005] 

Missouri Supreme Court Upholds Peculiar's Bonds

Earlier this week, by a 5-to-2 vote, the Missouri Supreme Court found that the City of Peculiar acted within its authority in authorizing the bonds. The Supreme Court, upheld the trial court's decision which had determined that the bonds did not require voter approval because the project was being leased to a corporation for commercial purposes. The finding by the Missouri Supreme Court that the plant qualifies as "commercial" reduces the possibility that future financings will come into question.  [12/24/2006] 

Parks Improve Property Values

The Illinois Association of Park Districts engaged Economics Research Associates (ERA) to research literature relating to the real estate impact generated by parks.  ERA found that neighborhood and community parks have a potentially positive impact on surrounding residential communities.  ERA noted the following:

Neighborhood parks can provide up to a 20% increase in housing values for those homes facing the park. Benefits from a neighborhood park can extend to approximately 600 feet, with houses nearer to the park receiving the majority of the benefit.

Community parks may provide benefits up to 33% of the residential real estate value. Homes within 1,000 feet of a large community park may receive a 9% increase in home value. Positive externalities of a community park may extend up to 2,000 feet.

 ERA's approach also looked at value enhancements generated by other park/ open space formats, including greenways, which are noted in the body of this report. Read the complete report.  [9/25/2005] 

Olivette Missouri Receives First Bond Rating

The City of Olivette, Missouri has received a "Aa3" rating from Moody's Investors Service.  The rating was obtained in connection with the City's sale of $1,855,000 Neighborhood Improvement District Refunding Bonds.  The bond proceeds will be used to refinance a 1997 Neighborhood Improvement District bond issue that was used to construct streets.  The refunding will result in over $105,000 of savings. WM Financial Strategies is serving as the City's financial advisor. [9/09/2005] 

Technology - Transcripts on CD Rom

Transcripts of proceedings have historically been provided in bound books.  Transcripts can now be produced on CD-ROMs with the added advantage of reducing storage space, easy retrieval of specific documents and pages, and easy dissemination.