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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] |
Municipal Bond Insurance 5/14/2008
The Davis Case - Bond
Tax-Exemption Disclosure Rules for Municipal Bonds May Change Competitive vs. Negotiated Bond Sales Tax Increment Finance (Missouri) |
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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]
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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]
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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. |
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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.
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Subprime Lending Impacting Municipal Bond Insurance The Municipal Bond Insurers'
credit ratings are under review due to subprime lending exposure.
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 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. 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 January 30, 2008, Fitch Ratings downgraded Financial Guaranty Insurance Co.'s rating to AA while continuing to leave the company on Negative Rating Watch. In its release, Fitch stated "This announcement is based on FGIC's not yet raising new capital, or having executed other risk mitigation measures, to meet Fitch's 'AAA' capital guidelines within a timeframe consistent with Fitch's expectations." As the insurance problems emerge and continue, in recent days New York Insurance Superintendent Eric Dinallo has been attempting to develop a plan to rescue bond insurers with the help of Wall Street firms. In addition, insurance regulators are reconsidering a 1998 legal loophole that allows bond insurers to issue credit-default swaps through shell companies called "transformers" and the Democratic leaders of the House Financial Services Committee are considering legislation to further regulate insurers. [1/30/2008] On January 31, 2008, Standard & Poor's lowered Financial Guaranty Insurance Co.'s rating to AA and placed the insurer on CreditWatch with developing implications. Standard & Poor's indicated that "The CreditWatch Developing placement reflects the possibility of either positive or negative outcomes. A positive outcome would be that the company is successful in raising sufficient capital to cover projected losses, in which case the rating could be raised back to 'AAA' with a negative outlook. In this scenario, the negative outlook would reflect the ongoing uncertainty surrounding the potential for further mortgage market deterioration and the company's ability to gauge its ongoing capital needs accurately. A negative outcome would be that the company is unsuccessful in its efforts to raise capital, in which case the rating could go lower." In addition Standard & Poor's placed MBIA and XL Capital Assurance on Credit Watch with negative implications. [1/31/2008] 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] On February 7, 2008, Moody's Investors Service downgraded XL Capital Assurance Inc. to A3 with a negative outlook. XL Capital Assurance is a subsidiary of Security Capital Assurance Ltd. In its release, Moody's indicated that "SCA is currently pursuing several capital management initiatives that, according to Moody's, if successfully executed could reduce but would not likely eliminate the company's capital shortfall at the Aaa rating level." [2/08/2008] On February 14, 2008, Moody's Investors Service downgraded Financial Guaranty Insurance Co. to A3. The rating remains on review for possible downgrade. In its release, Moody's indicated that it "is aware of a number of capital initiatives and restructuring efforts currently being considered by FGIC. Moody's believes the ultimate impact of these efforts on the credit profile of the financial guarantor is uncertain, and could be negative,... At this time, however, Moody's believes that FGIC's business position and franchise strength are consistent with an operating company insurance financial strength rating in the single-A range." 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." 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]
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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]
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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]
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NFMA Issues White Paper on Municipal Securities Laws On
September 13, 2007 the National Federation of Municipal Analysts (the
"NFMA") released a draft white paper titled "Federal Securities Law
Relating to Municipal Securities." The paper relates principally to matters
pertaining to municipal disclosure. The 42 page document includes a
summary of federal securities law relating to municipal securities, a
glossary, frequently asked questions relating to securities laws and a
timeline showing how the regulatory regime affects the municipal
market at each phase of the transaction. The paper is available at the
NFMA
website.
[9/16/2007]
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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]
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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]
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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. |
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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]
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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]
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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]
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]
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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,
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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]
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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]
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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]
Additional information regarding
Rule G-23 and its background is
available on this site at
www.Munibondadvisor.com/RuleG23.htm.
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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. 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] |
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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]
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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]
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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]
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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] |
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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]
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Taxpayers Pay More for Negotiated Bond Sales 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:
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"
Also see the commentary "Competitive Bond
Sales - Is Saving Taxpayers' Money Too Much Work?" on this site. |
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Competitive vs. Negotiated Bond Sales
States,
Cities Shun Finance Competition, Victimizing Taxpayers
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Tax Increment Finance
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 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]
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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]
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]
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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:
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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]
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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.
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WM Financial
Strategies |