SEC's Cox Missing in Action?

This week there was a four-hour hearing before a Congressional panel on the role the federal agencies played in the credit crisis.  During the hearing, former Federal Reserve Chairman Alan Greenspan referred to recent economic events as a “Credit Tsunami.”  So where was Christopher Cox, chairman of the Securities and Exchange Commission, during the Tsunami?  He was “Missing in action” according to the Bloomberg article “Cox ‘Asleep at Switch’ as Paulson, Bernanke Encroach.”

Cox wasn’t missing in action, he was working on his major initiative for the coming year – more municipal disclosure.  Even though municipal bonds default far less than corporate bonds (less than 1% for general obligation and utility revenue bonds) as early as March 2007 Cox began pushing for more municipal disclosure rules including the possibility of repealing the Tower Amendment. (Under the Tower Amendment that was adopted in 1975 as an amendment to the Securities Exchange Act of 1934, the SEC is essentially prohibited from regulating municipal bond issues.)  Although Cox was missing during many meetings relating to the recent bailout initiatives put in place by Federal Reserve Chairman Bernanke and Treasury Secretary Paulson, he was present at the October 23 Congressional hearing.  At the hearing, Cox urged Congress to give the SEC authority over municipal bond disclosure so that the SEC can require municipal borrowers to provide the same kind of disclosure as corporate borrowers.  While more disclosure may by desirable, doesn’t the SEC have more pressing issues to address?


Bonds Gone Wild

In Bloomberg’s September 26, 2008 article “Muni “Hydra” Bites Denver as Rates Hit Record; New York Pays 9%", Michael McDonald and Jeremy R. Cooke, wrote “The worst year on record for U.S. state and local government borrowers is getting worse.”

These guys must be a lot younger than me.  Does anyone remember the 80s?

Yes the bond market has gone wild.  For the past two weeks, yields on Aaa municipal bonds ranged from 113% to as much as 120% of US Treasury Bond yields, the highest ratio in history.  There is an absence of institutional buyers and approximately $10 billion of issues have been postponed.  The market is horrendous, but hardly the worst in history.  On January 14, 1982 the 20 Bond Buyer Index was 13.44% compared to 5.23% this week.  Although there were sporadic weekly yield declines, from November 3, 1977 until January 14, 1982 yields increased from 5.51% until reaching the 13.44% record high.  Yes things may improve, but they could get much worse; consider that in 1982 yields had increased over a period of more than 4 years before they began to decline. 

Timing to the market is a gamble.  For many bond issues, there are still bond buyers and a postponement is not required.  Finding underwriters or buyers for bonds is more difficult now.  To get bonds sold, issuers may have to consider establishing new relationships with financial advisors and underwriters with whom they have not previously worked; however, consider the possibilities; isn’t this the year when the public is demanding change?  See the 20 Bond Buyer Index-1970 to Present. [9/28/2008] 


Competitive Bond Sales - Is Saving Taxpayers' Money Too Much Work?©

In 1995 State Auditor Margaret Kelly released the study "Special Review of Bonds Issued by Political Subdivisions." In 2001 State Auditor Claire McCaskill released the study "Audit of General Obligation Bond Sale Practices" and a follow-up study by Ms. McCaskill’s office was just released.  Each study (along with other national and regional studies) has demonstrated that competitive bond sales result in lower total financing costs.  In spite of these findings, 87% of Missouri’s general obligation bonds are sold through negotiation.  The Auditor’s 2005 follow-up study and recent articles in the St. Louis Post Dispatch and Bloomberg suggest that many public officials prefer the negotiated sale method because they are not fully informed of the competitive sale approach or they believe a competitive sale will result in a heavier workload.  In response to the Auditor’s 2005 follow-up study, on January 6, 2006 Bloomberg’s municipal bond columnist Joe Mysak wrote "Municipal bond issuers are lazy, when they aren't entirely clueless."

To inform public officials of the ease of utilizing the competitive bond sale approach as well as the savings associated with competitive bidding, WM Financial Strategies has offered to host sessions titled "Competitive Bond Sales - Is Saving Taxpayers' Money Too Much Work?" at upcoming conferences of several Missouri associations that represent cities and schools.  WM Financial Strategies is also available to meet with small groups, including school boards and city council members, to discuss this topic.

For additional information regarding the auditor's report and Bloomberg's commentary, see "News and Commentary" on this site.  For additional information regarding competitive and negotiated bond sales see Bond Sale Methods on this site. [1/08/2006] 


Too Many Economic Development Incentives?

On November 26, 2005 the St. Louis Post Dispatch published the article "For schools, TIF is fight".  The article suggests that although there are Tax Increment Financing areas that have favorable outcomes many result in a needless loss of revenues to school districts.

Barely mentioned in the November 26th article is the proposed $62 million Tax Increment Financing in Sunset Hills.  In this continuing saga, the City of Sunset Hills approved proceeding with the TIF after the project failed to receive approval by the Tax Increment Financing Commission. Now owners of more than 250 residences wait for the planned buyout in the midst of the developer’s inability to obtain financing. Homeowners may find themselves in a TIF purgatory where they are unable to sell there homes to the developer and unable to sell in the open market (who would want to move into an area scheduled for demolition).

Not mentioned in the November 26 article is the fact that often a large portion of the Tax Increment revenue is from municipal sales taxes.  (In general, 50% of the increase in sales tax after the TIF is formed).  That represents a big tax loss to cities, assuming a development could be enticed to the community without TIF.

What is mentioned in the November 26 article is the Book “The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation”, by Greg LeRoy that was released in July. (See a description of the book with excerpts.)  Also mentioned is the Senate Interim Committee on Tax Increment Financing that is now studying Missouri Tax Increment Financing including the definition of "blight," Tax Increment Financing impacts, potential abuses, and the implementation of TIF in relation to the original intent of the legislation. The committee plans to issue a report and make recommendations to the general assembly for legislative action no later than January 20, 2006.

Maybe the answer to the Tax Increment Financing controversy is not a matter of new legislation but rather restraint and caution by municipalities.  [1/08/2006]

(Note: On February 14, 2006 the City of Sunset Hills terminated its proposed Tax Increment Financing.  Prior to that date, a circuit court judge ruled that certain actions taken by the City in connection with the TIF were invalid.

Election Contributions May Equate to Pay-to-Play

Like many states, Missouri presently prohibits the expenditure of public funds to support elections.  While local governments may educate the public on a referenda, Section 115.646 of the Missouri Revised Statutes prohibits the expenditure of public funds to advocate, support, or oppose any ballot measure. Underwriters and bond counsel firms are also precluded from offering contributions to support bond elections under Section 409.107 of the Missouri Revised Statutes.  Section 409.107 states "No investment firm, legal firm offering bond counsel services, or any persons having an interest in any such firms shall be involved in any manner in the issuance of bonds authorized by an election in which the firm or person made any contribution of any kind whatsoever to any campaign in support of the bond election."

Over the past several years, the Municipal Securities Rulemaking Board has adopted rules to prohibit "Pay-to-Play" practices (inappropriate practice whereby a broker-dealer or bank makes political contributions in order to be selected as bond underwriter).  In 1992, the Missouri General Assembly recognized that contributions to bond elections is a Pay-to-Play activity and appropriately adopted legislation prohibiting such contributions.  (See May 22, 2003 Interpretive Opinion – Matt Blunt File No.  2003-00438; IO-07-03).

In spite of recent national efforts to prohibit Pay-to-Play activities, in 2006 the Missouri General Assembly  considered Senate Bill 1035 to ease the ban prohibiting issuers from hiring companies that contribute to bond issue campaigns.   On its surface, the bill appeared to be innocuous since it would preclude "any direct financial contributions." If adopted, the bill would have permitted indirect contributions including "promotional materials" thereby opening the Pandora’s box for Pay-To-Play activities.  Activities that equate to Pay-To-Play, whether direct or indirect, increase bond issuance fees and interest costs and undermine public trust. Permitting local governments to engage underwriters based on election contributions has the following effects: 

1)   Reduce competition.  Competition is reduced when an underwriter is selected based on the best bond election campaign rather than selected through competitive bidding.

2)   Increase bonding costs.  Bond costs are increased when an underwriter is engaged based on election campaign contributions (whether direct or indirect) rather than based on ability to provide lowest fees and interest rates.

To insure the lowest interest costs and best financial terms for a bond issue, political subdivisions should select the parties to the transaction that have demonstrated the highest level of financial or legal expertise rather than firms with the deepest pockets for election campaigns.  [2006]


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