Tag: Governing

Muni Bond Games and the IRS’ Lurking Arbitrage Vampires

Mary Pat Campbell

Link: https://www.governing.com/finance/muni-bond-games-and-the-irs-lurking-arbitrage-vampires

Excerpt:

For example, Oakland, Calif., cleverly figured out in 1985 that it could issue tax-exempt bonds to fund its underwater pension plan, the proceeds of which it in turn would invest in normal pension portfolio holdings like taxable stocks and corporate bonds with a higher long-term return. It was a strategy almost certain to make a profit over time, even with the ups and downs in the stock market, but it didn’t take long for the IRS to put an end to that ploy as an abuse of the tax exemption. Thereafter, the IRS ruled, such pension bonds must be taxable.

Likewise, the arbitrage police have played cops-and-robbers with clever public financiers who invest their cash during construction periods at interest rates higher than their tax-exempt cost of money. Using today’s interest rate levels, for example, a tax-exempt 20-year AAA-rated bond can be issued with coupons around three-and-a-half percent and the proceeds reinvested in Treasury bills and notes at 4 to 5 percent. In almost any year like this one, there’s a profit to be gleaned when borrowing tax-exempt and reinvesting at taxable rates.

….


There is also a new controversy brewing in a niche sector of the muni bond market, in which issuers of taxable bonds are finding an opportunity to refinance at lower tax-exempt rates. Investors are suing them. It’s premature to guess how this issue will be resolved in the courts, but worth watching.

….

As interest rates drift lower in tandem with hoped-for disinflation, muni bond professionals are starting to chat up the idea that soon we’ll see a wave of advance refundings, in which a municipality can refinance its debt at a lower interest rate. In corporate America, the finance team must usually wait until the issue’s maturity or call date before refinancing. In muni-land, however, there is a unique situation that is peculiar to the tax-exempt world: the opportunity to issue new bonds to replace the old ones at a lower interest rate before their scheduled call date — typically within 10 years after issuance — by setting up an escrow fund to pay off the original debt when it is callable.

It doesn’t take a math or market genius to figure out that this advance refunding strategy is susceptible to abuses. In theory and previously in practice, it could be repeated several times over the life of the original bonds: wash, rinse and repeat. So the IRS caught on to this and Congress put a limit — of one — on such deals. To accommodate this unique feature of the muni market, the Treasury Department even created a special class of its own securities, known as the State and Local Government Series (SLGS, or “slugs” in industry jargon), which bear interest rates equal to the new borrowing rate to preclude the arbitrage profit gambit.

The political challenge for municipal officials today is that underwriters and advisers are keen to promote these advance refundings as soon as they become feasible. Some will compete with each other to make the first pitch to win an engagement even if it’s not optimal longer term. The motto of some hucksters is “whoever gets to the decision-makers first, wins.” All they really want is the engagement fees; to them, a dollar earned today is worth more than a dollar tomorrow, so they get lathered up without necessarily showing their clients the potential to save even more if they wait a couple years for even lower rates. This year and next could be just such a time period, depending on when you think the next national recession will occur.

Mostly it will be the muni bonds sold in 2022 and early 2023, when interest rates were peaking (above 4 percent on AAA paper and maybe 5 percent for lower ratings), that the advance-refunding promoters will pitch. Just remember that the IRS rules now prohibit multiple advance refundings: It’s one bite of the apple, and there will be an opportunity cost for jumping the gun ahead of lower long-term interest rates in future years. Although short-term interest rates are expected to decline, it’s not so obvious that the longer end of the Treasury and muni bond yield curves will follow in this business cycle, at least until the next recession. Refundings are almost always timely in recessions, but can be premature in the middle of an interest rate cycle.

Author(s): Girard Miller

Publication Date: 13 Mar 2024

Publication Site: Governing

Maine Takes on Fossil Fuel Divestment. How Will It Happen?

Mary Pat Campbell

Link:https://www.governing.com/finance/maine-takes-on-fossil-fuel-divestment-how-will-it-happen?utm_campaign=Newsletter%20-%20GOV%20-%20Daily&utm_medium=email&_hsmi=219420154&_hsenc=p2ANqtz-__sPq7wAi53EzPYe16VS7ePNypi9aGJv7mpM9geXevYQuSJJtrQ4NzYGMvpkVK6vF2KYhovrJ2o-svNpgMLyuWsqbxbovsKME3Sm1RZLuiVq8ZdoE&utm_content=219420154&utm_source=hs_email

Excerpt:

Activists credit the support of Beck, Maine Rep. Maggie O’Neil and state Sen. Chloe Maxmin for making Maine the first state to require fossil fuel divestment by law.

Passed and signed by Maine’s governor in 2021, LD99 calls for the state’s permanent funds and its pension system, MainePERS, to divest from fossil fuel investments by 2026 and not reinvest going forward.

It prohibits both specific lists of publicly traded companies as well as any whose “core business” is in fossil fuel exploration, extraction, refining, processing or infrastructure. (A separate 2021 law also requires Maine to divest from private prisons.)

Other pension systems, including New York state’s, have made promises to divest from companies whose primary business drives planet-warming emissions, but are not required to by legislation. In 2015, California passed a law to remove public investments in thermal coal, but a move to extend that to all fossil fuel companies died in the Legislature this session.

MainePERS’ assets — about $18 billion at the end of the last fiscal year — are small in comparison to New York and California, but how they manage their legislative mandate will be closely watched as other states face calls for fossil fuel divestment and wider questions of dealing with climate risk in investing.

Leaders at the pension system stressed a key phrase in the legislation, that any MainePERS divestment decision will be made “in accordance with sound investment criteria and consistent with fiduciary obligations” — crucial to a state constitutional requirement to its pension members.

….

MainePERS Chief Investment Officer James Bennett estimates about $1.2 billion of the system’s total holdings are in fossil fuel investments, split evenly between publicly traded companies and private investments.

Liquidating private investments will be more complicated, he says. Many of the limited partnerships MainePERS is invested in include fossil fuel assets alongside other infrastructure investments and cannot be separated. They’d need to sell the whole thing, if it indeed is within the financial interest of members to do so.

Author(s): Taylor K Brown

Publication Date: 13 July 2022

Publication Site: Governing

Public Pensions: Double-Check Those ‘Shadow Banker’ Investments

Mary Pat Campbell

Link:https://www.governing.com/finance/public-pensions-double-check-those-shadow-banker-investments

Excerpt:

For almost a decade leading up to 2021, bond yields were suppressed by low inflation and central bank stimulus. To make up for scanty interest rates on their bond investments, many public pension funds followed the lead of their consultants and shifted some of their portfolios into private credit funds. These “shadow bankers” have taken market share from traditional lenders, seeking higher interest rates by lending to non-prime borrowers.

Even during the pandemic, this strategy worked pretty well, but now skeptics are warning that a tipping point may be coming if double-digit borrowing costs trigger defaults. It’s time for pension trustees and staff to double-check what’s under the hood.

For the most part, the worst that many will find is some headline risk with private lending funds that underwrite the riskiest loans in this industry. Even for the weakest of those, however, the problem will not likely be as severe as the underwater mortgages that got sliced, diced and rolled up into worthless paper going into the global financial crisis of 2008. And until and unless the economy actually enters a full-blown recession, many of the underwater players will still have time to work out their positions.

The point here is not to sound a false alarm or besmirch the private credit industry. Rather, it’s highlighting what could eventually become soft spots in some pension portfolios in time to avoid doubling down into higher risks and to encourage pre-emptive staff work to demonstrate and document vigilant portfolio oversight.

Author(s):Girard Miller

Publication Date: 8 Aug 2023

Publication Site: Governing

Why Municipal Pensions Should Kick-Start an Innovation Fund

Mary Pat Campbell

Link:https://www.governing.com/finance/why-municipal-pensions-should-kick-start-an-innovation-fund?utm_campaign=Newsletter%20-%20GOV%20-%20Daily&utm_medium=email&_hsmi=266390798&_hsenc=p2ANqtz-9XCnmkpBsz7qeaom3Wd8LYY7HJUvGw_23wYI3K2k_OJd4ifQ6BmeoSGQSkdqdPtxzuK5YefHRPo_EMn8DeMV66jxxg-vECbMbX4zn0u7Ma9C6-9B4&utm_content=266390798&utm_source=hs_email

Excerpt:

Most of the media coverage of the collapse of Silicon Valley Bank was focused on the long lines of depositors who feared losing their money and the eventual bailout by the FDIC. The sequel to that story is that the failure of that bank and several others left a gaping void in the nation’s entrepreneurial economy — the place where new jobs spring out of the innovators’ alchemy of novel technologies, management skill and risk capital.

As a result, many early-stage growth companies in America are now stranded in a financing no man’s land between the highest-risk seed capital stage funded by individual angel investors and the multibillion-dollar private equity sector that still looks for eight- and nine-figure deals featuring companies already making sales on their way to a stock exchange listing. The startups’ cash cliff has been cited as the cause of a “mass extinction event” — a dead cylinder in the U.S. economy’s growth engine.

That’s where the idea of an “innovation fund” partnering with a dozen or so midsize local government pension funds could fill the void in this still-risky growth stage. Pension trustees could harvest lush investment returns on a nationally diversified portfolio with lower fees than the venture capital industry typically exploits. As a bonus, they could collectively fuel the engines of economic growth nationwide. Emergent businesses based in a state where a pension fund participates would have a fair shot at some of that capital if they could pass stringent due diligence reviews and fiduciary governance oversight by angel investment experts in their industries.

It’s a concept that originated years ago from the now-retired founder of one of the nation’s most prominent pension consulting firms. Today, the drawback on his original vision is that the larger public pension funds have outgrown the startup economy. As the chief investment officer of the California State Teachers’ Retirement System, the nation’s second-largest public pension fund, recently noted in a TV interview, they manage so many billions in each asset class, and with so many rules, requirements and restrictions, that it’s difficult for them to effectively put money into the venture capital marketplace. And even then, it’s got to be the chunkier, later-stage money earning a lower return than angel investors are seeking. Accordingly, my proposals here are a second-generation revision for which I alone am accountable.

What’s missing today is early-stage Series A and B funding. Putting money into promising firms raising $5 million to $20 million of fresh capital in these transition stages following their angel funding round would never move the dial on the Goliath pension portfolios’ investment returns. For their trustees and staffs, it’s just not worth the effort and headaches of monitoring hundreds of pubescent companies that are too young for them.

Author(s): Girard Miller

Publication Date: 11 July 2023

Publication Site: Governing

Chicago Confronts $35B Pension Crisis, Among Nation’s Worst

Mary Pat Campbell

Link: https://www.governing.com/finance/chicago-confronts-35b-pension-crisis-among-nations-worst?utm_campaign=Newsletter%20-%20GOV%20-%20Daily&utm_medium=email&_hsmi=266392609&_hsenc=p2ANqtz-908JiZoECoiHOSFWeUAutUv8VbdD2wEgfZjFzCrsEv6iI9JACAt9QL1zdrKBCqmO35ZPGv3sCgZURy904H11nrX4AQ5RWJg5Ti63o3xBq99exXZg0&utm_content=266392609&utm_source=hs_email

Excerpt:

One of Brandon Johnson’s first moves as Chicago mayor was to buy himself time to address the city’s biggest financial problem: the more than $35 billion owed to its pension funds.

Just days after his May inauguration, Johnson persuaded state lawmakers to shelve legislation that would’ve added billions to the pension debt, while pledging to establish a working group to come up with solutions by October.

Now, the clock is ticking for the progressive Democrat to fix the worst pension crisis among major U.S. cities.

Just as Chicago reels from a spate of shootings and carjackings, inequities exacerbated by the pandemic and high-profile corporate departures, its pension gap creates a financial burden that threatens its recovery and the mayor’s agenda.

The situation makes for a cautionary tale for municipalities across the country facing long-neglected contributions and funding shortfalls. Already, the third-largest U.S. city spends roughly $1 of every $5 on pensions, while more than 80 percent of property-tax dollars go toward retirement payouts.

….

In 2022, for the first time, the city put in an actuarially calculated contribution for all four pensions funds – a step that helped it shed the junk rating.

Author(s): Shruti Date Singh, Bloomberg News, TNS

Publication Date: 14 July 2023

Publication Site: Governing

In Communities Where Civic Health Is Poor, Lives Are Shorter

Mary Pat Campbell

Link: https://www.governing.com/now/in-communities-where-civic-health-is-poor-lives-are-shorter

Graphic:

Excerpt:

Neglected civic infrastructure — schools, parks, community centers, libraries and other public spaces that help foster a sense of belonging — coupled with barriers to participation in civic life aren’t just manifestations of poor governance. According to the 2023 County Health Rankings & Roadmaps (CHR&R) from the University of Wisconsin Population Health Institute (UWPHI), they have health consequences.

The rankings, published since 2010, were developed to provide insight and guidance for improving health equity. The new report focuses on relationships between the state of civic infrastructure, community engagement and well-being.

“There is a connection between our civic health and thriving people and places,” says Sheri Johnson, the director of UWHPI.

The pandemic made the chronic stress faced by those without access to broadband connections, safe public spaces or other civic resources more visible than ever. Public health researcher Arline Geronimus has been at the forefront of research demonstrating that the stresses of poverty and discrimination actually cause cellular-level damage, overloading the hormonal systems that help us survive dangerous situations.

Author(s): Carl Smith

Publication Date: 4 April 2023

Publication Site: Governing

More and Better Uses Ahead for Governments’ Financial Data

Mary Pat Campbell

Link: https://www.governing.com/finance/more-and-better-uses-ahead-for-governments-financial-data

Excerpt:

In its lame duck session last month, Congress tucked a sleeper section into its 4,000-page omnibus spending bill. The controversial Financial Data Transparency Act (FDTA) swiftly came out of nowhere to become federal law over the vocal but powerless objections of the state and local government finance community. Its impact on thousands of cities, counties and school districts will be a buzzy topic at conferences all this year and beyond. Meanwhile, software companies will be staking claims in a digital land rush.

The central idea behind the FDTA is that public-sector organizations’ financial data should be readily available for online search and standardized downloading, using common file formats. Think of it as “an http protocol for financial data” that enables an investor, analyst, taxpayer watchdog, constituent or journalist to quickly retrieve key financial information and compare it with other numbers using common data fields. Presently, online users of state and local government financial data must rely primarily on text documents, often in PDF format, that don’t lend themselves to convenient data analysis and comparisons. Financial statements are typically published long after the fiscal year’s end, and the widespread online availability of current and timely data is still a faraway concept.

…..

So far, so good. But the devil is in the details. The first question is just what kind of information will be required in this new system, and when. Most would agree that a complete download of every byte of data now formatted in voluminous governmental financial reports and their notes is overwhelming, unnecessary and burdensome. Thus, a far more incremental and focused approach is a wiser path. For starters, it may be helpful to keep the initial data requirements skeletal and focus initially on a dozen or more vital fiscal data points that are most important to financial statement users. Then, after that foundation is laid, the public finance industry can build out. Of course, this will require that regulators buy into a sensible implementation plan.

The debate over information content requirements should focus first on “decision-useful information.” Having served briefly two decades ago as a voting member of the Governmental Accounting Standards Board (GASB), contributing my professional background as a chartered financial analyst, I can attest that almost every one of their meetings included a board member reminding others that required financial statement information should be decision-useful. A key question, of course, is “useful to whom?”

Author(s): Girard Miller

Publication Date: 17 Jan 2023

Publication Site: Governing

Government Worker Shortages Worsen Crisis Response

Mary Pat Campbell

Link: https://www.governing.com/work/government-worker-shortages-worsen-crisis-response

Graphic:

Excerpt:

States and cities all over the country have seen a loss of workers over the past several years, and many are struggling to hire new ones. According to the Bureau of Labor Statistics, state and local governments lost more than 600,000 workers between the start of the pandemic and June of this year. Those shortages have begun to affect basic services, including many that are critical to safety and quality of life. According to a Center for American Progress report from March, there were 10,000 fewer water and wastewater treatment plant operators in 2021 than there were in 2019.

…..

The obvious reason why governments have struggled to hire and retain workers over the past few years, says Brad Hershbein, senior economist and deputy director of research at the W.E. Upjohn Institute for Employment Research, is that they can’t improve pay rates as quickly as the private sector can in response to worker demands for better wages. Another reason is that lots of government work has become newly politicized during the pandemic — public workers can be “heroes one day and villains the next,” he says. And a third factor is that staff shortages tend to make work that much more difficult for people who remain, contributing to unattractive working conditions.

“The burnout gets worse,” Hershbein says. “You get a spiral, where fewer people are stuck trying to handle the same amount of work and the whole thing collapses. That’s a real risk at a lot of agencies.”

Author(s): Jared Brey

Publication Date: 3 Oct 2022

Publication Site: Governing

Texas Maternal Death Data to Be Published Post-Midterms

Mary Pat Campbell

Link: https://www.governing.com/now/texas-maternal-death-data-to-be-published-post-midterms

Excerpt:

Texas health officials have missed a key window to complete the state’s first major updated count of pregnancy related deaths in nearly a decade, saying the findings will now be released next summer, most likely after the Legislature’s biennial session.

The delay, disclosed earlier this month by the Department of State Health Services, means lawmakers won’t likely be able to use the analysis, covering deaths from 2019, until the 2025 legislative cycle. The most recent state-level data available is nine years old.

In a hearing this month with the state’s Maternal Mortality and Morbidity Review Committee, DSHS commissioner Dr. John Hellerstedt said the agency wanted to better align its methodology with that of other states, and that there hadn’t been enough staff and money to finish the review for a scheduled Sept. 1 release.

….

Ortique said the state has already identified 149 potential maternal deaths in 2019, of which 118 have been analyzed by the committee to see if they were pregnancy-related. Six newly identified deaths may be added to that group, she said. The numbers cover deaths during the pregnancy through one year after giving birth.

The state has published a maternal death report every other year since 2014, often based on preliminary data updated later. For example, the maternal death report in 2018 identified 29 deaths in 2012 that were not included in the previous report. The committee also released updating findings from its most recent report, studying deaths from 2013, at the Sept. 2 meeting.

Out of 175 potential maternal deaths in 2013, 70 have since been determined to be pregnancy-related.

Author(s): Julian Gill and Jeremy Blackman, San Antonio Express-News

Publication Date: 14 Sept 2022

Publication Site: Governing

Bill Would Tighten Pension Rules for Convicted Public Workers

Mary Pat Campbell

Link: https://www.governing.com/finance/bill-would-tighten-pension-rules-for-convicted-public-workers

Excerpt:

New Jersey would make it harder for public employees who commit crimes to collect their pensions under a bill legislators are fast-tracking through the state Assembly.

The proposed reforms to the state’s pension law were recommended without discussion Thursday, Sept. 29, by the Assembly Judiciary Committee, just one week after they were introduced. That allows the measure to move to the Assembly floor for a vote expected on Monday.

The legislation would tighten the criteria under which pension boards decide whether former government workers convicted of on-the-job misconduct should lose some or all of their pensions. It would also expand the list of offenses that automatically disqualify public employees from receiving those benefits.

….

That change would take more pension decisions out of the hands of the state’s retirement boards, which are often reluctant to strip officials of their full pensions, under a process in which they weigh offenders’ misconduct against the good they did throughout their careers. The proposal would also revamp how boards consider those factors, making it easier for them to refuse to grant benefits.

To become law, the bill would have to pass the Assembly and Senate and be signed by Gov. Phil Murphy. So far, no Senate version has been introduced, and its potential fate in the upper chamber remains unclear.

Author(s): Riley Yates, NJ.com

Publication Date: 30 Sept 2022

Publication Site: Governing

How Deceptive Lobbyists Are Exploiting the Goodwill of Public Employees

Mary Pat Campbell

Link: https://www.governing.com/finance/how-deceptive-lobbyists-are-exploiting-the-goodwill-of-public-employees

Excerpt:

If you followed the saga of the route to passage of the Inflation Reduction Act, you already know that a last-minute maneuver by Arizona Sen. Kyrsten Sinema torpedoed a provision in the Senate compromise bill that would have finally closed the so-called “carried interest loophole.” That’s where savvy real-estate financiers and managers of private partnerships such as hedge funds and private equity deals are able to cut their income taxes as much as 40 percent by masquerading their compensation as a capital gain that enjoys much lower income tax rates.

….

Public pension funds, public employees and their associations need to put a stop to this, and they have both the moral high ground and the clout to do so. It’s high time for political and financial blowback. The PR firms orchestrating this nonsense will just keep it up until their profiteering clients get called out.

….

The reality is that if the fund managers had to pay standard tax rates on their income, it would have zero impact on pension systems’ returns. What are the managers going to do? Cook up fewer deals? Pull up stakes and move to a tax haven? Demand even higher fees on top of their already cushy income? They can huff and puff all they want, but pensioners would lose nothing if the loophole were plugged.

Author(s): Girard Miller

Publication Date: 13 Sept 2022

Publication Site: Governing

What We’ve Learned — and Failed to Learn — from a Million COVID Deaths

Mary Pat Campbell

Link: https://www.governing.com/now/what-weve-learned-and-failed-to-learn-from-a-million-covid-deaths

Excerpt:

The pandemic is not done. The number of new infections — surely an undercount due to unreported home tests — again tops 75,000 per day. The number of hospitalizations has climbed 20 percent over the past two weeks. The Biden administration has warned there could be 100 million more Americans infected by early next year. Yet Congress seems unwilling to provide more money for basic responses such as tests and vaccines, even as it becomes increasingly clear that even mild cases can lead to dangerous long-term damage.

Yet there are positive developments to consider as well. Vaccinations and certainly boosters are not where they should be, but three out of four Americans have received at least a single dose and two-thirds are fully vaccinated. The Commonwealth Fund has estimated that, absent vaccines, an additional 2.3 million Americans would have died, and 17 million more would have been hospitalized. Public health measures such as masking have largely fallen out of favor, but they helped prevent a death toll that could have been even more terrible.

“A million is way too many people, but as a result of the work that has been done, through public health and vaccination, it’s a number that’s a lot lower than it might have been,” says David Fleming, a distinguished visiting fellow at the Trust for America’s Health. “If we did not do those things, we would not be looking at the 1 million death threshold, we’d be looking at the 3 million death threshold.”

Author(s): Alan Greenblatt

Publication Date: 12 May 2022

Publication Site: Governing