Governor Jerry Brown's State of the State: Pinning Hope on Taxes

(Jan. 19, 2012) -- Governor Jerry Brown’s State of the State speech didn’t provide much added detail on what will be another difficult budget year. He will push for voter approval of temporary higher taxes on sales and wealthier taxpayers. This would raise several billion dollars each year while in effect. Brown also said more budget trims will be needed to deal with ongoing deficits. The governor also remains committed to construction of a bullet train that will entail billions of dollars in general obligation bond sales for the start-up phase. We have questioned the wisdom of this train before and still see public finance risks from the project. The independent Legislative Analyst’s Office has expressed concern about Brown’s proposed budget. Among other things, the LAO questions whether the higher taxes will raise as much as Brown expects.

California Supreme Court Upholds Law to Kill Off Redevelopment

(Dec. 29, 2011) -- In an interruption of a holiday week in which we planned almost no posts, there is some big news. The California Supreme Court on Thursday (December 29) upheld the state’s law that abolished redevelopment agencies. Debt service on existing tax allocation bonds is to be protected under the law, and in general that provision will protect most TABS. That doesn’t mean, however, there won’t be some downgrades depending on the implementation of the state law. In addition, a handful of redevelopment bonds with below-investment-grade ratings already faced tough issues. A few bond deals that were in trouble already won’t necessarily be bailed out now because of questions of whether the state will simply raid unencumbered funds. In a second ruling, the state’s high court struck down another law that would let redevelopment agencies stay in business in exchange for added payments benefiting other public agencies. So there you have it. Some big news for a slow holiday week. We will have more to say about this soon.

Municipal Bond Fund Inflows Continue in Week Ended Dec. 21

(Dec. 23, 2011) -- Municipal bond funds recorded more than $760 million of “inflows” during the week ended December 21, according to Lipper FMI. The funds are ending 2012 on an upbeat note. In contrast, “outflows” dominated the picture in early 2011, amid a panic over muni bond default predictions by an analyst or two. These analysts, as usual, were from outside the muni bond market but became self-styled experts thanks to media attention.

Municipal Bond Fund Inflows Stay Strong As 2011 Draws to Close

(Dec. 16, 2011) -- Municipal bond funds saw “inflows” of $460 million in the week ended December 14, according to Lipper FMI. The inflows totaled about $1 billion a week earlier. Reinvestment dollars might explain some of the bigger numbers recently. The funds aren’t complaining given that “inflows” have now occurred in nine of the last 10 weeks. What a contrast to the exodus earlier this year, driven in part by Chicken Little analysts predicting huge municipal bond defaults.

California's Automatic Budget Cuts: Better Than Past Inaction

(Dec. 14, 2011) -- As expected, California Governor Jerry Brown announced mid-year budget cuts after revenue didn’t meet projections. The state is cutting $1 billion from its fiscal 2012 budget, with reductions affecting school bus service and a variety of other programs. Higher-than-expected revenue in November probably helped the state avoid even deeper cuts. Credit analysts will be happy any cuts are occurring. In the past, other governors and the legislature never could agree on mid-year changes and deficits would pile up when revenue didn’t meet projections. It is better, from a credit standpoint, to build in automatic “triggers” that force reductions.

California Drops to Second Place; Reflecting on Volume Trends

(Dec. 6, 2011) -- An interesting note on recent volume figures in the municipal bond market. After compiling November sales, California (the state and all its local issuers) dropped to second among all U.S. states for muni sales so far in 2011. New York moved into first place. Through October, California sales were about 30% lower than the same period in 2010. At the end of November, however, California’s volume was 40% less than the same 11-month period in 2010, according to statistics compiled by Thomson Reuters. California issuers have sold about $35 billion of municipal bonds in 2011, down from about $58.3 billion in 2010, according Thomson Reuters. What happened in November to cause this fall-off? We bet it was the flurry of taxable Build America Bonds sold toward the end of last year. Issuers rushed billions of dollars of taxable BABs to market in late 2010 to take advantage of a generous federal interest-cost subsidy that was expiring at the end of last year. That no doubt is part of the explanation why California’s volume is now off 40% from last year instead of 30% at the end of October. Across the entire U.S., municipal bond sales have dropped 32.3% in the first 11 months of 2011 compared with the same period in 2010, according to Thomson Reuters. New York is one of the few states where issuance is actually up this year (though by only 1%). California will finish in either the top or second spot in 2011 because Texas is far behind in third place at $21.5 billion. Looking at November alone, municipal bond sales across the U.S. dropped about 25% from November 2010. Refunding sales, reflecting attractive low rates, jumped 35% in November. This refinancing of older bonds has helped prop up new sales in California in recent weeks. It also caught our eye that new bond sales for health care purposes rose 39% in November. We have been noting in recent weeks that investors could choose from several new health-care bonds in California. The trend continues this week with Sutter Health’s $355 million new offering.

National Public Finance Could See Upgrade If Litigation Is Settled

(Dec. 1, 2011) -- Under new stricter criteria for bond insurers, Standard & Poor’s has affirmed the BBB rating for National Public Finance Guarantee Corp., or NPFG. This company was set up as a new subsidiary of MBIA Corp. after the financial crisis caused steep downgrades for insurers due to exposure to riskier securities outside the municipal bond market. National Public Finance was set up to shield the safer municipal bond portfolio from MBIA’s riskier exposure. As we mentioned the other day (in the November 29 item below), some banks sued over MBIA’s creation of National Public Finance. A media report this week indicated that settlement negotiations could possibly end the litigation. “If the litigation is resolved favorably and National remains a separate legal entity and maintains the assumed book of business and capital, we could raise the rating on National to its stand-alone credit profile,” Standard & Poor’s said in a release. The stand-alone rating on National Public Finance is single-A, following a one-notch cut yesterday from A+.

Another Airline Bankruptcy Means a Review for Some Muni Bonds

(Nov. 30, 2011) -- Here we go again. This week’s bankruptcy filing by AMR Corp., the parent of American Airlines, brings back memories of the United Airlines debacle for certain municipal bonds. Tax-exempt bonds have been sold on behalf of airlines to finance so-called special facilities and other improvements. Their security varies; some are secured and some are unsecured, and the terms of leasehold mortgages backing the bonds can vary. (Keep these separate from airport revenue bonds backed by general receipts at an airport. Airport revenue bonds are far safer.) The United Airlines case showed how the security varied. In some instances bondholders were paid in full and in other cases the recovery was relatively small. American Airlines backs municipal bonds at Los Angeles International Airport. It will be interesting to see how the airline treats that debt because American is usually a top player, or close to it, in terms of market share in Los Angeles. It might want to keep its existing arrangements in place as much as possible so as not to avoid losing any competitive advantage. What that might mean for individual bonds is harder to predict because the security behind the debt can vary, and in bankruptcy the terms can get tested. The United Airlines case was especially sobering in terms of some of the surprises it brought. That doesn’t mean American Airlines will take the same stand. However, the bankruptcy is intended to help the carrier reduce some of its debt load, though corporate bonds often take the biggest hit. Across the U.S. American Airlines backs roughly $3 billion of muni bonds, according to various estimates, and the security for the debt varies.

MBIA Talks With Banks on Settlement; Could Help Muni Subsidiary

(Nov. 29, 2011) -- The Wall Street Journal said several banks are in talks with MBIA Inc. to settle a legal dispute arising from big losses during the financial crisis. The banks objected to MBIA’s subsequent strategy of setting up a new company that shielded municipal bonds from the riskier securities with big losses. MBIA in turn claimed the banks misled the insurer about the safety of the riskier securities, including those tied to mortgages. Settlements that put this dispute behind it could help lift a cloud over MBIA and the municipal bond subsidiary (National Public Finance Guarantee Corp.). That could help reassure investors holding older municipal bonds backed by the company. In addition, the MBIA subsidiary at some point might be able to start writing new municipal bond insurance again if the legal dispute is resolved.

Radian Asset Assurance Under Downgrade Review By Moody's

(Nov. 23, 2011) -- Radian Asset Assurance Inc., which insures certain municipal bonds, had its Ba1 financial strength rating put on review for possible downgrade by Moody's Investors Service. Moody's started the review after downgrading parent Radian Group to Caa1 from Ba3. The parent company can't count on help from another subsidiary, Radian Guaranty, because of "the adverse effect of the continued stress in the mortgage market on the firm's capital and liquidity position." In addition, Moody's noted that Radian Asset Assurance itself "is also not immune to potential stress in its insured portfolio. While the performance of Radian Asset's structured finance portfolio appears to have somewhat stabilized, its public finance portfolio has been negatively affected by the recent bankruptcy filing of Jefferson County and weakness in healthcare exposures. Radian Asset assumed about $227 million, mainly Jefferson County's sewer bonds, and it had about $5.6 billion exposure to healthcare and long-term care credits as of 30 September 2011." Radian has explored starting a new municipal bond insurer after buying out an existing shell company from another potential start-up.

Municipal Bond Funds Continue "Inflow" Streak for Sixth Week

(Nov. 18, 2011) -- For a while we were giving weekly updates on inflows and outflows into municipal bond funds, mainly because of a streak of outflows earlier this year on a misinformed “panic” over tax-exempt debt. The panic was sparked by certain uninformed remarks predicting huge defaults for the municipal market. It is worth noting that municipal bond funds have now seen six straight weeks of “inflows.” In the week ended November 16, inflows totaled a half-billion dollars and a week earlier the inflows were $761 million, according to statistics compiled by Lipper FMI. Inflows have now been recorded for 10 of the last 11 weeks. Various factors are always driving money going into and out of the funds. We have no doubt, however, that smaller investors have turned again to tax-exempt funds and bonds to get some yield at a time when so-called safer alternatives pay less. Tax-exempt yields on higher-quality bonds aren’t anything to write home about, but after doing the math on the Taxable Equivalent Yield they are still more attractive than plenty of other alternatives.

Municipal Bankruptcy Filings Lead AGM to Question Some States

(Nov. 16, 2011) -- The main active players for insuring municipal bonds, Assured Guaranty Municipal and to a lesser extent Assured Guaranty Corp., might not participate in some states because of concern over local bankruptcy filings. The Jefferson County, Alabama, bankruptcy filing and one in Harrisburg, Pennsylvania, raise questions about whether states need more say in the process. That is the view, at least, of Assured Guaranty Chief Executive Dominic Frederico, who said his company might not back municipal bonds in certain states that don’t have a process for reviewing or approving local bankruptcy filings. Frederico mentioned his concern in an investor conference call the other day; he basically stressed that local officials are going to undermine the promises and pledges that have long made the municipal market safe if they seek to evade this responsibility with bankruptcy filings. California this year passed a law with the goal of putting some thresholds in place prior to a local municipality bankruptcy; it will be interesting to see is Assured Guaranty thinks it has enough teeth. The recent Vallejo example taught a lot of California localities that municipal Chapter 9 bankruptcy is a last resort and perhaps shouldn’t be used even if it is the last resort. That is why such filings have been so rare. Better to find other solutions than to resort to a bankruptcy filing because that, in and of itself, is no solution.

California's Fiscal 2012 Revenue Projections Get Dose of Reality

(Nov. 15, 2011) -- Moody’s Investors Service noted earlier this month that some of the largest states recorded less-than-expected tax receipts in the first quarter of the new fiscal year, which began July 1. “In addition to the weak economy, state fiscal pressures that may force mid-year budget cuts or belt-tightening for fiscal year 2013 include federal spending reductions, high unemployment, and, in some places, depressed housing markets,” Moody’s said in a report. The State of California, listed as one of the laggards in the report, didn’t see any improvement in October either, according to a controller’s report. Total general fund revenue was $811 million less-than-expected in October, with personal income tax receipts almost 13% below projections. Corporate taxes missed projections by almost 4% and sales tax revenue was more than 1% above the budget. For the first four months of fiscal 2012, California is about $1.5 billion shy of the general fund revenue estimate. Almost $1.2 billion of that shortfall is coming from the “not otherwise allocated” category, the controller’s office said. This category plugged in $4 billion of expected revenue that was used to balance the budget, even though skeptics questioned whether it was realistic to do so. In response, California will make mid-year budget cuts if its estimates don’t pan out. State disbursements in the first four months of the fiscal year are running $1.7 billion higher than projections. “October’s poor revenues capped a very disappointing first four months of the fiscal year,” State Controller John Chiang said. “Unless revenues and expenditures begin to track with projections, the State will face increasing cash pressure in the months ahead.” California’s Department of Finance says the revenue shortfall so far this fiscal year might be about $200 million less than the controller’s numbers, based on more up-to-date figures. What can you take from all these numbers? The economy, even if it is improving a bit, isn’t going to bail out the public sector.

Jefferson County, Alabama, Bankruptcy Involves Unique Mess

(Nov. 14, 2011) -- Some stories in the general media have made it sound like the Jefferson County, Alabama, bankruptcy filing will be some sort of trigger for other municipalities to consider bankruptcy filings. No it won’t. No, no and no. This long-running story involved a derivatives mess the county was involved in, and the potential bankruptcy filing (it finally occurred last week) has been threatened forever, or so it seems. There are certainly lessons for other issuers about getting too involved with riskier financial instruments. This bankruptcy, however, isn’t a sign others are looming.

San Jose Redevelopment Agency Gets a Fix from LOC Provider

(Nov. 4, 2011) -- The San Jose Redevelopment Agency will be able to avoid a default on certain subordinate variable-rate debt this month after a letter-of-credit provider extended its guarantee, which had been scheduled to expire on November 25. We discussed this situation recently. The San Jose agency was in a bind because redevelopment agencies can’t make changes to certain financial arrangements while awaiting a California Supreme Court decision on new state laws affecting the field. The state this summer approved dissolving redevelopment agencies unless they make added payments to benefit local entities. The legislation has been challenged and the state’s high court expects to rule on its constitutionality in January. In the meantime, however, redevelopment agencies can’t issue bonds or take steps to change financial contracts. Under normal circumstances it wouldn’t be a big deal for this letter of credit to be extended. JPMorgan, the LOC provider, found a way to provide an extension through next July 1 by working with the trustee on the $95 million of variable-rate debt. In this way the redevelopment agency didn’t have to take any action.

October a Decent Month for New Muni Bonds: Thank Refundings

(Nov. 1, 2011) -- Overall municipal bond sales in California continue to lag last year’s pace, with new issuance down about 30% in the first 10 months of 2011 compared with the same period in 2010. New volume so far in 2011 is at $32 billion in California, down from about $46 billion for the same period last year, according to statistics tracked by Thomson Reuters. However, new sales in the state have picked up, thanks in part to the state’s return to the market after it agreed on a fiscal 2012 budget. California was running about 40% below last year’s pace in the first eight months of this year, and now it is only 30% behind. If you look at October alone for new municipal bond sales across the entire United States, it is worth noting that refunding deals about matched the volume for October 2010. However, new-money sales in October dropped about $10 billion from the same month in 2010, according to Thomson Reuters. This confirms our recent comments that refinancing of older bonds (known as refundings) is helping keep the new-issue market somewhat vibrant. Across the U.S., overall muni bond sales dropped 23% in October from the same month a year ago. That is deceiving, though, because taxable Build America Bond sales helped drive issuance last year as issuers rushed to sell BABs before federal authority to do so expired at the end of 2010. In reality, last month’s national municipal bond sales of $35 billion represented a decent healthy month by historical standards.

S&P Sees Redevelopment Bonds Doing Okay In Spite of New Law

(Oct. 25, 2011) -- Standard & Poor’s said many of the California redevelopment bonds it rates should continue to do okay, despite state legislation that has cast a cloud over the industry. “Although we recognize the legislation, if upheld, presents possible risks related to restrictions in agency resources and activities as well as the timing of revenue allocation, we do not expect either piece of legislation to affect overall credit quality for the majority of the bonds we rate that have good coverage of existing debt service by pledged revenue and pledged reserves,” S&P said. The California Supreme Court in January is expected to decide whether a new law to dissolve redevelopment agencies is constitutional. An alternative lets these agencies stay alive through added payments to other public entities. State officials have said that existing bond obligations must be honored. S&P still has a stable outlook on a majority of tax allocation bonds in California. “The dissolution legislation states its intent to honor revenue pledges associated with enforceable obligations, including bonds, of the former RDAs,” S&P noted. “Furthermore, where the dissolution legislation creates timing-of-payment hurdles in some areas, strong coverage by pledged revenue, pledged investment-grade reserve funds, and attentive administration should overcome these potential pitfalls. Future legislative efforts are likely to remedy these timing issues.” S&P recently issued a rating warning for several non-investment-grade TABs that already have relatively weak debt service coverage. 

Another Healthcare Issuer Will Provide New Single-A Bond Offering

(Oct. 20, 2011) -- The other day (see item below) we mentioned a couple healthcare bond sales that are pending. As long as we are mentioning single-A tax-exempt bond sales for health care groups, we also should note an upcoming deal of $110 million for the Fremont-Rideout Health Group. The City of Marysville plans to issue the revenue bonds, perhaps within a couple weeks or so. Moody’s Investors Service rates the bonds A2 with a “negative” outlook. As a positive, Moody’s cites a “notable turnaround” in fiscal 2011 and a “very strong balance sheet.” Several previous years of operating volatility and the size of the debt issuance prompted Moody’s to maintain the negative outlook.

Two Healthcare Issuers Will Provide New Single-A Bond Offerings

(Oct. 18, 2011) -- If California’s single-A general obligation bond isn’t offering enough yield for your taste this week, you can always dabble in some tax-exempt health-care bonds. A couple larger sales have popped up on our radar and should price soon. Catholic Healthcare West expects to sell roughly $350 million of revenue bonds through the California Health Facilities Financing Authority. Orange County Children’s Hospital also plans to sell more than $100 million of revenue bonds through CHFFA. Both issuers fall in the single-A category.

S&P Puts Some Low-Rated Tax Allocation Bonds on CreditWatch

(Oct. 17, 2011) -- Standard & Poor’s said it might downgrade several redevelopment agency bonds with non-investment grade ratings, citing risks from a new California law that could let the state take unencumbered funds that otherwise might help cover debt service. “The CreditWatch is due to the agencies’ reliance on unpledged resources to meet debt service payment obligations, particularly in light of new legislation regarding redevelopment agencies that we believe could further deteriorate already-weakened credit characteristics,” S&P said. Most of the 16 underlying ratings S&P is reviewing are already single-B or double-B. The California Supreme Court expects by January to decide the constitutionality of the new redevelopment law. State officials stressed that existing redevelopment bonds wouldn’t be forced into default by the new law. However, tax allocation bonds that were weak to begin with could default if they needed unpledged redevelopment agency resources, above and beyond tax increment revenue, to get by. The state wants to take those unpledged monies under the new law. Tax increment revenue used to back existing bonds couldn’t be diverted by the state.

Municipal Bankruptcy Bill Doesn't Cave In to Public Union Demands

(Oct. 12, 2011) -- California Governor Jerry Brown signed a bill that has been debated in public finance circles, though the legislation was watered down from past versions. The bill, pushed by public labor unions to protect their interests at the expense of taxpayers, sought to make it harder for local governments to pursue bankruptcy. The unions wanted some sort of mechanism for state approval before a locality could file for bankruptcy. The bill that was passed (not the only one introduced on this subject) requires a local government vote to declare a fiscal emergency prior to entering bankruptcy. Under another alternative in the bill, a government and creditors can enter negotiations ahead of such a filing. According to Brown’s signing message, "This bill does not prevent a municipality from declaring bankruptcy or even throw roadblocks in its path. The goal is to find alternative, less drastic solutions whenever possible."

Palm Drive Health Care District Sees (Small) G.O. Bond Upgrade

(Oct. 5, 2011) -- The Palm Drive Health Care District’s past emergence from bankruptcy recently helped boost its credit rating, just not by much. Even though the district continued to meet general obligation bond payments during bankruptcy, the G.O. rating only went up to CC from C from Standard & Poor’s. The small 37-bed hospital overseen by the district is subject to “operational volatility” and a competitive market, S&P noted. In addition, even after bankruptcy, the hospital still faces “thin financial flexibility.” The Palm Drive Hospital is located in Sebastopol. The health care district is studying several proposals from larger entities for potential affiliation, a move that could help bring added stability to its operations.

State's Return to Market, Refundings Help Volume Improve a Bit

(Oct. 3, 2011) -- The State of California’s return to the new-issue bond market helped bolster year-to-date volume figures, even though municipal debt sales across the state remain down from 2010. From January to September almost $27 billion of long-term municipal bonds were sold by issuers in California; during the same period in 2010 almost $40 billion of munis in California came to market, according to statistics compiled by Thomson Reuters. However, through September of this year, California issuance is now only down about 33% from the same period in 2010; it was down 40% when the January to August period was calculated. While it certainly helped to have the state back in the market after a budget-related delay, numerous other issuers also flocked to sell refunding bonds to take advantage of low interest rates. Across the entire United States issuers sold almost as many refunding bonds as they did new-money bonds in September, according to Thomson Reuters. So far in 2011, municipal bond issuance across the U.S. is down by about 36% compared with the same period in 2010; however, refunding sales are only down about 18% while new-money issuance is off by about 46%. State-related issuers will continue to help boost issuance in October, with decent-sized sales coming from the California State Public Works Board and a refunding of state economic recovery bonds.

Cities' Group Won't Give Up on New Bond Insurance Company Idea

(Sept. 27, 2011) -- Bond insurance, now more of a bit player in municipal finance, still is getting attention from some prospective players. In a press release yesterday, the National League of Cities once again raised the idea of pursuing a new public finance mutual bond insurance company. In essence the company would be owned by issuers, but it is expected it will pursue private capital from third-party investors. The league is pursuing the idea through an agreement with Radian Asset Assurance Inc., a subsidiary of Radian Group Inc. By having a company with only issuers as members, investors wouldn’t have to worry about any expansion beyond public finance. The former triple-A insurers lost their way when they expanded into guaranteeing riskier securities, such as mortgage-related instruments. “A mutual bond insurance company with a public finance book of business would restore capacity that was lost in recent years,” David Beidler, president of Radian Asset Assurance, said in the release. Assured Guaranty Municipal continues to insure municipal bonds, though at a much slower pace than in the past when guarantors had triple-A ratings. AGM also is seeking to demonstrate it can hold on to a double-A financial strength rating after the recent release of new stricter criteria from Standard & Poor’s for bond insurance. Radian previously bought a shell company, Municipal and Infrastructure Assurance Corp., that was going to be used by another company as a new insurer. It no doubt will take several months for these parties to explore the mutual bond insurance concept. One lingering question is whether the return on investment makes sense for third-party investors; another is whether a new insurer could earn a triple-A rating or would have to settle for something lower.

Los Angeles Unified School District Readies $400 Million Bond Sale

(Sept. 21, 2011) -- The Los Angeles Unified School District plans to sell $400 million of general obligation refunding bonds. A preliminary official statement dated September 20 is already circulating for the sale. As we have noted before, such refunding sales to refinance older bonds will keep popping up as long as tax-exempt rates remain so attractive for issuers.

A "Negative" Sector Outlook Looks at the Forest, Not the Trees

(Sept. 20, 2011) -- Moody’s Investors Service is continuing to maintain a “negative” outlook on the overall public finance sector, for both local and state governments, because of a weak economy and expectations for less federal funding in the future. These broad sector outlooks don’t mean individual credits will be downgraded; they do mean that general credit quality faces pressure because of various trends. “The challenges for states include the lackluster economic recovery and the stated intention of both political parties to reduce projected federal budget deficits,” Moody’s said. “This is certain to result in reduced funding of various types for state and local governments.” States have benefited from a recovery in tax revenue; the increase, however, is offset by the loss of federal stimulus money. “For local governments, which rely heavily on property tax revenues, the ongoing impact of the real estate market downturn has been particularly negative,” Moody’s said. “Despite modest economic growth and a boost in sales taxes, a robust recovery has failed to materialize, and revenues for local governments have declined.” There has been a positive development thanks to increasing light shown on one area of public finance. “The enactment of pension reforms by states and local governments over the last two years -- and improved market performance by pension funds -- are positive developments for the credit standing of states and localities,” Moody’s said.

Municipal Bond Funds See "Inflows" for Second Straight Week

(Sept. 17, 2011) -- Municipal bond funds saw the second straight week of “inflows” in the period ended September 14. The inflows totaled $470 million, according to Lipper FMI. A week earlier the inflows were $565 million. The two-week “inflow” streak broke a previous six-week streak of “outflows.”

California's $5.4 Billion Revenue Anticipation Note Sale Goes Well

(Sept. 15, 2011) -- The State of California finished its revenue anticipation note sale yesterday as good demand helped place $5.4 billion of debt. Individual investors apparently ended up ordering about two-thirds of the RANs though we aren’t sure how many they actually bought in the final tally. In any event the demand appeared solid thanks in part to a state budget with added safeguards, including automatic cuts if revenue doesn’t meet expectations. The tax-exempt yield on the June 2012 maturity was in the neighborhood of 0.40% for a note due in about nine months. In contrast, some measurements of one-year tax-exempt notes peg yields at about 0.30%.  

Assured Guaranty Says S&P Ignored Issues Over New Criteria

(Sept. 10, 2011) -- Dominic Frederico, the president and chief executive officer of Assured Guaranty Ltd., said this week that Standard & Poor’s ignored several concerns about new criteria that will affect bond insurers’ ratings. Assured Guaranty’s subsidiaries are the main active players left in insuring municipal bonds, following sharp downgrades of other triple-A insurers after the financial crisis. As such, the company has a lot at stake in avoiding an S&P downgrade because of the new criteria. Six issues raised about the proposed criteria were ignored, according to a presentation Frederico made on September 7 at the Keefe, Bruyette & Woods 2011 Insurance Conference. Another change, over increasing municipal capital charges, was lowered from the proposed level. However, the municipal capital charges were still increased from past years “without support,” Frederico’s prepared presentation said. A limit on single-risk exposure was replaced by an “even more punitive test,” Frederico said. Assured Guaranty will continue to evaluate the effect of the new criteria on its financial strength ratings. The company already has been taking steps to address revised capital requirements.

Municipal Bond Funds See "Inflows" to End Six Weeks of Outflows

(Sept. 10, 2011) -- Municipal bond funds ended a six-week run of “outflows” in the week ended September 7, according to Lipper FMI. “Inflows” were $565 million in the latest week.

Montebello's Private Placement Note Sale Cleared for This Month

(Sept. 8, 2011) -- We noted earlier this summer that the City of Montebello was taking steps to restore fiscal balance. Among other things, it put together a balanced budget with a $1 million reserve. Now the city is poised to sell $3.9 million of short-term notes in September to cover any cash-flow dips in the current year. Montebello said in a Business Wire release this week that it is going forward with the sale after a superior court dismissed a lawsuit over a past tax and revenue anticipation note sale. The suit had questioned the TRAN sale because of the way it was bought by the city’s redevelopment agency. The suit was dismissed because the loan already was repaid, according to the city’s release. The new short-term notes will be sold through a private placement. “I am confident that the City of Montebello has turned the corner,” Mayor Art Barajas said in the release. “We are in our strongest financial position in recent years.” For example, “the city’s past practice of shifting restricted funds to balance the bottom line of the General Fund account has stopped.”

California's $5.4 Billion Note Sale Lands Top Short-term Ratings

(Sept. 2, 2011) -- If our memory serves us right, California has landed a top rating from Standard & Poor’s for its revenue anticipation notes for the first time since before the financial crisis and recession hammered the state’s finances. S&P yesterday assigned an SP-1+ rating for the California $5.4 billion RAN sale, which is scheduled for September 15. The notes will mature in June 2012, though some also could mature in May 2012 as well. “The combined effect of a smaller cash flow borrowing, reduced general fund spending, the addition of some payment deferrals, active management of the timing of some disbursements, and bolstered alternative borrowable resources, in our view, help to produce very strong projected cash coverage of the RANs at maturity,” S&P said in a statement. “In our analysis, the state’s projected strong level of cash coverage helps allow the state to withstand a variety of our hypothetical stress scenarios, including some that are relatively severe, and still repay the RANs with an excess cash cushion.” Moody’s Investors Service yesterday gave the RANs its highest MIG 1 rating. The notes help the state deal with seasonal cash flow imbalances in its general fund, due in part to the timing of tax receipts.

Municipal Bond Funds See "Outflows" for Sixth Consecutive Week

(Sept. 2, 2011) -- For the sixth straight week, “outflows” hit municipal bond funds. The outflows totaled $282 million in the week ended August 31, according to Lipper FMI. While it is difficult to pinpoint reasons for the recent trend, a seller who was looking to get out at the “top” after the recent rally might be choosing an opportune time. But investors needing tax-exempt income often stick with the funds through thick and thin.

City of Vernon Faces Continuing Scrutiny: This Is a Good Thing

(Aug. 31, 2011) -- The City of Vernon may have dodged the bullet of disincorporation, but it is still facing a healthy dose of scrutiny. We say “healthy” because taxpayers and bondholders both benefit from reviews that examine the decision making of public entities. Last week we noted that state legislation to disincorporate Vernon was probably in trouble after Los Angeles County supervisors balked at the notion. The legislation was in fact stopped by a Senate vote this week. However, Vernon’s scrutiny is far from over. State Senator Kevin de León, who helped stop the bill, yesterday requested a legislative audit of Vernon’s power utility. “The city of Vernon’s finances have been called into question and the public is entitled to a thorough and transparent review of those finances,” De León said in a release. “The public is also entitled to more knowledge about the management and compensation of the city’s utility. The era of self-dealing in Vernon is over and this audit will help ensure that happens.” De León also has called for several other reforms at the industrial city. Assembly Speaker John Perez had pushed for the legislation to dissolve Vernon, and he has expressed disappointment with De León’s efforts to help block the bill. We also noted recently that the Internal Revenue Service is reviewing Vernon’s 2009 Series A electric system bonds to ensure compliance with rules governing tax-exempt debt issuance. Vernon is going to face continued scrutiny from several directions and, in the long run, that is a good thing.

Municipal Bond Funds See "Outflows" for Fifth Consecutive Week

(Aug. 26, 2011) --We haven’t been mentioning the investment trends for municipal bond funds lately, mainly because a sense of equilibrium returned after the funds ended a 29-week period of “outflows” earlier this year. However, there has been a bit of a trend recently, with weekly “outflows” from the municipal funds occurring for five straight weeks. This includes $148 million of outflows in the week ended August 24, according to Lipper FMI. That is less than the $323 million of outflows recorded a week earlier. Some market timers might have been tempted to sell after a recent powerful rally, though the reasons for such trends aren’t always easy to pin down.

California General Obligation Bond Sale Targeted on September 20

(Aug. 22, 2011) --The State of California is looking at September 20 as the date for an upcoming general obligation bond sale. That timing could change, but that is the target date now listed by the state treasurer’s office. We imagine it will be a billion-dollar-plus offering. As we explained last week, the state is lining up several long-term bond sales that had been delayed until a new budget was in place. At least two G.O. sales are expected before the end of the year, including the one in September.

California's Revenue Anticipation Notes Planned in September

(Aug. 17, 2011) -- Elsewhere on August 17 we discuss some upcoming long-term bond sales planned by the State of California and associated entities. We also mention the roughly $5 billion California revenue anticipation note sale planned for the week of September 12. This sale will pay off a bridge loan the state obtained to avoid potential market uncertainty amid the federal debt ceiling impasse. California initially had planned to sell RANs in late August, but the interim loan was obtained instead just in case the debt ceiling wasn’t raised; federal leaders did reach a last-minute agreement. While most of our readers focus on longer-term bonds, sometimes they park money in state RANs to take advantage of yield premiums California has often paid over notes from local issuers. This year, however, the budget agreement has relieved some of the usual concern about state finances, especially because “triggered” spending reductions will kick in if revenue falls short of projections. As a result, while the state still might pay a yield premium because of the size of the sale, investors shouldn’t expect much of a windfall (especially after recent tax-exempt note sales offered one-year returns of about 0.30%). The Federal Reserve’s recent resolve to keep rates low for a couple more years also might allay investor concern about a yield jump in coming months. States and localities sell such notes for cash-flow purposes because tax revenue often varies throughout the year while expenses remain steadier month-to-month.

California Supreme Court Helps With Redevelopment Review

(Aug. 12, 2011) -- The California Supreme Court did everyone a favor by agreeing to review the state’s new redevelopment legislation. The court has agreed to review the legislation directly rather than have challenges go through lower courts. The state’s high court will begin hearing arguments in September and a decision is expected by January 2012. The new law doesn’t get rid of redevelopment agencies outright, as Governor Jerry Brown had initially proposed. The local agencies can stay alive by making increased payments to other public entities. However, cities and others argue the new law violates a voter-approved proposition that prevents the state from raiding local tax funds. The Supreme Court also blocked most of the new law from taking effect until a court decision is out. However, redevelopment agencies can’t take on new debt, enter new contracts, or acquire property while the high court is considering the case.

California Gets an Initial Red Flag on Optimistic Revenue Hopes

(Aug. 10, 2011) -- The State of California’s first month in the new fiscal year showed $539 million less revenue than projected for the general fund. That is about 10% less than expected in July. “While July’s revenues performed remarkably similar to last year’s, they still did not meet the budget’s projections,” California Controller John Chiang said in a statement. “While we hope for better news in the months ahead, every drop in revenues puts us closer to the drastic trigger cuts that could be imposed next year.” After California lawmakers couldn’t agree on extending tax increases, they passed a fiscal 2012 budget that counts on $4 billion of revenue from an improved economy or other factors. If that money doesn’t materialize, deeper cuts will be triggered in various programs, including education. One month doesn’t make a fiscal year. However, it is clear that a robust economic rebound is elusive.

Memo to Chicken Littles: Municipalities Dealing With VRDB Issues

(Aug. 9, 2011) -- As 2011 dawned, the Chicken Littles of the world were clucking about all kinds of alleged “risk” in the municipal bond world. One of their concerns involved whether issuers with variable-rate debt could replace expiring bank “facilities” backing such bonds. This was another tempest in a teapot. More than 99% of facilities supporting variable rate debt rated by Moody’s Investors Service, and due to expire in the first two quarters of this year, were in fact dealt with successfully, the rating agency said. These bank commitments “were extended or have been replaced by new facilities provided by other banks, or were refinanced,” Moody’s said. “Despite the continued headwinds faced by both municipal issuers and banks, most public finance sector issuers had a variety of options available to them to address expiring facilities.” This has occurred even though an “unprecedented” amount of bank facilities expired in 2011, reflecting big variable-rate issuance in 2007 and 2008, before the financial crisis hit. Among recent trends, direct loans from banks becoming more common as an alternative to bank-supported variable rate demand bonds, Moody’s said.

Muni Bond Fund "Outflows" Jump; A Bad Timing Award for Sure

(Aug. 5, 2011) -- Some investors yanked money out of municipal bond funds at the wrong time in recent days. “Outflows” from the muni funds jumped in the week ended August 3, totaling $861 million, according to Lipper FMI. That is the biggest weekly outflow in more than three months. The Bond Advisor suspects that some of the “outflows” reflected a reaction by investors to negative media stories, specifically the usual doom-and-gloom predictions about local and state governments in case the federal debt ceiling wasn’t raised. Well, the debt ceiling was raised, easing that concern. Moreover, tax-exempt bonds staged a powerful rally in the last week for other reasons, and investors who jumped out of the funds missed out on even higher prices. Municipal bond inflows have occurred in five of the last nine weeks, following a 29-week period of “outflows.”

Federal Debt Ceiling Agreement Alleviates One Muni Bond Concern

(Aug. 2, 2011) -- The agreement on raising the federal debt ceiling has one positive for municipal bonds. It means there won’t be a bunch of doom-and-gloom stories to worry about if the agreement hadn’t been reached. Over time any cuts in federal spending will have some affect on states and localities, but there is time to analyze the eventual changes once it is clearer what they will be.

New California Bond Sales About Half of 2010 Pace Through July

(Aug. 1, 2011) -- New bond sales by California bond issuers are running 46.7% behind the dollar volume of 2010 so far this year. Long-term bond sales in California totaled almost $18 billion from January through July of 2011, according to Thomson Reuters statistics. That is down from $33.8 billion for the same period last year. Across the U.S. municipal bond sales are down 39.5% this year compared with the same period in 2010, according to Thomson Reuters. California’s issuance has been affected in part by the absence of the state in selling bonds during its protracted budget debate. July issuance across the U.S. declined by almost 17% over 2010 July levels. New-money bond sales across the U.S. are off 45.6% so far this year, according to Thomson Reuters, while refundings dropped 26.2%. However, refundings in July almost matched the 2010 level, thanks to attractive tax-exempt rates from an issuer’s standpoint. Refundings refinance older higher-cost debt.

California Sells $5.4 Billion of "Interim" Notes Amid Federal Debate

(July 27, 2011) --  The State of California has obtained a $5.4 billion bridge loan to avoid potential market uncertainty in case a federal debt ceiling impasse continues into August. Eight banks bought the "interim" RANs, which will mature on November 22, 2011. They can be paid off earlier. The yield on the notes is 0.237%. California Treasurer Bill Lockyer had planned in late August to sell a similar amount of revenue anticipation notes. However, “if Congress and the President do not reach an agreement to raise the debt ceiling by Aug. 2, capital markets likely would be thrown into chaos,” Lockyer said in a statement. “Additionally, if the federal government prioritizes payments to conserve cash and avoid default, California and other states could see a disruption in their payments for health care, transportation and other services.” Lockyer said the interim financing avoids any potential fallout from a continuing debt ceiling impasse. A regular RAN sale is still planned to pay off the interim loan.

Municipal Bond Funds See More "Inflows" for Second Week in Row

(July 22, 2011) -- Municipal bond funds recorded inflows for the fifth week out of the last seven weeks, according to Lipper FMI statistics. Inflows for the week ended July 20 totaled $123 million, following $367 million of inflows a week earlier. Municipal bond funds, in the week ended June 8, broke a 29-week streak of “outflows.” As we keep saying, recent “flow” numbers are small enough either way to suggest some sort of temporary equilibrium for the funds.

Local Redevelopment Fight Continues; Some Agencies "Active"

(July 20, 2011) -- Don’t expect much clarity on the fate of California’s redevelopment agencies anytime soon. Although the recent budget agreement supposedly killed off local redevelopment efforts, some agencies already are using a state-provided alternative that lets them make bigger payments to other local governments in exchange for staying active. In addition, this week redevelopment supporters filed a lawsuit challenging the state’s action. It is probably going to take many months for that suit to get ruled on and then months more for it to move to an appellate decision. Unless, of course, the state’s high court hears it directly. (Remember, existing tax allocation bonds can continue to benefit from tax increment revenue to get paid off. This payment stream remains even if a locality stopped future redevelopment efforts.) The state budget uses $1.7 billion of added payments from redevelopment agencies to help balance this year’s budget. San Diego is one example of a locality that is staying active in redevelopment; the city council has voted to make this year’s state payment and bigger payments to other local governments in future years in order to stay active.

Municipal Bond Funds See "Inflows" As Positive Trend Continues

(July 15, 2011) -- Municipal bond funds recorded inflows for the fourth week out of the last six weeks, according to Lipper FMI statistics. Inflows for the week ended July 13 totaled $367 million, reversing $272 million of outflows a week earlier. Municipal bond funds, in the week ended June 8, broke a 29-week streak of “outflows.” Recent “flow” numbers are small enough either way to suggest some sort of temporary equilibrium for the funds.

California Revenue Trend Stays Positive in June, Beats Estimate

(July 12, 2011) -- California’s general fund revenue in June was $440.5 million higher than projected, or 3.7% above estimates, the state controller’s office said. Personal and corporate income tax collections were both about 7% better than expected, while sales tax revenue came in about 1% higher than projected. The newly enacted budget counted on $1.2 billion of added revenue in May and June. The actual number was $849 million of added revenue for those two months, the financial report said. For all of fiscal 2011, which ended June 30, California took in $6.6 billion more general fund revenue than it did in fiscal 2010. “The latest report shows many positive signs,” Controller John Chiang said in a statement. “The state is spending less than it took in, we are borrowing less cash, and all three major sources of revenue show signs of growth. But the success of the newly-adopted state budget will depend on continued economic expansion throughout the year.”

A Couple Bond Sales Loom on the Horizon for Week of July 18th

(July 11, 2011) -- We previously mentioned that the City of Los Angeles will be selling general obligation bonds in July. The new-money portion of that sale, around $117 million, is expected to sell July 19 through competitive bids from underwriters. A $380 million G.O. sale of refunding bonds is expected to sell competitively on July 21. The Modesto Irrigation District is circulating a preliminary official statement for $110 million of tax-exempt electric system refunding revenue bonds. As far as we know this deal could price during the week of July 18. However, once the prospectus is out a pricing is always possible earlier. Among other deals that might price in coming weeks, the Turlock Irrigation District board of directors will vote July 12 on an agenda item authorizing up to $230 million of first priority subordinated lien revenue refunding bonds. Standard & Poor’s already has assigned a single-A rating to the issue.

California Outlook Revised to "Stable" Thanks to New Budget: S&P

(July 7, 2011) -- The outlook on bonds tied to the State of California is now “stable” instead of “negative” after the recent budget agreement helped eat into a structural deficit, Standard & Poor’s said. “Because the state has improved the structural alignment between its recurring revenues and expenditures, we now view the state’s rating outlook as stable through the two-year outlook horizon,” S&P said in a statement. Most of the budget solutions “are largely realistic.” Even so, the recently-passed budget represents a “missed opportunity,” S&P said, because California put off dealing with a backlog of past one-time fixes (such as internal borrowing from various state funds). S&P affirmed its A-minus rating on California general obligation bonds.

San Francisco PUC Water Bond Sale Might Be Held This Month

(July 5, 2011) -- We mentioned the other day that the San Francisco Public Utilities Commission is lining up a bond sale of more than $600 million, based on a new rating assignment. The water revenue bonds are rated AA-minus by Standard & Poor’s. The authorized sale is up to $700 million, according to a resolution approved by the Board of Supervisors in June. It appears competitive bids from underwriters could be taken sometime in July. The lion’s share of the sale ($565 million) will finance work for the water system improvement program. Other water revenue bonds will pay for water main and Hetch Hetchy improvements. A $42 million water refunding bond sale also was rated.

San Francisco PUC Gets Rating for $700 Million-plus Water Bonds

(July 2, 2011) -- The San Francisco Public Utilities Commission could be lining up a sale of more than $600 million in Series 2011A bonds, based on a new rating assignment. The water revenue bonds are rated AA-minus by Standard & Poor’s. Another $70 million of water revenue bonds are being sold in two other series, based on the S&P rating assignment, and a $42 million water refunding bond sale also was rated. We will add details when appropriate.

Municipal Bond Funds See "Inflows" for Three Weeks in June

(July 1, 2011) -- Municipal bond funds recorded inflows for the third week out of the last four weeks, according to Lipper FMI statistics. Inflows for the week ended June 29 totaled $163 million, up from $137 million of inflows a week earlier. Going back another week there were outflows of $172 million. The municipal bond funds in the week ended June 8 broke a 29-week streak of “outflows” with $274 million of inflows. As we noted a couple times recently, these numbers are small enough either way to suggest some sort of temporary equilibrium for the funds.

San Diego Community College Bonds, Aa1 and AA+, Pricing Soon

(June 30, 2011) -- Earlier in June we noted that the trustees of the San Diego Community College District had approved moving forward on a general obligation bond sale from two past election authorizations (2002 and 2006). A $350 million portion of that new-money sale might price next week, after the July 4^th holiday. A smaller G.O. refunding piece of about $16 million also is set to price. The deal will get the attention of conservative investors thanks to a Moody’s Investors Service grade of Aa1 and a Standard & Poor’s rating of AA+, or one notch below triple-A. The rating reflects “the district’s enormous tax base and solid resident wealth levels,” Moody’s said in a report.

Finding One Silver Lining Even as Downgrades Outpace Upgrades

(June 28, 2011) -- Want some sort of silver lining in the generally negative news about the state of public budgets? In the first quarter of 2011 four out of five rating actions by Fitch Ratings were “affirmations” of existing grades. Also, 91.3% of Fitch’s ratings had “stable” outlooks at the end of the first quarter. That is worth mentioning since the Chicken Littles always see municipal bonds as going to hell in a hand basket. Of course, a dose of reality confirms the fact that times are tougher. U.S. public finance downgrades outnumbered upgrades for the ninth consecutive quarter in the first quarter of 2011, Fitch notes. Negative rating watches outweighed positive watches by 15 to 1, Fitch added.

Municipal Bond Funds See "Inflows" for Two Out of Three Weeks

(June 24, 2011) -- Municipal bond funds recorded inflows for the second week out of the last three weeks, according to Lipper FMI statistics. Inflows for the week ended June 22 totaled $137 million, following outflows a week earlier of $172 million. The municipal bond funds in the week ended June 8 broke a 29-week streak of “outflows” with $274 million of “inflows.” As we noted last week, these numbers are small enough either way to suggest some sort of temporary equilibrium for the funds.

Montebello Takes Budget Action to Ease Concern on City Finances

(June 23, 2011) -- Montebello’s City Council has approved a budget plan that will let the city move forward on pursuing a borrowing designed to avoid a potential cash crunch. The budget and a broader fiscal recovery plan should help ease concern about Montebello’s situation, which had received some well-deserved negative publicity. The total general fund operating budget is about $45 million. Montebello’s ability to close a remaining deficit of about $2.7 million hinges on enactment of various steps, including a continuation of employee wage concessions, according to documents prepared for the City Council’s June 22 meeting. Adoption of other user fees and miscellaneous spending cuts, including employee furloughs, also will help close the gap. Montebello’s staff also has drafted for the City Council a “Statement of Financial Goal, Principles & Guidelines” that was proposed for adoption by resolution. “This Statement is designed to provide a framework for future decision making and actions which will help to restore the City’s creditworthiness in the financial marketplace and will be used to evaluate future financial actions and decisions,” a staff report said. “After adoption by the City Council, any item appearing on a future City Council agenda which has a financial consequence will include an evaluation of consistency with the Statement of Financial Goal, Principles & Guidelines.”

San Diego Community College Eyes $700 Million G.O. Sale (AA+)

(June 18, 2011) -- It is encouraging to see some larger bond sales are popping up on our radar, and by that we mean $100 million and up. The trustees of the San Diego Community College District at a May 26 meeting approved moving forward on a general obligation bond sale from two past election authorizations (2002 and 2006). The sale could total about $700 million and will get the attention of conservative investors thanks to a Standard & Poor’s rating of AA+, or one notch below triple-A. In addition, a smaller G.O. refunding also is planned by the college district. The rating reflects “such factors as the district’s location within the deep and diverse San Diego metropolitan economy, willingness to reduce expenditures, and strong-to-very-strong available general fund balances,” S&P said in a report.

Saratoga Readies a G.O. Sale With a Triple-A Rating from S&P

(June 18, 2011) -- Looking for an upcoming triple-A bond sale? The City of Saratoga’s council recently approved selling about $12 million of general obligation bonds to refund the city’s existing 2001 G.O. debt (Community Library Project). Standard & Poor’s rates the bonds AAA. We haven’t seen a Moody’s rating yet, but we would expect Aa1 at a minimum and perhaps triple-A. Saratoga is going to sell the bonds by taking competitive bids from underwriters. We haven’t seen a sale date yet. Saratoga is about 10 miles southwest of San Jose and benefits from a wealthy residential base.

Brown Is Right With Budget Veto; Muni Fund "Outflows" Return

(June 17, 2011) -- California Governor Jerry Brown did the right thing by vetoing the budget passed by his fellow Democrat legislators this week. The governor would be far wiser to seek a comprehensive plan that might let citizens vote on extending tax increases in exchange for a spending “cap” on future state budgets, as well as some sort of pension reform for public employees. In other news for municipal bonds, “outflows” returned for bond funds. Lipper FMI said outflows for the week ended June 15 totaled $172 million. The municipal bond funds a week earlier broke a 29-week streak of “outflows” with $274 million of “inflows.” These numbers are small enough either way to suggest some sort of temporary equilibrium for the funds.

Sales Tax Collections Keep State Revenue Ahead of  Projections

(June 16, 2011) -- California general fund revenue through May (for fiscal 2011) is $408 million ahead of revised budget estimates, the state controller’s office said in a new report. Sales tax collections played a big part, ahead of projections by $306 million, the report said. Personal income and corporate taxes didn’t vary much from the estimates, which were revised in May. The fiscal year ends on June 30, 2011.

Chowchilla Staff Proposes "Structurally Balanced" FY 2012 Budget

(June 14, 2011) -- The City of Chowchilla has been presented with a proposed budget for fiscal 2012 that is “structurally balanced,” a city agenda item noted this week. This wouldn’t be worth mentioning in some instances, but in Chowchilla’s case it is significant that the city is returning to balance. “The city’s financial situation seems to be stabilizing,” City Administrator Mark Lewis said in a report to the city council for its June 13 meeting. “For the most part at this time, our major revenue sources have appeared to stabilize,” but at a “significantly lower level” than they were before the recession. Lewis commended the City Council for making “timely critical decisions” on staff and spending reductions. This action kept the city “financially solvent.” (In past budget workshops a Chapter 9 bankruptcy filing had appeared on a list of options; however, this option also was crossed out because of the high expense, including legal fees, of such a drastic action. Fortunately it was never needed.) The city is ending fiscal 2011 with a positive fund balance from operations of $272,400. Other one-time transactions, including the sale of property, provided money that Lewis recommends setting aside as a cushion for “unforeseen occurrences.” Under the proposed 2012 budget (which begins July 1), revenue and expenses are “structurally balanced,” Lewis said. Chowchilla also saved money the last year by using the debt reserve fund to make payments on 2005 lease revenue bonds (Civic Center Project). We haven’t been able to access the actual proposed budget detail yet for fiscal 2012. However, we assume the city plans to resume payments (but we don’t know that officially yet). After all, it is hard to imagine the city could justify setting aside money for “unforeseen occurrences” and at the same time miss debt payments. We are seeking those debt-related details so we don’t have to go on speculative assumptions on our part. We also assume, but don’t know for sure, that the proposed spending plan would discuss replenishing the two reserve fund draws in July 2010 and January 2011. The 2005 issue included a bond insurance policy by the former XL Capital Assurance (now Syncora Guarantee Inc.), a company that was left in rough shape by losses on riskier assets such as mortgage-backed securities.

More New-Issue Pricing Examples Wrap Up a Relatively Busy Week

(June 11, 2011) -- When we prepared our June 10 weekly summary of new-issue bond pricings here, we were aware that a handful of deals were pending near the end of the week. Here is a quick Saturday update on those issues. The Sacramento City Unified School District did price its general obligation refunding bonds. They are rated Aa3 by Moody’s Investors Service after a recent one-notch downgrade. We believe these were the final pricing levels. The five-year bond yielded a tax-exempt 1.66% and a 10-year, 3.16%. The 15-year yielded 4.28%. The bond due in 2029 yielded 4.42%. The Redondo Beach Unified School District priced G.O. bonds as well. Most of the maturities were structured as zero-coupon bonds, including a reported yield at 2.68% in five years. We believe there was a current-interest bond due in 2034 that yielded somewhere in the neighborhood of 4.95%. The St. Helena Unified School District priced a smaller issue of G.O. bonds with a high AA+ rating. This debt, too, was structured as zero-coupon bonds with reported yields of 5.81% in 15 years and 6.125% in 20 years. Municipal bond funds or other bigger investors are certainly buying some of the maturities in the above deals because there are million-dollar-plus trades. We neglected to mention that Oxnard priced its lease revenue bonds with an A+ rating. Bonds that carry insurance from Assured Guaranty Municipal yielded 3.50% in 2018, 4.30% in 10 years, and 5.00% in 14 years. A tiny G.O. sale by the Forestville Elementary Union School District also carried AGM insurance and yielded 2.58% in 2016, 4.02% in 10 years, and 4.60% in 14 years. A 25-year maturity yielded 5.25%.

Municipal Bond Fund Inflows End a 29-Week Streak of Outflows

(June 10, 2011) -- The municipal bond “outflow” streak is finally over, based on Lipper FMI weekly statistics. Municipal bond funds saw inflows of $274 million in the week ended June 8, according to Lipper FMI, ending a 29-week streak of outflows. Analysts had been expecting inflows at some point, especially because the middle of the year is a time when a lot of interest payments roll in combined with principal redemption. A lot of investors decide to re-invest that money in tax-exempt bonds. In addition, people have come to their senses and realized the predictions of widespread municipal bond defaults were outright lies. Even so, some investors will remain leery of the bond funds because of the risk rising interest rates will put a dent in future net asset values.

Rio Vista Voters Reject Initiative to Slash Water and Sewer Rates

(June 9, 2011) -- Voters in Rio Vista this week rejected a proposal to slash water and sewer rates. A 48-page city report on the proposed rate cut had warned that the city would face several challenges if the rates were lowered. For example, the city questioned whether it could meet bond covenants on year 2000 debt issued for Beach sewer system improvements. The February city report also had noted that the “negative fiscal impact of this initiative on Rio Vista is significant.“ Among other things, “the rate reduction does not provide Rio Vista with sufficient revenue to cover the cost of providing water and sewer services.” Turnout of registered city voters was about 45%. The votes against the rate cuts totaled 1,206 and those for, 979. Those who opposed the measure represented 55.19% of the votes cast, according to Solano County special election tabulations. The defeated plan would have cut rates by roughly half beginning on July 1. Rio Vista is located southwest of Sacramento.

More "Essential-Purpose" New Bonds Looming on the Horizon

(June 8, 2011) -- We often have made the point, during rougher economic cycles, that “essential-purpose” municipal bonds remain a good investment. One example: water district revenue bonds that often fare well through good and bad times. People, or at least most people, keep washing dishes, feeding plants, taking showers, and flushing toilets during recessions and good times alike. Granted, conservation efforts and economic downturns can affect consumption, new water hook-ups, etc., but in general these bonds are steadier performers. That doesn’t mean there won’t be occasional downgrades, including in smaller less diversified districts or in areas where new growth that didn’t materialize had been projected to boost revenue. A couple more new bond sales should price soon from this “essential-purpose” sector. The Contra Costa Water District soon plans to sell $66 million of water revenue refunding bonds; Fitch Ratings already has assigned an AA+ grade, one notch below triple-A. The San Bernardino Valley Municipal Water District soon plans to sell $9 million certificates of participation with the highest triple-A rating from Standard & Poor’s. While some investors shy away from COPs, each deal is different and lease-related structures can be strong. For example, the San Bernardino district’s COPs will benefit from “extremely strong debt service coverage” of no less than 17.5 times from 2012 to 2015 as the debt service kicks in “fully,” S&P noted. The COPs also will be the only debt of the district since other bonds are being paid off in fiscal 2011. The district serves a broad and stable service area, benefits from strong financial management, and maintains “extremely strong cash reserves,” S&P said. It also has an ample water supply. The regional agency was formed in 1954 and covers the eastern two-thirds of the San Bernardino Valley; cities served include San Bernardino, Redlands, Rialto, Colton, Loma Linda, and several others.

Stupid Bill for Locals With Stupid Leaders Passes Stupid Assembly

(June 6, 2011) -- Though the action didn’t get a lot of attention, the California Assembly last Thursday passed a bill that would make it more difficult for localities to pursue bankruptcy protection. Assembly Bill 506 passed along party lines. It would require some sort of neutral evaluation before a locality can pursue a bankruptcy filing. The Bond Advisor has noted before that such legislation stinks. Public unions want it passed so poorly-run localities with employment contracts that screw taxpayers can’t use bankruptcy as a bargaining chip to get concessions. We’ll see if the state Senate is stupid enough to pass the bill.

Municipal Bond Fund "Outflows" Again; Reach 29 Straight Weeks

(June 3, 2011) -- Municipal bond fund “outflows” were $436 million in the week ended June 1, according to Lipper FMI, up from $296 million of outflows a week earlier. The outflows were $108 million in the week ended May 18 and $95 million in the week ended May 11. This week’s outflows were the largest since the $796 million recorded the first week in May.

Fremont Redevelopment Agency Deal Returns to Our Calendar

(June 2, 2011) -- Earlier this year, as redevelopment agencies rushed to sell bonds because of Governor Jerry Brown’s proposal to curtail these local entities, we mentioned that the Fremont Redevelopment Agency may price $138 million of tax allocation bonds to help pay for a new Bay Area Rapid Transit station. However, in March we removed the bonds from our sales calendar because the city had decided against moving forward on the deal. The city cited uncertainty because of Brown’s proposal, and Fremont wasn’t sure the deal could be assembled fast enough because it required an agreement with BART on the station’s construction. We have put the deal back on our calendar because Standard & Poor’s rated the bonds A+ the other day. We couldn’t find in Fremont’s agendas where it had decided to get the deal going again, but for now we will assume it might be on the horizon again. We previously thought the deal merited attention as a solid single-A credit. Brown’s revised budget in May kept his proposal to curtail redevelopment, though it still isn’t clear the legislature will pass it.

California Municipal Bond Sales Down By About 70% So Far in 2011

(June 1, 2011) -- New municipal bond sales by California state and local issuers are still down by about 70% so far this year compared with the same period in 2010. Sales totaled $7.6 billion through the end of May, down from $25.4 billion for January to May, 2010, according to statistics compiled by Thomson Reuters. Across the United States, municipal bond sales are down by about 51% this year. California is still the second most-active market this year for new issues, trailing only New York. The State of California has a “moratorium” on new bond sales until its budget is in place. This continues to be a big factor in why overall issuance is off this year. Governor Jerry Brown’s revised budget doesn’t include a lot of bonds for later this year, either. A surge in taxable Build America Bond sales at the end of 2010, before that federal giveaway program expired, essentially stole volume from 2011. A wave of “negative” press about municipal bonds sent rates higher earlier this year and sidelined issuers who could wait out the sour market. However, it is now more of an issuer’s market now after a strong spring rally pushed yields lower. Across the U.S. total long-term bond sales have reached almost $84 billion so far this year, Thomson Reuters statistics show. About $5 billion of those carried bond insurance. About $47 billion of the sales were new-money and $24.6 billion refunded existing existing issues. Another $12 billion was a combination of new-money and refunding deals.

Municipal Bond Funds Still Leak "Outflows"; 28 Straight Weeks

(May 27, 2011) -- Municipal bond funds can’t quite turn the corner on ending “outflows.“ Municipal bond fund “outflows” were $296 million in the week ended May 25, according to Lipper FMI, up from $108 million of outflows a week earlier. They were $95 million in the week ended May 11, compared with the $796 million recorded the first week in May. This was the 28^th straight week of outflows, based on Lipper FMI reports. If you were going to buy the funds, the time to do so was during the January 2011 panic when stupid and uninformed investors dumped municipal bonds because of doom-and-gloom predictions by so-called “pundits” and “experts.” Some investors are warier about putting money in funds, or leaving it there, if they are concerned about inflation, rising interest rates, etc. Of course, if income generation is your goal, the best way to do that is buying municipal bond directly, though the funds can provide diversification, maturity management, etc.

Compton City Council Authorizes Staff Layoffs on Deficit Concern

(May 25, 2011) -- A couple weeks after a bond downgrade, the City of Compton is moving closer to laying off city workers over a budget deficit. Compton’s City Council approved the layoffs at a meeting last night. The specific implementation is in the hands of city management. Earlier this month Standard & Poor’s lowered its “underlying” credit rating on City of Compton lease-revenue bonds by three notches, to BBB-minus from A-minus, because of a recent pattern of deficit spending. Deficits from fiscal 2008 to 2010 were about 20% of the budget for each year, S&P said. The rating agency left a “negative” rating outlook on Compton because city officials had discussed budget cuts, but hadn’t identified or approved specific action as of earlier this month.

Municipal Bond Fund "Outflows" Remain Low for Another Week

(May 20, 2011) -- Municipal bond fund “outflows” remained relatively low in the latest week. Outflows were $108 million in the week ended May 18, according to Lipper FMI. They were $95 million in the week ended May 11, well below the $796 million recorded the first week in May. This was the 27^th straight week of outflows. Another fund tracker, the Investment Company Institute, actually showed a small level of “inflows” for municipal bond funds during a week earlier in May. If you were going to buy the funds, the time to do so was during the January 2011 panic when stupid and uninformed investors dumped municipal bonds because of doom-and-gloom predictions by so-called “pundits” and “experts.”

Brown's Revised Budget Plan Calls for Reducing New Bond Sales

(May 17, 2011) --A lower deficit estimate and a lower target for new general obligation bond sales are a couple of the items that merit attention in Governor Jerry Brown’s revised budget plan. (We plan to discuss Brown’s revised budget in more depth in our May print edition that is being mailed in a few days.) Growing tax collections let Brown revise the expected deficit downward, to a bit below $10 billion. He still wants to extend existing “temporary” tax increases for five years, though the income-tax increase would only apply for four years. What if voters didn’t endorse such tax increases after, and assuming, the legislature puts them in place? That is one big question of a “Plan B.” Brown still wants to eliminate local redevelopment agencies, a proposal we consider downright stupid. A previous vote on this proposal fell a vote short. Brown wants to cut the state’s issuance of general obligation bonds this year. The state already passed on its typical spring borrowing. “It is estimated that only a limited amount of new bonds will need to be issued in the fall for new and existing projects,” Brown’s revised budget says. That is because Brown wants the state to use existing bond cash “more efficiently,” citing a balance of more than $11 billion of proceeds that remain unspent from past sales. In fiscal 2012, which begins this July 1, Brown proposes selling only about $4 billion of G.O. bonds, including about $1.5 billion this fall. This decline in new supply will probably help keep the state’s “penalty” spread narrower relative to higher-rated municipal bonds than the penalty would be with higher issuance. This spread also will be driven by whether investors see a final budget as a credible way to limit the state’s chronic deficits.

Municipal Bond Fund "Outflows" Plunge From Recent  Levels

(May 13, 2011) -- Municipal bond funds have now seen weekly “outflows” for half a year. That is the bad news from the funds’ standpoint. The good news is that the “outflows” plunged in the latest period. Outflows were only $95 million in the week ended May 11, well below the $796 million recorded a week earlier, according to Lipper FMI. The outflows in the last three weeks of April were $583 million, $1.2 billion, and $854 million. While it is too early to say the funds might break the 26-week streak of outflows, the latest week's result might provide a bit of optimism that most of the “dumb” money has exited.

California Revenue Picture Through April: $5 Billion Ahead of 2010

(May 11, 2011) -- California’s revenue for the current fiscal year through April was almost $5 billion, or 7.1%, above the level for the same period in fiscal 2010, according to a new report by the state controller’s office. Personal income tax collections accounted for much of the improvement, which were up 12.6% (or $4.6 billion) from last year. “This is unsurprising given the slow, but steady progress we have seen in the labor markets and the rising California incomes reported by the Bureau of Economic Analysis,” the report said. Total general fund revenue in the month of April beat the fiscal 2012 governor’s estimate by about $400 million, according to the controller’s monthly financial update. The unwillingness of California’s political leaders to live within the state’s means explains the continuing budget crunch. Through April in the current fiscal year, the state had total receipts of $75.5 billion and disbursements of $83.3 billion, the financial report said.

Bad News for the Chicken Littles: Issuers Defy Another Prediction

(May 9, 2011) -- The Chicken Littles who sounded various alarms over the municipal bond market are getting roasted yet again over another faulty prediction. Last year the alarmists expressed concern that municipal issuers would have trouble renewing bank letters-of-credit that help support billions of dollars of variable-rate tax-exempt debt. In reality, however, issuers are successfully dealing with the expiring bank agreements, Moody’s Investors Service said in a new report. Based on activity in the first quarter of 2011, most of these bank agreements were either extended or replaced with substitutes, Moody’s said. In a smaller number of instances issuers converted the bonds to a fixed-rate, paid the debt off with internal cash, or obtained other bank loans. The challenge isn’t over by any means; even larger numbers of these credit facilities are up for expiration later in 2011. It appears, however, that these expirations are being addressed without problem. (While variable-rate debt tends to be issued with long-term maturities, the letters of credit that provide a back-up expire every few years.) Many individual investors don’t own these bonds in the first place. Money-market funds and other big short-term investors hold this debt. So why does all this matter? The banks obviously are confident that municipal issuers will keep meeting their obligations as planned. They know almost all these issuers are a good credit risk, even after the tough sledding in recent years amid a sour economy.

A Couple Updates on the Mailings of Recent Print Editions

(May 9, 2011) -- Our March print edition explained that the April print edition would be mailed very late, maybe even in May, for a very good reason we discussed. In fact the April print edition was just mailed and the regular May print edition will be mailed after Governor Jerry Brown releases his revised budget next week. We also have been hearing that a set of readers never saw the March edition and it now appears the post office lost one sorted bundle. While replacements were sent out to some, our printer needs to run off more March editions to address anyone else affected by the lost bundle. They will be mailed in a handful of days to readers we believe were affected.

Municipal Bond Fund "Outflows" Continue for 25th Straight Week

(May 6, 2011) -- Municipal bond funds recorded $796 million of outflows in the period ended May 4, according to Lipper FMI, the 25^th straight week in which money going out exceeded investments coming in. The outflows a week earlier were $583 million, compared with $1.2 billion and $854 million in the two previous weeks.

California Income Tax Receipts Beat Estimates, LAO Update Says

(May 5, 2011) -- The State of California’s general fund income tax collections are running 5.1% above what was projected in the fiscal 2011 budget for the year ending June 30. That translates into $2.3 billion more income taxes than projected, said an update from the California Legislative Analyst’s Office. “PIT estimated tax payments were notably strong in April,” the analyst’s update said. “This bodes very well for June--a large PIT estimated tax payment month.” PIT estimated tax payments in April were $416 million, or 35.4% above administration projections, the analyst’s update said. For the fiscal year to date, PIT estimated tax payments are 17.5% above projections and 19.8% above 2009-10, the update said. So far this fiscal year, net general fund income tax collections are running $4.5 billion ahead of the previous fiscal year for the same time period, the analyst’s update added. Corporate tax collections are $654 million below projections.

Constitutionality of Brown's Redevelopment Fund Shift Questioned

(May 4, 2011) -- A 16-page legislative counsel discussion casts doubt on the constitutionality of part of Governor Jerry Brown’s proposal to take local redevelopment money to help balance the state’s own budget. Brown also has proposed eliminating local redevelopment agencies altogether, a move that didn’t get approval the first time around in a legislative vote earlier this year. “It is our view … that revenues derived from the general ad valorem property tax is constitutionally dedicated for use by local jurisdictions for their own operations or programs,” the Legislative Counsel Bureau said in a memorandum dated April 28. Brown wants to use $1.7 billion of such redevelopment funds to help close the state’s current budget gap. “We conclude that the requirement in Assembly Bill No. 101 that, for the 2011-12 fiscal year, property tax revenues in a Redevelopment Property Tax Trust Fund that are transferred to a Public Health and Safety Fund, both of which would be created in each county that contains a redevelopment agency, for use solely to reimburse the state for costs of providing health care or trial court services in that county, would violate Section 1 of Article XIII A of the California Constitution,” the legislative counsel memo says. “It is our view that a court would conclude that those property tax revenues, as so used, would be deemed to be apportioned to the state, rather than to the districts within a county as required by subdivision (a) of Section 1 of Article XIII A.” Putting aside all the complexity of that earlier run-on sentence, the bottom line is that local agencies might use the memo to keep pressure on legislators to reject Brown’s proposal. Brown’s staff has said that his proposal is constitutional and they have rejected any claims to the contrary. Assemblywoman Diane Harkey, R-Dana Point, asked the legislative counsel to weigh in on whether Assembly Bill 101 is constitutional. The bureau also is expected to provide another opinion on whether Brown’s proposal violates Proposition 22, which was passed by voters to add restrictions on the state’s ability to use or redirect local property tax revenue.

School District Financial Pressure Remains Amid State's Problems

(May 4, 2011) -- California’s local school districts will continue to face financial pressure until it is clear how the state will resolve its own budget deficit, Fitch Ratings said in a report. According to Fitch, "escalating credit pressures will lead to further negative actions on California school districts in the near term and that longer term credit stabilization will depend largely on the direction of state support for education. Continued downward credit pressure is expected to result from a persistent challenging state funding environment, expected cessation of one-time federal revenues, shrinking enrollment and tax bases in economically stressed regions, weakening debt profiles, and diminished expenditure flexibility due to already significant cost cutting to date." Some school districts are positioned to weather fiscal stress better than others, Fitch said, and based on reviews it has conducted since the beginning of 2010 about two-thirds of ratings were affirmed. However, "negative action" was taken on about one-third of the ratings reviewed, Fitch added. "Since most school districts have almost no control over their revenues, prudent management practices and expenditure controls are crucial to maintaining credit quality in this challenged environment," Fitch said. How districts deal with labor contracts is one big factor; contingency planning and liquidity and reserve levels are other items that help drive credit quality.

California Municipal Bond Sales Down By About 72% So Far in 2011

(May 2, 2011) -- New municipal bond sales in California remain slow so far in 2011, dropping to $5.4 billion from $19.2 billion in the first four months of 2010, according to statistics compiled by Thomson Reuters. That is a decline of almost 72%. Across the U.S., muni bond sales dropped by 53% in the first four months compared with 2010, Thomson Reuters statistics show. A few reasons explain the decline and we repeat what we said a month ago. First, a surge in taxable Build America Bond sales at the end of 2010, before that federal giveaway program expired, essentially stole volume from 2011. Second, a wave of “negative” press about municipal bonds sent rates higher earlier this year and sidelined issuers who could wait out the sour market. (Tax-exempt rates have dropped since then.) Finally, the State of California has a “moratorium” on new bond sales until its budget is in place. The state’s absence will keep affecting overall sales volume since it is a multibillion-dollar issuer.

Municipal Bond Fund "Outflows" Continue for 24th Straight Week

(April 29, 2011) -- Municipal bond funds saw a 24th straight week of “outflows” in the period ended April 27, according to Lipper FMI. The outflows were $583 million, down from $1.2 billion a week earlier and $854 million two weeks ago.

S&P Affirms California State Rating; Budget Progress Is Main Focus

(April 26, 2011) -- Standard & Poor’s said any downgrade on the State of California, if it occurred, would likely be related to a problem with “liquidity” if a fiscal 2012 budget is delayed. The rating agency affirmed the state’s A-minus general obligation bond rating with a “negative” outlook. “In our view, the state’s priority of payment structure demonstrates that, despite a visible budget crisis, the state’s ability to fund its debt obligations remains strong,” S&P said. The main concern arises if the state needs “aggressive” cash management strategies with a late budget, S&P said. However, the Bond Advisor also has noted repeatedly that the state’s past “aggressive” cash management approaches, such as issuing IOUs, actually helps bondholders by preserving cash for higher-priority long-term debt payments. California’s outlook could return to “stable” if the state passes a timely budget and can issue revenue anticipation notes before a cash crisis emerges, S&P added.

Montebello Faces Audit by State Controller on Finance Matters

(April 22, 2011) -- The City of Montebello will be audited by the California Controller’s Office because of concern over a failure to submit timely financial reports to the state. In addition, Montebello is under scrutiny after media reports about potential inaccurate financial accounting in the past. The other week the Bond Advisor noted that Montebello had lost a breath of fresh air in its fight against a budget crisis. Peter Cosentini, the interim city administrator, told the city council he is resigning effective May 12. Cosentini cited concern the city isn’t moving fast enough to deal with budget deficits and a looming cash crunch. Montebello isn’t a big issuer in the bond market, with its redevelopment agency most active the last handful of years. The state controller doesn’t pursue such audits very often. Controller John Chiang notified Montebello of the planned audit in a letter.

Municipal Bond Fund "Outflows" Continue for 23rd Straight Week

(April 22, 2011) -- Municipal bond funds registered a 23rd straight week of “outflows” in the period ended April 20, according to Lipper FMI. The outflows were $1.2 billion, up from $854 million a week earlier and $1.1 billion two weeks ago. It can be tricky to evaluate why the outflows were at a certain level in any one week. However, we are in April, when various types of investments can be sold to cover federal income-tax payments.

Drumbeat Is Steady, Louder: Some Want to Dump Tax-exemption

(April 20, 2011) -- The drumbeat we have warned about before, the one calling for getting rid of tax-exempt bonds, keeps getting louder. We see another federal legislator is fashioning a proposal to make the municipal bond market entirely dependent on taxable Build America Bonds in the future, with some of the interest expense subsidized by the U.S. Treasury. We aren’t saying the proposal will gain traction. We are saying it is a concern the issue is even on the table, in one form or another. We are also surprised that a handful of market participants can see this happening sometime in the future. Don’t worry, your existing tax-exempt bonds would be “grandfathered” and remain tax-exempt. Do worry, however, about the massive federal deficit/debt problem that is generating such proposals. You heard it here first when the muni market embraced taxable BABs with such gusto; the market shot itself in the foot.

Assured Guaranty Gets Boost from a Billion-Dollar Settlement

(April 18, 2011) -- Bond insurer Assured Guaranty Ltd. received a boost with last week’s out-of-court settlement that will pay the insurer $1.1 billion. The settlement with Bank of America and Countrywide Financial involves residential mortgage-backed securities. The settlement represents almost one-third of Assured Guaranty’s non-investment-grade exposure to residential mortgage-backed securities. “This settlement significantly strengthens our balance sheet, allowing us to more effectively assist municipal issuers,” Dominic Frederico, president and chief executive officer of Assured Guaranty, said in a release. (We have noted previously that Assured Guaranty might have to beef up its balance sheet in case S&P changes it criteria for bond insurer capital requirements.) Various bond insurers have argued that certain mortgage-backed securities didn’t meet underwriting standards. The collapse in this market fueled the financial crisis. The settlement raised hopes about other deals for other bond insurers, several of whom lost triple-A ratings after the mortgage-backed meltdown.

Municipal Bond Fund "Outflows" Continue for 22nd Straight Week

(April 15, 2011) -- Municipal bond funds registered a 22^nd straight week of “outflows” in the period ended April 13, according to Lipper FMI. The outflows were $854 million, down from about $1.1 billion a week earlier. As we said last week, it can be tricky to evaluate why the outflows were at a certain level in any one week. However, we are in April, when various types of investments can be sold to cover federal income-tax payments.

California State Revenue Brightened in March, Excluding Exception

(April 11, 2011) -- The State of California’s revenue picture continued to look a bit brighter in March, even though official numbers didn’t reflect the gains. The California Controller’s office said total March receipts were $370 million less than in the proposed fiscal 2011-12 budget. However, this figured included $1.2 billion that was lost when a sale and leaseback of state office properties was canceled. In terms of “regular” revenue sources, the state did okay in March, including personal income tax collections of $1.2 billion more than projected. The state’s sales taxes also were up in March, while corporate tax collections were down compared with estimates

Muni Bond Fund "Outflows" Top $1 Billion in Latest Weekly Period

(April 8, 2011) -- Municipal bond funds saw higher outflows in the latest weekly period ended April 6, with an increase to about $1.1 billion, according to Lipper FMI. This is the first time they rose above $1 billion in more than a month. Weekly outflows have now occurred for 21 straight weeks. It can be tricky to evaluate why the outflows jumped in any one week. However, we are in April, when various types of investments can be sold to cover federal income-tax payments. The outflows had slowed to $404 million a week earlier.

Muni Bond Fund "Outflows" Continue for the 20th Straight Week

(April 1, 2011) -- Municipal bond fund weekly outflows have now occurred for 20 straight weeks but continue to show signs of settling into a narrower range. In the week ended March 30, for example, the outflows slowed to $404 million, the lowest figure yet given recent trends. Outflows had totaled $640 million in the weekly reporting period that ended March 23, according to Lipper FMI. Going back even further, the outflows in previous weeks were $569 million; $528 million; $1 billion; $610 million and $974 million. The outflows peaked at about $4 billion in the week ended January 19.

State, Local Tax Revenue Sets a Record in Fourth Quarter of 2010

(March 30, 2011) -- Those poor governments. Times are so tough. Right? Well, in the fourth quarter of 2010, they extracted more wealth from the private sector (taxes) than ever before. Total state and local tax revenue rose to $380.3 billion, up from $372.2 billion in the fourth quarter of 2009, according to U.S. Census Bureau figures. Individual income tax collections also set a record in the fourth quarter of 2010; these taxes represented about one-sixth of overall receipts. As we always say, governments have a spending problem, not a revenue problem, though it is true that state receipts can plummet suddenly (especially in California) because of a reliance on the volatile income tax. Property tax collections of $177.1 billion in the 2010 fourth quarter represented a decline from $182.5 billion in the same year-earlier quarter. Still, that was the second-highest quarter of collections, based on U.S. Census Bureau statistics. Local governments tend to be more dependent on property taxes and are finally starting to pay the piper for the real estate downturn. This “lag” between the time the economy sours and property tax receipts actually drop also means local governments aren’t out of the woods in terms of pinched budgets.

Muni Bond Fund "Outflows" Continue for the 19th Straight Week

(March 25, 2011) -- Municipal bond fund outflows rose to $640 million in the latest weekly reporting period that ended March 23, according to Lipper FMI, up from $569 million of outflows a week earlier. Weekly outflows have now occurred for 19 weeks straight, though they seem to have settled into a narrower range. Two weeks earlier the outflows totaled $528 million and the week before that, $1 billion. Going back even further the outflows were $610 million and $974 million in the two earlier weeks.  The outflows peaked at about $4 billion in the week ended January 19.

California Budget Impasse: Mulling Taxes, IOUs, Pension Reform

(March 24, 2011) -- We haven’t said much about California’s budget negotiations because there are plenty of “regular” media outlets covering the usual dilly-dallying in Sacramento. However, new developments indicate Governor Jerry Brown might not get the special election he wanted in June on five-year tax extensions. Time is running out to get that election scheduled, though Brown continues to hold out hope that a handful of Republicans needed to support the special election will still provide votes. If not, there is now talk of a possible November election on the taxes. A new survey by the Public Policy Institute of California indicates Brown is losing ground on his tax plan. Only 51% of likely voters now say the special election is a “good idea,” down from 66% in January, the PPIC said. Support for extending the temporary tax increases also dropped in March to 46% from 54% in January. Brown had better give a lot more thought to developing his “all-cuts” budget regardless of when or whether a tax election is held. The delay in an election could lead to yet another protracted budget fight and the necessity of the state issuing IOUs. Just remember, IOUs benefit bondholders because the state is conserving cash to meet its top constitutional obligations, including debt service. The yield “premium” on California general obligation bonds has shrunk in recent weeks relative to higher-quality muni debt. Some of this trend reflects a general drop-off in muni bond sales and a halt to any new California G.O. sales until a budget is in place. However, hope for a budget deal also might have led to a shrinking yield “premium” and the premium could widen once again if talk grows about IOUs, a long budget fight, etc. The Public Policy Institute survey also found that a majority of likely voters (56%) see spending on public pension systems as a “big problem.” The Bond Advisor continues to believe that the state should tackle pension reform in exchange for any vote on temporary tax extensions.

Why The Fremont Redevelopment Bond Sale Is Off Our Calendar

(March 22, 2011) -- A month ago we mentioned that the Fremont Redevelopment Agency may price $138 million of tax allocation bonds to help pay for a new Bay Area Rapid Transit station. We thought the deal merited attention as a solid single-A credit. However, we finally removed it from our sales calendar because the city decided against moving forward on the deal for now. The city cited uncertainty because of Governor Jerry Brown’s proposal to dissolve redevelopment agencies. Fremont wasn’t sure the deal could be assembled fast enough because it required an agreement with BART on the station’s construction.

Muni Bond Fund "Outflows" Rose to $569 Million in Latest Week

(March 18, 2011) -- Municipal bond fund outflows rose to $569 million in the latest weekly reporting period that ended March 16, according to Lipper FMI, up from $528 million of outflows a week earlier. Two weeks earlier the outflows totaled $1 billion; the week before that, $610 million, and a week earlier, $974 million. Weekly outflows have now occurred for 18 weeks straight. The outflows peaked at about $4 billion in the week ended January 19.

Congressional Budget Office Targets Tax-exempt Bonds ... Again

(March 17, 2011) -- The other day the U.S. Congressional Budget Office came out with its laundry list for options to pare the federal deficit. As usual, the CBO took a shot at tax-exempt bonds, as it always does in these reports. In short, the CBO suggests doing away with tax-exemption altogether. The report suggests letting local and state governments sell taxable bonds, and the federal government would then subsidize 15% of the interest costs. The net savings for the Feds would be $143 billion from 2012 to 2021, the CBO report said. “A disadvantage of the option is that it could raise borrowing costs for issuers of tax-preferred debt and thereby deter some investment that might have national benefits or place greater burdens on already strained state and local budgets,” the CBO report said. “A subsidy payment rate of 15 percent is at the lower end of the range of estimated annual reductions in interest payments attributable to the exclusion of bondholders’ income from federal taxes.” A subsidy of 20% or even 25% might be an option to consider, said the report, called Reducing the Deficit: Revenue and Spending Options. The taxable Build America Bond program that expired last year offered an overly-generous 35% subsidy. Legislators have talked about renewing it with a lower subsidy rate, such as 28%. The main thing to take away from this is that tax-exemption isn’t a given for the future of municipal bonds, although we still don’t expect a change anytime soon. If a change did occur, existing tax-exempt bonds would be “grandfathered” and protected.

California's Retiree Health Obligation Keeps Growing: Now $60 Bln

(March 16, 2011) -- Here is something the state’s Republicans should be bringing up to Governor Jerry Brown before they agree to a vote on a five-year extension of “temporary” tax increases. California Controller John Chiang released a report the other day noting that the state now faces a $60 billion liability for health and dental benefits for the state’s retirees over the next 30 years. As of June 30, 2010, the liability had jumped about $8 billion in one year alone, Chiang said. That is because “employees are retiring earlier, retirees are living longer, and actual premiums increased more than previously projected by the actuary,” Chiang said, citing a state retirement fund study. Unlike state pensions, which are “pre-funded” with contributions ahead of time, the retiree health benefits are being covered on a pay-as-you-go basis. Chiang said California set aside $1.4 billion for these costs in 2011, not the roughly $4 billion it should have. The state would have to set aside almost $3 billion a year to start fully pre-funding these future retiree health costs. Chiang said “it is critical that we begin making down payments on this tab and adopt strategies to reduce health care costs.” Why would anyone agree to five years of tax extensions without having this important public finance matter on the table as well? Oh, that’s right, one of our so-called political parties is in the back pocket of the public unions. This is going to be an issue for the state’s credit rating if it isn’t addressed in future talks.

Amount of Outstanding Municipal Bonds Closes On $3 Trillion Mark

(March 15, 2011) -- The Federal Reserve’s recently-released flow of funds report for the fourth quarter of 2010 provides one interesting statistic: Outstanding municipal bonds stand at $2.925 trillion, closing in on the $3 trillion mark. The “household” sector, which includes individual investors, owns just a little more than one-third of all these bonds. Individuals actually represent a bigger share than that because they also hold municipal bonds through mutual funds.

Court Filings Over MBIA Split Continue; Muni Bond Angle Matters

(March 14, 2011) -- The court fight is continuing over a 2009 decision that benefited municipal bondholders by splitting bond insurer MBIA Insurance Corp. The New York State Insurance Department approved the split to shield municipal bond guarantees from riskier securities backed by MBIA. The new muni bond subsidiary is known as National Public Finance Guarantee Corp. Over the weekend, new court documents by banks that opposed the split cited four former New York insurance superintendents who said they wouldn’t have approved the restructuring. They said it took away claims-paying resources from MBIA Insurance to capitalize the new municipal bond subsidiary. One of the former superintendents said the insurance department exceeded its authority by dividing up stronger and weaker assets in the restructuring. MBIA officials say that the split should be upheld and told media outlets that the latest court filing is without merit. A Wisconsin regulator took a similar approach in shielding Ambac’s municipal bond exposure from riskier securities. National Public Finance is rated Baa1 by Moody’s Investors Service and BBB by S&P, with an “outlook developing” label.

Muni Bond Fund "Outflows" Slowed to $528 Million in Latest Week

(March 11, 2011) -- Municipal bond fund outflows dropped to about $528 million in the latest weekly reporting period that ended March 9, according to Lipper FMI. A week earlier the outflows totaled $1 billion; the week before that, $610 million, and a week earlier, $974 million. Weekly outflows have now occurred for 17 weeks straight. The outflows peaked at about $4 billion in the week ended January 19.

California Unemployment Rate Might Remain Above 10% Until 2013

(March 9, 2011) -- An updated economist forecast says California’s unemployment rate might stay in the double digits until early 2013, another sign the state’s public sector can’t count on a big economic rebound to mend budgets. The UCLA Anderson School of Management report predicts the state’s unemployment rate will average 11.6% this year, 10.5% next year, and 9.3% in 2013. California’s unemployment rate was 12.4% at the beginning of this year. Governor Jerry Brown’s proposed budget predicted that it will take until 2016 for California to recover the jobs lost during the recent recession.

California Controller's Review Adds to Fire on Redevelopment

(March 8, 2011) -- In a report with fascinating timing, the California State Controller’s Office found various deficiencies after reviewing practices at 18 local redevelopment agencies. The report, released yesterday, adds fuel to Governor Jerry Brown’s attempt to burn down local redevelopment agencies for good. A joint legislative panel last week went along with Brown’s plan to get rid of redevelopment agencies, though the proposal would have to respect existing obligations such as debt service. Brown wants to use any excess tax increment revenue for schools, counties, and other local purposes, thus saving the state money. The controller’s review found that five out of the 18 redevelopment agencies didn’t make required “pass-through” payments to schools totaling $33.6 million. Three other agencies beyond the 18 in this report also failed to make $7.1 million of such transfers, the report said. On the plus side, all 18 agencies made required deposits into low and moderate income housing funds. The controller’s review questioned various accounting practices, such as certain charges allocated to redevelopment agencies. The report also questioned certain cities’ internal loans from redevelopment funds. It also noted that “virtually any condition” can be construed as blight, singling out Palm Desert’s use of redevelopment money to refurbish the Desert Willow Golf Resort. The report also noted that the Hercules Redevelopment Agency faces serious problems, including a potential bond default. We discuss Hercules elsewhere because of a recent financial disclosure by the city. In conclusion, Controller John Chiang said in a statement that redevelopment agencies need more openness. “The lack of accountability and transparency is a breeding ground for waste, abuse, and impropriety,” Chiang said. “In whatever form local redevelopment takes in the future, the level of oversight and openness must be consistent with the amount of public dollars entrusted to their care.”

Municipal Bond Fund "Outflows" Rise to $1 Billion in Latest Week

(March 4, 2011) -- Municipal bond fund outflows rose to about $1 billion in the latest weekly reporting period that ended March 2, according to Lipper FMI. A week earlier the outflows totaled $610 million and the week before that, $974 million. Weekly outflows have now occurred for 16 weeks straight. The outflows peaked at about $4 billion in the week ended January 19.

Municipal Bond Default Predictions: An Example of One Problem

(March 3, 2011) -- Yesterday we mentioned yet another report claiming to predict future municipal bond defaults, this time using a nice round figure of about $100 billion. The problem, as we noted, is that “municipal bond” encompasses a large universe of issuers. The report apparently derives its default estimate in large part based on performance expectations for unrated or “junk” rated municipal bonds. Many investors don’t often think of these deals as fitting in the “traditional” category of municipal bonds, and by that we mean the traditional general obligation, water and electric revenue, and similar types of munis. Let’s give an example of a “non-traditional” purpose. The California Infrastructure and Economic Development Bank sold a series of 2007 senior, subordinate and junior bonds for something called the Sonoma Academy project. We assume these bonds were sold to “big” institutional investors or other sophisticated funders. Due to an event of default involving the non-senior debt, the holder of the senior bonds had the right to accelerate bond payments. It did so in December 2010. There is a standstill agreement in place through March 4 while the holder of the senior bonds negotiates with the borrower. The Sonoma Academy is a private college-preparatory high school in Santa Rosa. Yes, it benefited from municipal bonds that can be sold for nonprofits. No, it doesn’t fit our definition of a “traditional” municipal bond. The risk is far different, and yet these “non-traditional” borrowers are being lumped into some people’s default predictions for the overall municipal market.

Higher Redevelopment Borrowing Costs Helps Drive Novel Idea

(March 2, 2011) -- Elsewhere on this site we have been looking at the higher yields available on redevelopment tax allocation bonds. As expected, there is now a rush to sell TABs thanks to Governor Jerry Brown’s proposal to all but end future local redevelopment efforts. The legislature is pondering Brown’s plan, though the outcome is far from certain. The City of Riverside and Riverside County are so concerned about the current yield “premiums,” they are looking at another strategy. They would buy each other’s redevelopment debt at lower borrowing costs, a strategy that would also let them move fast in light of the governor’s redevelopment proposal, according to a story in the Riverside Press-Enterprise. The local entities might buy as much as $50 million of each other’s redevelopment debt, the story added. The plan appeals to the agencies because of the low returns they currently earn on pooled investment funds, the story said. However, the investment pools also limit purchases to the highest-quality securities; an exception to this policy would be needed to buy lower-rated redevelopment debt, the story added.

New Sales of Municipal Bonds Dropped to 11-Year Low in February

(March 1, 2011) -- Municipal bond sales across the U.S. dropped by almost 41% in February, falling to the lowest level for that month since the year 2000, according to statistics compiled by Thomson Reuters. In January, amid market turmoil that had pushed tax-exempt rates higher, municipal bond sales dropped more than 60% over January 2010 levels. The slower pace of sales so far this year also has been one factor in pushing tax-exempt yields lower in recent weeks. More investors also were enticed to buy munis last month after January’s spike in tax-exempt yields. The February bond sales totaled $16.16 billion, according to Thomson Reuters, and so far this year muni issuers have sold about $29 billion. That is a 52% decline from the first two months of 2010. Municipal bond sales in California totaled about $2.8 billion in February, down 54% from $6.2 billion in the same month a year earlier, according to Thomson Reuters. We didn’t see many “big” tax-exempt sales in California last month. Indeed, out of the biggest 25 new municipal bond sales across the country last month, only two were priced in California. A rush to market by local and state governments to beat a 2010 deadline for the expiring taxable Build America Bonds program also explains why volume has declined so much in early 2011. Many issuers rushed to finance projects with the taxable BABs because the federal subsidy for interest costs was overly generous, making the taxable option cheaper for a borrower than tax-exempt debt. In essence, some sales that would have occurred in 2011 were brought in 2010 instead to capitalize on the taxable BAB giveaway.

Commission's Warning on Public Pension Reform a Good Thing

(Feb. 28, 2011) -- California’s Little Hoover Commission did the municipal market a favor last week by adding to the chorus of voices calling for public pension reform. We had more time over the weekend to study its recommendations. The nonpartisan commission, which recommends ways for state government to become more efficient, warned that pension liabilities for current employees must be addressed to avoid drastic service cuts in the future. “Public employees also share in the prospect of a very different California, as cities such as Los Angeles, San Diego, San Francisco and San Jose prepare to spend one third of their operating budgets on retirement costs in coming years,” the commission’s report said. “Pensions are at the center of what will be an intensifying fight for diminishing resources from which government can pay for schools, police officers, libraries and health services.” It was just as interesting to us that Governor Jerry Brown appeared before a joint legislative budget committee last week. Brown told one Republican lawmaker to consider proposing pension reform in exchange for supporting his proposal to extend certain tax increases for five more years. It would be a mistake for the state to squander this opportunity to pursue much-needed public pension reform. Too bad a potential special election on the tax extensions couldn’t be linked to pension reform.

Muni Bond Fund "Outflows" Slow Again; Our Fund Index Jumps

(Feb. 25, 2011) -- Municipal bond fund outflows dropped to $610 million in the latest weekly reporting period that ended February 23, according to Lipper FMI. A week earlier the outflows totaled $974 million. Weekly outflows have now occurred for 15 weeks straight. The outflows peaked at about $4 billion in the week ended January 19. A lot of the lemmings who ran for the door recently managed to sell “low.” A recent tax-exempt bond rally has lifted bond prices, which also boosts the net asset values of the municipal funds. For example, the Bond Advisor’s California Municipal Bond Fund Index now stands at $11.48, up from $11.30 a month ago. The net asset value of the Index was hovering around $12.00 last summer.

California Assembly Panel Open to Redevelopment Compromise

(Feb. 24, 2011) --We have been talking elsewhere about interesting tax allocation bond opportunities after Governor Jerry Brown proposed curtailing local redevelopment in the future. It will be interesting to see if Brown’s proposal can even move forward, especially since he is pushing lawmakers to act by early March on the fiscal 2012 budget plan. The Assembly Budget Committee suggested a compromise might let the state get $1.7 billion out of redevelopment agencies without eliminating them altogether. Here is what the committee’s summary said: “The Assembly’s Version includes the General Fund savings of the Governor’s plan, but reflects that the final budget crafted by the Budget Conference Committee may achieve the savings through reforms in lieu of elimination. Such reforms must achieve the anticipated General Fund savings, improve redevelopment, provide more funding for schools and other local governments, and protect affordable housing programs.” The battle over redevelopment is going to heat up in March, and we wouldn’t be surprised to see redevelopment agencies try to keep finding some middle ground once the horse-trading gets serious.

February Print Edition Is Going Out the Door ... Almost As We Speak

(Feb. 23, 2011) -- Last month in our print edition, the Bond Advisor explained some of the unprecedented developments affecting us in recent months. Part of the lingering impact of those developments is that our print edition in February is going out late in the month (probably mailed on February 24). The new third party that is working with us will restore our publishing schedule to “normality” in two stages. March’s print edition will mail before the middle of the month, and will include several updates on changes to our electronic coverage and future plans for helping small and big investors alike. In April and thereafter our new working arrangement requires that each print edition go out toward the beginning of the month. Your February edition will arrive in February, just very late, but it will include some important observations on current market opportunities.

A "Moral" Victory for Muni Bond Funds; "Outflows" Below $1 Billion

(Feb. 18, 2011) -- Municipal bond funds have won a “moral” victory of sorts. Outflows dropped below $1 billion in the latest weekly reporting period. The $974 million outflow figure for the week ended February 16 is based on figures compiled by Lipper FMI. Weekly outflows have now occurred for 14 weeks straight. As we said last week, our kind of municipal bond investor buys tax-exempt bonds directly and builds a portfolio to generate (and maximize) tax-exempt income. Our kind of investor, while aware of inflation risk, etc., doesn’t run with the lemmings. The tax-exempt bond market rallied despite more lemmings exiting bond funds.

A Good Idea: Standard Reports on Public Pensions in One Place

(Feb. 16, 2011) -- Keeping with this week’s headline theme of good and bad “ideas,” here is an idea we like. Recent proposed federal legislation seeks to pull aside the curtain on state and local public employee pension plans by requiring uniform financial statements filed with a central repository. While we tend to look askance at yet another federal oversight mechanism for anything, this proposal might be a good thing by giving bond investors more information about the relative health and funding status of public pension plans. This is an area we have long argued needs better information, especially since bond rating downgrades are one of the risks investors assume if unfunded obligations mount for public pension plans. A rating agency came out the other day and said it sees merit in this federal reporting system. “The statements would follow a new, uniform format that uses a common set of criteria, including a discount rate assumption that is lower than what has typically been used in the public sector,” Moody’s Investors Service said. “The proposed rules would more closely align public pensions’ reported expenses and obligations with corporate peers and provide new incentives to state and local governments to take action to ensure the long-term viability of their plans.” Indeed, the Bond Advisor sees a real plus in the legislation because it has actual teeth. Governments that don’t want to file the reports would give up the privilege of issuing tax-exempt bonds or getting other perks, such as federal subsidies from a Build America Bonds program. Maybe a similar threat is needed to improve the poor performance of some public entities in providing continuing disclosure.

A Bad Idea: Obama Wants to Revive Taxable Build America Bonds

(Feb. 15, 2011) -- Only a few hours after we posted the item below yesterday (“Do Not Bring Back Taxable Build America Bonds”), President Obama proposed resurrecting taxable BABs in his fiscal 2012 budget plan. Obama would make the plan permanent after the two-year taxable BAB experiment that expired last year under his “stimulus” plan. The president would reduce the interest-expense subsidy level to 28% instead of 35% in an effort to make it more revenue-neutral. We aren’t convinced the 28% level would be revenue-neutral, though it would be better than the federal giveaway of tax dollars at the 35% level. Taxable BABs were set up in a way to let issuers sell taxable municipal debt; however, the feds then subsidized part of the interest costs. As we noted in the item below, we oppose taxable BABs and don’t see the need for them. It appears Congressional Republicans will be our best hope in blocking their re-appearance. For example, U.S. Senator Orrin Hatch already has criticized an effort to bring taxable BABs back; he calls them a “disguised state bailout.” We won’t spend a lot of time on fighting over the plan until it is clearer whether there is a risk taxable BABs will return; if they did get resurrected, the tax-exempt market will face the same distortions it faced previously.

A Better Idea: Do Not Bring Back Taxable Build America Bonds

(Feb. 14, 2011) -- The drumbeat keeps building in pockets of the municipal market to bring back taxable Build America Bonds. You can find commentary popping up here and here to that effect, and federal legislation to resurrect the program. We never liked taxable BABs, which expired at the end of 2010 after a short run under the federal “stimulus” program. We objected to it as a “giveaway” of taxpayer money because of a rich subsidy level (35%). Issuers sold taxable BABs but then the federal government subsidized their interest payments by that 35% level. It was cheaper for issuers to sell taxable BABs than tax-exempts, at least on longer maturities, because of this giveaway. We also disliked the way these taxable BABs “distorted” the tax-exempt bond market. In 2009 and 2010 about $180 billion of taxable BABs were sold, including last year’s rush to market before the program expired. This left tax-exempt buyers with less supply to chase, and ultimately in our view artificially depressed tax-exempt rates (at least until late 2010, when there was a muni sell-off for other reasons). Issuers already benefit from one federal subsidy: the tax-exemption for interest that helps lower borrowing costs. Issuers and federal taxpayers don’t need yet another dubious “stimulus” plan whether it be taxable BABs or some other giveaway. No doubt there was some benefit to municipal issuers in reaching a “broader” investor base through taxable bonds. No market is perfect, and there are certain inefficiencies in the tax-exempt world as well. We will take the blemishes over taxable BABs any day of the week. So far there is at least some opposition to bringing taxable BABs back.

Various Factors Keep Driving Municipal Bond Fund "Outflows"

(Feb. 11, 2011) -- Municipal bond funds continued to see “outflows” in the latest weekly reporting period. The $1.2 billion outflow figure for the week ended February 9 was a tad higher than the $1.1 billion reported a week earlier, according to figures compiled by Lipper FMI. Weekly outflows have now occurred for a full quarter (13 weeks) and totaled roughly $25 billion. An irresponsible default prediction by one analyst helped push some unsophisticated investors out of municipal bonds. Some investors also might be exiting funds on concern over rising interest rates, especially since U.S. Treasuries keep climbing higher. Fund prices generally will decline, particularly if rates jump quickly. We understand that market "timers" jump in and out of  bond funds. Still, even if fund prices might drop, investors who exit must weigh opportunity costs. If they’re running to money-market alternatives they are giving up tax-exempt income in exchange for an opportunity to earn just about nothing on their cash. Our “kind” of municipal bond investor buys tax-exempt bonds directly and builds a portfolio to generate (and maximize) tax-exempt income. Our “kind” of investor, while aware of inflation risk, etc., doesn’t run with the lemmings.

California General Fund Revenue Beats January Budget Estimate

(Feb. 10, 2011) -- The State of California’s tax revenue beat estimates for the month of January, coming in $715 million higher than projected in a proposed spending plan, the state controller’s office said today (Feb. 10). Personal income and sales tax collections both were higher than expected. The recovery so far is proving to be “fairly jobless,” the controller’s report said, meaning unemployment remains high. Still, the state is better off than a year ago. January 2011 state revenue was 11.3% higher than in January 2010. There are mixed messages indicating “we still have a long way to go” for California to rebound, Controller John Chiang said in a release. “We urgently need a solid budget with real solutions for California.”

All You Need to Know About a Congressional Hearing on Muni Debt

(Feb. 9, 2011) -- The item below mentions today's U.S. House of Representatives subcommittee hearing titled “State and Municipal Debt: The Coming Crisis?” The best testimony by far notes that giving states the ability to file for bankruptcy protection is unneeded. “Fortunately, the prospect of state bankruptcy is unnecessary for states to change their ways,” Nicole Gelinas, a Searle Freedom Trust Fellow at the Manhattan Institute, explains in her prepared testimony. “As my colleague E.J. McMahon has written, states already possess the tools to pare back their future liabilities before these commitments grow even more burdensome. For one thing, lawmakers and governors across the nation can change the laws that allow state workers to collectively bargain their wages. Similarly, lawmakers and governors can change constitutions and laws to pare back retirement benefits for future workers (and, in some cases, current workers).” As the Bond Advisor has always stressed, municipal bankruptcy is not an answer or solution to anything. Just ask the City of Vallejo. U.S. states have the complete ability already to balance their budgets and restore fiscal stability; in some states, however, their leaders simply lack the willingness and guts to address the reality of what it means to live within their means. California, of course, is exhibit one for gutlessness. Still, what a yield opportunity that provides for savvy investors

A Congressional Committee Looks at Muni Bonds; Don't Forget "?"

(Feb. 8, 2011) -- On Wednesday (Feb. 9) a U.S. House of Representatives subcommittee will hold a hearing titled “State and Municipal Debt: The Coming Crisis?” First things first. Some of the media preview stories we have seen about this hearing fail to include the question mark after the word "crisis." That little omission makes a bit of difference in reading the title. Second, the hearing will include some interesting discussion worth airing. One of the speakers will examine the need for public pension reform, a topic we have stressed in the past. Other speakers will debate the pros and cons of giving states the legal ability to file for bankruptcy protection. We don’t support changing the current landscape and don’t believe states would use such a law anyway, absent an event that triggered a meltdown of civilization as we know it. In that case a bankruptcy filing would be beside the point. (Some argue that having bankruptcy as an option would give states more leverage in negotiations with public unions, etc. The City of Vallejo’s recent experience with bankruptcy suggests the process didn’t help with certain ongoing structural problems.) Just remember, plenty of other people for years have been discussing public pension reform and other topics. Congress is often a latecomer to the table and a hearing doesn’t mean there will be any action.

Municipal Bond Fund "Outflows" Continue But at Slower Pace

(Feb. 7, 2011) -- In our January print edition we discussed the “lemmings” who have been leaving the municipal bond market in droves. Smart investors are gladly taking appropriate bonds off the lemmings’ hands, especially when prices are discounted to bargain levels. Money is still leaving the market, though at a slower pace, if municipal bond fund trends are used as the example. In the week ended February 2 the “outflows” for muni funds totaled $1.07 billion, according to Lipper FMI. The weekly outflows peaked at about $4 billion in the week ended January 19 so some of the panic is probably subsiding. (Remember, in 2009 “inflows” were at record levels and continued until late in 2010.) An asterisk should be added to analyzing municipal bond fund “flows.” We know a lot of “traditional” municipal bond buyers who stick with the market through thick and thin. They tend to buy bonds directly, but sometimes diversify with bond fund holdings. In this day and age especially, when interest rates remain so low, there is another type of investor. They finally got around to “chasing” some extra yield and a lot of money poured into municipal bond funds in 2009 as part of that trend. This group, and this is a generality, also can react to “headline risk” and stampede over a few negative headlines (regardless if the analysis is based on reality and actual default risk for municipal bonds). Take some of the recent “outflows” with a grain of salt in assessing the actual strengths and weaknesses of municipal bonds. Sophisticated investors also will sell, or buy, munis at certain times as well. Such trends certainly merit watching. The trends influence yields and existing bond prices, regardless of what is driving the trends. Our comment also cuts both ways. The massive “inflows” in 2009 didn’t necessarily mean everyone had fallen in love with municipal bonds. Sometimes investors just see “relative” yields in one sector as being too attractive to pass up. One legitimate concern about the recent trend: Some smaller investors managed to “buy high” and “sell low.” One positive: some in our audience wisely “buy low” (and hold on to generate tax-free income) or eventually “sell high.” We aren’t big on market timing in any event. A tax-exempt bond portfolio should be structured to generate as much income as possible given an investor’s parameters for credit risk, maturity length, etc.

A Consumer Index Shows Muni Bond Concern; We Add Perspective

(Feb. 4, 2011) -- U.S. consumers aren’t thrilled about municipal bonds right now, based on the findings of one poll. (The Bond Advisor adds some caveats about interpreting such polling later in this article.) The latest RBC U.S. Consumer Outlook Index found that 62% of consumers surveyed “are not confident in municipal bonds as an investment,” according to a release from RBC (Royal Bank of Canada). Only 22% of the consumers surveyed “find these bonds to be a good investment.” Chris Mauro, head of municipal bond research at RBC, said in a statement that the lack of confidence could reflect recent “negative” headlines for municipal bonds. “The consumer response confirms that the continual stream of news stories about state and local government fiscal problems is having a negative impact on investor perception,” Mauro said. “The results are consistent with the sizable outflows from municipal bond mutual funds that we have seen over the last several weeks. Given the current challenging budget environment, consumers will likely continue to see these negative headlines for at least the next several months.” We certainly think there is a kernel of truth in all this. Obviously investor confidence has been shaken, though in January’s print edition we note problems with certain “negative” headlines. The Index findings are based on polling conducted from January 28 through 31. By the way, we looked at some statistics released by the polling company based on the consumers who were interviewed in December. Almost half of them reported 2009 household income of $49,000 or less. Another 31% were in the $50,000 to $99,000 range and 22% were $100,000 and above. We mention that because a good chunk of these consumers aren’t “traditional” municipal bond investors in the first place (and no doubt a few might even confuse municipal bonds with bail bonds). On the other hand, a good chunk of those with such income would be more likely to do bond investing through tax-exempt bond funds and, in that sense, a loss of confidence in munis could in fact show up in the “outflows” occurring in recent weeks. Of those surveyed in December, 39% said they own stocks, bonds, or mutual funds, the polling company said. The other 61% don’t own any of these investments. Those numbers are also relevant, we believe, in assessing just how much some of the respondents know about municipal bonds (or other investing vehicles) in the first place. The latest RBC Index also finds that 60% of Americans believe the country is on the “wrong track.” Such pessimism no doubt colors their views on a lot of things, including “confidence” in municipal bonds. By the way, we’re not knocking RBC for asking the question. It’s always interesting to see how people view municipal bonds, regardless of their station in life. Some of these people will in fact be in a position to invest money in the years ahead and it is a cautionary note that muni bonds don’t inspire confidence right now. There are also other reliable barometers for gauging a loss of confidence in munis, and the recent bond fund outflows and jump in tax-exempt rates relative to U.S. Treasuries provide one answer. As we noted in January’s print edition, many munis might in fact be a very “good investment” right now at current tax-exempt yields. We also don’t know what the respondents in the RBC Index consider a “good investment,” but if they’re using a savings account yielding a fraction of a percentage point they might want to re-consider their strategy.

The Devil Is in the Details, But Not Always in "Global" Outlooks

(Feb. 3, 2011) -- The outlook for the nonprofit healthcare sector, which is a big user of tax-exempt municipal bonds, remains “negative“ through 2011, according to a new Moody’s Investors Service report. Okay, but what does this mean where the rubber meets the road, especially for smaller investors? In our January print edition we cite a recent new healthcare bond that offered enticing tax-exempt yields. That deal was probably more appropriate for some smaller investors than certain riskier hospital bond sales. Even so, some investors never realize the potential opportunities because they get too caught up in the “negative” global views for certain sectors. This brings us back to the new Moody’s report. We believe these global outlooks for a sector provide some value because there are “real” negative trends pressuring the health care sector in general. Notice what we said, however: “in general.” While the entire municipal bond market requires knowledge of individual credits on a case-by-case basis, this becomes even more important in the nonprofit healthcare sector.

In an annual report, Moody’s gives this sector a “negative” outlook through 2011 “due to the slow economic recovery, ongoing revenue pressures, and substantial uncertainty surrounding federal healthcare reform.” Among other things, “the thinning ranks of well-insured patients remain an unambiguous driver of weaker financial results, manifested in softer volumes, weaker payer mix, and stressed operating revenues,” Moody’s said in comments attributed to senior analyst Brad Spielman. “Also, all hospital revenue streams are under pressure, including Medicare, Medicaid, commercial payers, and philanthropy,” Spielman said. “These pressures are likely to be exacerbated as federal stimulus funding comes to an end in June and the shift begins toward alternative payment schemes.”

Moody’s also says there are “a number of positive developments” in the last year for this sector. There has been greater rating stability, improved operating results, and stronger balance sheets. “However, much of the improvement has come from comparatively easy reductions in expenses rather than from strong revenue growth,” Moody’s said. “Many hospitals have achieved operating performance stability thanks to good expense controls and capable management,” according to Spielman. “Implementation of provider fees in many states has also helped to create short-term relief from Medicaid reimbursement pressures, the rebound in investment markets, and the preponderance of strong liquidity among healthcare systems.” There is one more “long-term positive” to note, and that is an “ongoing trend towards mergers and acquisitions.” Among other things, this “provides an exit strategy for bondholders,” especially when stronger healthcare systems acquire weaker entities. Our final comment on all this: the continuing credit concerns in this sector also represent an opportunity when investors get rewarded with an added risk premium (higher tax-exempt interest rates). Don’t write off an entire sector over a “negative” outlook. (The red flags raised by Moody's do give ideas on issues to look at for individual issuers.) Of course, you’d also have to write off a lot of other municipal bond sectors using negative trends as a measuring stick. We fear some unsophisticated investors are doing just that.

California Treasurer Questions an Industry Reimbursement Practice

(Feb. 2, 2011) -- California Treasurer Bill Lockyer doesn’t want money raised by bond sales to be used for reimbursing municipal industry participants for certain expenses. Lockyer has sent a letter to underwriters of the state’s bonds and said he was prohibiting them from claiming certain fees as reimbursable expenses out of bond proceeds. These fees went to either the California Public Securities Association or the Securities Industry and Financial Markets Association (SIFMA). Lockyer is concerned issuers are in essence helping pay for the groups' lobbying activity. The fees to these associations are calculated based on a very small percentage of the size of each bond deal. Tim Ryan, president of SIFMA, said in a statement that the funding of his organization’s political action committee “is completely separate from and unrelated to the underwriting assessment.” Ryan’s statement added that, “we can’t speak to every underwriter-client relationship, but underwriting fees and permitted expenses are negotiated and agreed to prior to any transaction.” While this issue isn’t really pertinent to bond investors per se, it is something that is being watched by the industry because Lockyer is apparently studying various practices regarding expenses paid to those who assemble and sell bond deals.

January's New Sales Were Slow Indeed; California a Tad Better

(Feb. 1, 2011) -- Yesterday on another page, we mentioned there is a “shortage” of sorts affecting the new-issue municipal bond market. Now there are some actual figures to show just how slow January sales were. Across the U.S. municipal bond sales dropped 63% in January compared with the same month in 2010, according to statistics compiled by Thomson Reuters. That was also the slowest monthly volume since way back in January 2000. A rush to market to beat a 2010 deadline for the expiring taxable Build America Bonds program helped drain some volume from early 2011. As important, turmoil in the muni market and a rate spike in January kept some issuers on the sidelines. By the way, new bond sales in California didn’t fall as steeply in January. Issuers sold $1.8 billion of munis, down from almost $2.7 billion in January 2010, according to Thomson Reuters. That is a decline of about 31%. Sometimes when volume is way off, tax-exempt rates will decline or stay steady thanks to constant demand. In January, however, a large sell-off by investors (individually or through municipal bond funds) meant that rates had to rise to entice the new buyers who remains. For the week ended January 26, municipal bond funds saw another $1.9 billion of “outflows” due to investor selling, according to Lipper FMI. That is somewhat of an improvement since a week earlier the outflows were closer to $4 billion.

Rising State Tax Revenue Is Good, Just Not Enough for California

(Feb. 1, 2011) -- The Wall Street Journal is reporting that state tax revenue rose at the fastest rate in almost five years during the fourth quarter of 2010. A new report to be released Tuesday by the Nelson A. Rockefeller Institute of Government will show that tax revenue increased 6.9% in the 41 states that already have reported their revenue, the Journal reported. California’s overall tax revenue rose 19.35% in the fourth quarter, with personal income tax collections jumping almost 32% over the same quarter in 2009, according to the Rockefeller Institute. Bond investors will take any good news they can get, and having a rebound is better than the alternative from the last two or three years. (Of course, it would be difficult not to rebound from the dismal 2009 numbers.) Even so, some perspective is needed. California’s “structural imbalance” in its budget is so bad, the state isn’t going to grow out of the current mess. Governor Jerry Brown’s State of the State address last night was far more telling about the challenges and decisions California faces in the months ahead. It takes a certain type of politician to equate the recent upheaval in Tunisia and Egypt with the right of voters in California to extend tax increases. Brown said “the state belongs to all of us” in an effort to convince legislators to put the tax question on the ballot this year. The state doesn’t yet “belong” to voters quite enough to hold an election on other pressing matters, such as perhaps gutting and reforming the current public pension system.

"Free" Web Site Updates To Return Soon With Modification

(Jan. 26, 2011) -- In previous updates and in a letter to subscribers, The Bond Advisor noted it had acted against certain individuals who have either misused our content or otherwise distributed it without permission. A new letter going to subscribers on Jan. 29 provides updates on several steps we have taken to deal with such issues and our print publishing schedule, including the plan for resuming "limited" free updates here in February. In the future most updates will be provided only to existing subscribers to the print edition. More to say on this beginning next week.

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The older archived material below will be removed soon for new content.

California's Holding Back of Money Is a Plus for State Bondholders

(August 27) -- Earlier this week California’s top finance officers noted that the state is holding back almost $3 billion of payments, primarily for local school funding, pending a final budget agreement. We have explained before why new legislation that lets the state manage its cash this way is actually a plus for holders of state bonds. This strategy conserves cash for constitutionally-protected payments, including G.O. bonds. It also lets California avoid issuing IOUs. However, the state probably will have to issue IOUs soon as well unless a new budget gets passed. The IOUs also are a way to conserve cash for higher-priority payments such as debt service. What about local schools that aren’t receiving money as fast as they expected? They have had plenty of notice that this was coming down the road and should have lined up ways to cover any cash shortfalls, whether with existing reserves, short-term private loans, or even tax anticipation notes.

A "Bad" Water Bond Won't Be Voted on This Year ... Goes to 2012

(August 10) -- An $11 billion general obligation water bond scheduled for this November’s ballot has now been officially postponed until 2012. Supporters of the measure feared it would get defeated in the current economic climate. The Bond Advisor loves municipal bonds but we oppose this "bad" proposal, whenever it gets voted on. We agree with those who argued it would be better to raise the funds through other mechanisms, such as water fees, rather than using the state’s general obligation credit.

August Print Edition Will Be Mailed at the End of This Week

(August 9) -- The August print edition will be mailed later this week. We made a new hire in July to help us get back to a schedule of mailing print editions early in the month, but we are making some changes in our August commentary to discuss a tricky bond payment ploy by one issuer. You will see why we are discussing the matter when the print edition arrives.

A Thing to Recall When Bond Insurer's Parent  Files for Bankruptcy

(August 5) -- The news that FGIC Corp., the holding company of bond insurer Financial Guaranty Insurance Co., has filed for bankruptcy is also non-news in one sense. An insurance company continues to operate under all the previous rules and regulations, even if its holding company files for bankruptcy. The bankruptcy filing also doesn’t affect a previous agreement that let National Public Finance Guarantee Corp. reinsure the vast majority of FGIC’s municipal bonds. National Public is the former MBIA insurance subsidiary. This is also important to remember in case the AMBAC holding company ever files for bankruptcy. The bond insurance subsidiary wouldn’t be affected by the bankruptcy, which is important because a Wisconsin regulator has segregated the AMBAC insurer’s riskier exposure in an effort to help municipal bondholders.

New Tax-exempt Bond Sales Drop By 15% Across U.S. in July

(August 2) -- About $18 billion of new tax-exempt bonds sold across the U.S. in July, down 15% from the same month in 2009, according to statistics compiled by Thomson Reuters. Taxable Build America Bond sales were about $6 billion in July; while these taxable deals are still siphoning off tax-exempt supply, the BAB issues dropped to the lowest level in a year. Only about $2 billion of the new muni sales carried bond insurance.

Moody's Might Lower California Housing Finance Agency Bonds

(July 29) -- Moody’s Investors Service said it might downgrade the California Housing Finance Agency, a move that would affect about $1.3 billion of bonds tied to the agency’s issuer rating. The current issuer rating is A1, the fifth-highest possible. “This action is based on the potential effects of continuing high levels of delinquencies and foreclosures on single family mortgage loans, stresses related to the agency’s variable rate debt and interest rate swaps, short-term borrowing, and other factors that may have negative effects of the agency’s capital resources, profitability and liquidity,” Moody’s said in a statement. Most of the impact would be on multifamily housing revenue bonds tied to the CHFA issuer rating. Moody’s already is reviewing the agency’s home mortgage revenue bonds for possible downgrade; they are rated A3, the seventh-highest level possible. Despite the rating warnings, Moody's noted the agency still has "significant financial resources."

Oxnard High School District Bonds Yield 3.15% on 10-year Maturity

(July 28) -- The Oxnard Union High School District sold $50 million of general obligation bonds yesterday. Standard & Poor’s recently upgraded the bonds to A+ from A, citing the district’s maintenance of “strong” reserves. This new bond sale also is backed by a financial guarantee from Assured Guaranty Municipal. A five-year bond with a 4% coupon was priced to yield 1.80%. A 10-year maturity with a 5% coupon was priced to yield 3.15%. Looking for a tax-exempt yield of 4% or more? The 15-year maturity broke that barrier by yielding 4.05%. The 20-year bond yielded 4.50% and the 30-year, 4.78%.

Municipal Bond Funds Still Seeing Trend of "Inflows" So Far in 2010

(July 26) -- It has been awhile since we mentioned the trend for money flowing into municipal bond funds. Despite all the “bad” press about muni bonds in recent months, investors continue to put more money into bond funds than they are taking out. For example, in the latest week ended July 21, funds reported about $642 million of “inflows,” according to figures tracked by Lipper FMI. So far in 2010, tax-exempt bond funds have only seen “outflows” in three weeks; the rest of the time, equal to roughly half a year, the bond funds have seen “inflows,” though at a slower pace than the record-breaking year in 2009. Overall municipal bond fund assets are at a record level of a bit above $500 billion. As we have noted before, one factor driving the “inflows” into bonds continues to be extremely low interest rates on money market funds and other short-term instruments.

New Bill Affects Ratings in Offering Documents; Munis Unaffected

(July 22) -- The financial reform bill signed by President Obama the other day is stirring up parts of the credit markets, specifically regarding the use of rating agency grades in prospectuses. The rating agencies are concerned that a provision in the bill would subject them to greater liability than in the past. As a result, they don’t want their ratings published in offering documents for securities registered with the Securities and Exchange Commission. The greater liability results from a change that views the rating agency grades as “expert” advice rather than just an opinion. As far as we can tell, the change won’t impact municipal bonds because they aren’t registered with the SEC in the first place. (Local and state governments have an exemption from SEC regulations affecting corporate borrowers.) Rather, the impact will be on fixed-income securities tied to mortgages, auto loans, credit cards, etc.

Berkeley G.O. Bond Finally Yields 4%-plus ... on a 2034 Maturity

(July 21) -- The City of Berkeley priced $16 million general obligation bonds yesterday. The high-quality deal (Aa2 and AA+) yielded a tax-exempt 2.75% in 10 years and 3.47% in 15 years. The 19-year maturity yielded 3.88%. The 2034 term bond yielded 4.25%. We knew the deal had to top 4% on one of its maturities. It continues to be a seller’s market for higher-quality deals. On Monday Pasadena’s $36 million sale of double-A electric revenue bonds yielded 1.55% in five years and 2.81% in 10 years. The Sonoma Valley Health Care District priced $23 million of G.O. bonds yesterday with an A1 rating. The five-year bond yielded 2.10% and the 10-year, 3.25%. The 15-year maturity yielded 4.10%.

Why Municipal Analysts Care About a Taxable Tribal Gaming Bond

(July 19) -- During times of economic stress in particular, the Bond Advisor makes a distinction between “traditional” municipal bonds backed by solid tax pledges, water and sewer utility charges, etc., and non-traditional munis for assisted-living homes, real estate projects, or what have you. The “traditional” muni has broad backing from a big tax base, diversified revenue stream, etc. The non-traditional muni is often tied to the success of a single project and has less financial cushion for error. Many non-traditional muni bonds pan out just fine, but investors usually demand bigger yield premiums to buy them.

This brings us to a fight about a non-traditional muni bond (very, very non-traditional) issued by the Lake of the Torches Economic Development Corporation in Wisconsin. The $50 million of Series 2008 taxable gaming bonds benefited the Lac du Flambeau tribe. Bonds tied to Indian gaming enterprises are about as non-traditional as you can get and smaller investors usually won’t see them anyway. This deal was sold entirely through a limited offering to a sophisticated California-based investor (Saybrook Capital LLC). So why are we even mentioning a Wisconsin bond deal for an Indian project? Earlier this month the National Federation of Municipal Analysts, which represents analysts at the “big” investors (mutual funds, etc.), filed a friend-of-the-court brief in a case involving this bond deal. The issuer decided to quit making bond payments on grounds the trust indenture for the debt violated federal regulations governing tribal gaming.

A federal judge sided with the issuer in a lower court opinion and the municipal analysts want to see that decision reversed. The municipal analysts are miffed that the issuer is now making an argument that contradicts its previous disclosure in the prospectus: the issuer and the tribal counsel previously represented that the deal wouldn’t run afoul of federal regulations. The analysts also say the judge erred in dismissing the entire trust indenture, instead of letting the repayment obligation stand while “severing” any other disputed issues. The municipal analysts said the ruling needs to be overturned at an appellate level so it doesn’t set any bad precedent for the broader municipal market. “The ruling challenges both the right of bond investors to rely upon disclosure and opinions, and the sanctity of repayment obligations in bond documents,” NFMA Chairman Mark Stockwell said in a press release.

While the Bond Advisor does not think this ruling in and of itself would prompt “traditional” or even “non-traditional” issuers to repudiate their debt, it does raise important questions about whether investors can rely on issuer representations in the offering documents. It is ridiculous to think a court should be able to give an issuer a windfall and let it walk away from payments on a two-year-old bond issue. “From the perspective of a bond purchaser, this case presents a nightmare that Kafka might have rejected as the product of an overactive imagination,” the municipal analysts’ friend-of-the-court brief says. This is why smaller investors with a single-minded goal of protecting their principal avoid non-traditional municipal bonds in the first place. The Bond Advisor isn’t trying to scare any smaller investors with this tale, especially because this involves a very non-traditional muni bond. It does show the battles that can arise from time to time, and smaller investors can be grateful there are bigger investors with the wherewithal to fight such shenanigans.

With Short-Term Yields This Low, Our Barbell With "Twist" Entices

(July 16) -- Our July print edition revisits a barbell strategy with a “twist,” an investing approach to consider when the yield curve is steep. Subscribers already have reviewed this “twist” if they read July’s edition, and it is important to emphasize it again when you see the low yields at the short end of the curve for higher-quality issuers. (A new three-year bond from a high-quality issuer this week yielded 0.84%, and barely topped 1% for a four-year maturity.) The Bond Advisor’s “twist” provides one way to beat those yields at the short end of the barbell approach. Of course, if you buy into all the recent “Chicken Little” journalism about municipal bonds, you wouldn’t like our “twist.” And, if you aren’t a print subscriber already, you won’t learn about this “twist” on these still-free Web updates.

States See Overall Revenue Improvement in 1st Quarter ... Sort Of

(July 13) -- States seemed to receive a little good news in the first quarter of 2010. Revenue from major tax sources rose 2.5% in the first quarter over the same period in 2009, according to the Nelson A. Rockefeller Institute of Government. The report echoes improvement the U.S. Census Bureau saw in both state and local tax collections in the first quarter (see item below). However, the increase is deceptive. Legislated tax increases in California and New York helped drive the revenue gain, the Rockefeller Institute said. And, state revenue was still 9.3% lower in the first quarter from 2008 levels. Also, 33 states saw a revenue downturn in the latest first quarter over 2009. California was in the minority, seeing overall collections rise by 15.6% in the first quarter. Based on early indications these income taxes were weak in the important second quarter, one reason many states still face budget struggles, the Rockefeller Institute said.

Nationwide Tax Collections Up in First Quarter; Property Tax Down

(July 12) -- Local and state governments across the nation collected almost $300 billion in taxes during the first quarter of 2010, according to the U.S. Census Bureau. The total was up by about $2.4 billion over the same quarter in 2009. Property taxes, the biggest portion of tax collections for governments, dipped a little in the first quarter over the same 2009 period. In contrast, property tax collections in 2009 actually increased over 2008, despite the serious economic and housing downturn. That is because there is a “lag” between the time of a downturn and the actual impact on assessed values. Many state governments have been hit hardest by the downturn because they depend more heavily on income tax collections, which are more volatile. Belt-tightening remains the order of the day for most governments, and not just this year. California’s state and local governments collected almost $26 billion of taxes during the first quarter. Since property taxes aren’t due until April, the biggest tax items in the first quarter were income taxes (almost $11 billion) and sales taxes (about $8.5 billion). General tax trends are interesting to look at, but municipal bonds depend on an issuer-by-issuer analysis because of variation in local tax structures, debt service coverage ratios, etc.

State Spending Cap Gets Support from Some Previous Opponents

(July 8) -- In a sign of how desperate various groups are getting to see that California’s budget gets balanced, even the Los Angeles Times said in an editorial the other day that the legislature should pass a spending cap and set up a rainy-day fund. The newspaper said this is the time to do so because it is Gov. Schwarzenegger’s last budget. (Such a proposal would need voter approval.) The Times in the past didn’t like the idea of a spending cap because it would take the “human” element out of decision making. Apparently the Times is starting to realize, based on the “humans” in office in Sacramento, that it isn’t such a bad idea to limit their power. The “human” element is leaving us with multibillion-dollar deficits every year. The newspaper did back a May 2009 ballot measure for a spending cap, but that plan included tax increases as well. The rainy-day fund would let the state save money during good times so it didn’t have to go through cycles of severe program cuts during bad times, the Times said. The Bond Advisor might argue certain programs still need severe cuts, whether in good or bad times. Even so, we have long argued for a spending cap to impose discipline on a state with monopoly powers.

Larger July Print Edition Wrapped Up and Is Now in the Mail

(July 8) -- A larger-than-usual July print edition has been wrapped up and has gone in the mail on July 8.

Municipal Bond Funds See Rare Week of Outflows in Latest Week

(July 6) -- The first half of 2010 concluded with an unusual week for municipal bond funds. Investors actually withdrew more cash than they put in, with “outflows” for the week ended June 30 totaling $232 million, according to Lipper FMI. That is only the third week of “outflows” for municipal bond funds since the start of 2009. The funds saw “inflows” all of last year and in 2010 there have only been three weeks of “outflows.” The pace of “inflows” has slowed this year but still stayed steady. One week of outflows doesn’t indicate a trend so we’ll defer any comment on the possible reason.

Local and State Tax Collections See Small Growth Once Again

(June 30) -- Local and state governments in the U.S. collected almost $300 billion in taxes during the first quarter of this year, a bit shy of a 1% increase over the first quarter in 2009, the Census Bureau said. While the rebound is tepid, it is the second straight quarter that overall tax collections rose over the year-earlier period. Before that, tax collections dropped for a full year. State tax receipts rose 2.5% in the first quarter mainly because income tax collections rose. Sales tax receipts rose only slightly. Local government tax receipts fell 1.1% in the first quarter over the same year-earlier period, largely because lower property tax valuations are finally showing up. The stock market jitters yesterday reflected concern over a possible “double-dip” recession if worldwide economic growth slows down. Even if that doesn’t occur, state and local revenue probably will only rebound slowly due to lingering high unemployment and consumer caution.

An Indirect Benefit for Municipal Tobacco Bonds from Court Ruling

(June 29) -- Yesterday's U.S. Supreme Court decision that prevents the U.S. from seeking $280 billion in past profits from tobacco companies will help so-called municipal tobacco bonds, though not a lot. The municipal tobacco bonds are backed by a 1998 settlement between states and major tobacco makers. Anything that removes concern about bankruptcy filings by tobacco makers is a plus for bonds tied to their fate (even though tobacco companies probably would keep making the settlement payments while in bankruptcy). We don't think the court decision will help municipal tobacco bonds all that much because investors are much more focused on declining cigarette consumption, which has a bigger direct impact on revenue backing the municipal bonds.

Update: June Print Edition Mails June 29; Back to "Normal" in July

(June 29) -- Our June print edition finally mailed on June 29, reflecting the fact May's issue went out later in the month. We also took on some unexpected speaking engagements in June that required travel; that delayed June's issue. However, some of what we learned from investors at the meetings we attended prompted us to write a new essay you will see on the  front page of June's edition. July's issue will return to our pattern of mailing earlier in the month, with a larger-than-usual edition going out no later than July 7.

Taxable BAB Extension Doesn't Pass Yet In a Temporary Setback

(June 28) -- An extension for taxable Build America Bonds is still in limbo after the U.S. Senate bottled up a broader bill affecting jobless benefits. The taxable BABs expire at the end of this year. While we would love to see these taxable bonds disappear, we are sure Congress will pursue another way to keep them alive beyond the current legislation

New Plan to Sell "Deficit" Bonds Given a Cold Legal Shoulder

(June 23) -- You wouldn’t know California is near any deadlines for having a new budget in place by July 1, when the new fiscal year starts. As usual, state legislators aren’t acting with any urgency. In one good development, the California Attorney General’s Office recently threw cold water on a Democrat party proposal to borrow $9 billion against future bottle and can deposits. A letter from the Attorney General’s Office said the borrowing plan would run the risk of violating Proposition 58, which was approved by state voters in 2004 to block such borrowing for operating deficits. These tired proposals to protect unsustainable state spending plans are a sign of bankrupt leadership in Sacramento.

Puerto Rico Plans to Sell $1.8 Billion of Sales Tax Revenue Bonds

(June 17) -- The Puerto Rico Sales Tax Financing Corporation (COFINA) is getting ready to offer $1.8 billion of first subordinate sales tax revenue bonds. They are rated A1 / A+ and a good way for California residents to geographically diversify their portfolios. Interest earned is exempt from state and U.S. income taxes for investors in all 50 states. A small portion of the deal will involve taxable Build America Bonds.

California Economic Outlook Remains Sluggish; State Budget Blues

(June 15) -- A forecast coming today from UCLA's Anderson School of Business still paints a gloomy picture for California's economy, according to media reports. The state's unemployment rate will average around 12% in 2010 and won't return to below 10% until 2012, the UCLA forecast says. Inland areas of the state will continue to be hit the hardest, with coastal residents seeing a bit more room for optimism, according to the forecast. All this also will mean more state budget blues, even if tax revenue picks up a bit. Total general fund revenue was about 10% more than expected in May, the state Controller's Office noted recently. Even so, personal and corporate income taxes are still below 2009 levels for the first five months of the year.

June Print Edition to Mail in Middle of Month for Larger Issue

(June 8) -- June's print edition will mail in the middle of the month for a larger-than-usual issue, and also because May's edition mailed late to make sure the governor's revised budget didn't include any unpleasant surprises.

California Treasurer Says Default Swaps Aren't Hurting G.O. Debt

(June 7) -- California Treasurer Bill Lockyer said on Friday that the credit default swaps market isn't harming the state's G.O. bonds. "The effect of CDS trading on California bond prices is not significant enough to cause concern at this time," he said in a press release. Lockyer made the comment after digesting a second round of letters from six of the state's bond underwriters who make markets in credit default swaps. "The banks themselves have not bet against the credit quality of California GO bonds to any meaningful extent," Lockyer added. Previously Lockyer said big investors aren't expecting California to default when they participate in this swap market: "Instead, investors buy or sell them to bet on how perceived credit risk will be reflected in market prices," he said. Lockyer still objects to "naked" CDS trading, which involves activity where the participant doesn't actually own the state's G.O. bonds.

U.S. States Not Out of Fiscal Woods; Also Seeing Some Recovery

(June 4) -- States face another tough year in fiscal 2011, which begins next month, according to a biannual survey of state budget officers. States have cut spending from $687.3 billion in fiscal 2008 to $612.9 billion in fiscal 2010, the survey said. Fiscal 2011 will only see moderate revenue growth and a recovery won't gain traction until 2012. Overall state revenue may not reach 2008 levels until 2013, the survey said. In a separate comment on a financial television channel, Pennsylvania Governor Ed Rendell said he took issue with Warren Buffett's recent comment about a "terrible problem" for some municipal debt in coming years. Rendell said states won't need federal aid to meet debt payments, especially as a recovery refills public coffers.

Another Note Sale With Paltry Yields; 0.3894% Is the Latest Example

(June 3) -- Yesterday on our Research page we noted the paltry yields for top-rated tax and revenue anticipation notes. Ventura County has gone even lower than yesterday's example, pricing one-year TRANs at 0.3894%. That makes us nostalgic about 0.4%!

Tax-exempt Sales Fall Again in May Due to Impact of Taxable BABs

(June 1) -- Municipal bond sales rose by about 21% in May over the same month in 2009, according to statistics tracked by Thomson Reuters. However, tax-exempt sales actually dropped about 7% because taxable Build America Bonds keep taking away volume. (See the item below for more on a taxable BAB extension.) So far this year tax-exempt sales are down about 17% from the same period a year ago, with taxable BABs a key culprit. Here is an example of the problem: Within a few days the San Francisco Public Utilities Commission plans to sell more than $500 million of water revenue bonds rated Aa2 and AA-, but four-fifths of the deal could be taxable Build America debt.

U.S. House Approves Taxable Build America Bond Extension

(May 28) -- Late Friday the House of Representatives voted to extend municipal taxable Build America Bonds. The federal subsidy for interest costs would drop to 32% in 2011 and 30% in 2012, down from 35% now. That might make taxable Build America Bonds a little less attractive for some issuers, but spur even more of this debt in 2010 while the terms remain more attractive.

Federal Government Putting the Screws to Taxable BABs Issuers

(May 27) -- Uncle Sam is getting his first. That is the message for taxable Build America Bond issuers, some of whom won't use the program because of the way the U.S. is using "offsets" to reduce its interest-subsidy payments. The State of Maryland disclosed the U.S. cut a subsidy payment because the state owed payroll taxes to the feds; it was an official confirmation of a practice other issuers have said is happening. This is a tricky way for the U.S. to get money it claims it is owed from local governments, and we are glad some issuers (such as Florida) won't sell such taxable bonds. The Internal Revenue Service also said it might audit half of the taxable BAB issues. One of its concerns? The yields might be set too high in some new issues, forcing Uncle Sam to pay more interest-rate subsidy. The IRS is curious about how these issues trade after being sold. These taxable BAB issuers are getting what they deserve for getting in bed with Big Brother and selling out the tax-exempt market.

California Democrats Propose Borrowing $9 Billion for Budget Trick

(May 26) -- Deposits made on cans and bottles and an oil severance tax would play a role in backing $9 billion of bonds to "balance" the state's budget, at least if certain California Democrats get their way. The governor's office already slammed the idea. This "idea" is why the state is at best a double-B or low triple-B credit in terms of political management, even though the financial protection and cushion for its bonds justifies a higher rating. The largest state union (Service Employees International Union California) loves the borrowing plan, which isn't a surprise.

Municipal Bond Funds Still Gaining Assets After Short Reversal

(May 25) -- Municipal bond funds saw "inflows" of about $536 million during the latest week of tracking, which ended May 19, according to Lipper FMI. The limited "outflows" in April are a distant memory for now. Investors who sat on the sidelines in the hopes rates would rise are realizing they have lost interest-earning potential for years to come. A flight-to-quality over credit fears in Europe also benefits munis to a degree. Muni bond funds now oversee $495 billion, the most they have ever managed.

Bad News, Good News on Taxable Build America Bond Extension

(May 24) -- The federal giveaway that has sucked more than $100 billion of municipal bonds away from tax-exempt sales might be closer to getting extended in Congress. That bad news already was expected. The good news, to a degree, is that the federal subsidy for interest costs would drop to 32% in 2011 and 30% in 2012, down from 35% now. That might make taxable Build America Bonds a little less attractive for some issuers. At a 35% subsidy issuers can get a lower borrowing cost than they can on tax-exempt bonds, especially on longer maturities. The other bad news? Issuers will try to sell as many taxable BABs as possible this year, which will continue to limit both tax-exempt sales and help keep a lid on tax-exempt yields due to supply-and-demand factors. You can see this trend on our Upcoming Sales page, where we note taxable BABs on the right-hand side (after the credit rating).

Example of Yields on Capital Appreciation Bond New-Issue Sale

(May 20) -- Our table on the Yield Trends page excludes capital appreciation bond (CAB) pricings. That is because the yields posted for such "compound interest" bonds would be confusing if they are posted next to yields on current-interest debt. Once in awhile, however, we flag some recent zero-coupon pricings just to give a sense of the market. Yesterday, for example, the Newman-Crows Landing Unified School District general obligation deal featured CABs that yielded 3.16% in 2015 and 4.87% in 2020. These bonds are insured by AG Municipal and are rated A1 without the financial guarantee. The 15-year yielded 5.75% and the 20-year, 6.34%.

California Legislative Analyst Agrees With Governor on One Thing

(May 19) -- California's independent Legislative Analyst's Office agrees with Gov. Arnold Schwarzenegger's estimate that the state faces a deficit of almost $18 billion in the fiscal year that begins July 1. That estimate "is reasonable," the LAO says. (The governor proposes $19 billion of solutions because he wants a $1.2 billion budget reserve.) The LAO suggests, however, that certain deep spending cuts might shift pressure to counties. The LAO would prefer a mix of revenue increases (fees, non-tax revenue) to go along with spending cuts. The LAO agrees that other changes earlier this year make the state's cash position stronger, but warns that IOUs or other gimmicks are still a possibility if California's new budget isn't approved until August or September.

May Print Edition Finally Mailed After Incorporating Budget Plan

(May 17) -- [UPDATE: Due to one more change the edition mailed on May 19.] Our May print edition spends time talking about one way the state has fiddled with local money to avoid its own tough budget decisions. As a result, we also waited to see if the governor would propose more such shenanigans in Friday's budget revision. Our printer couldn't do a fast turnaround by Saturday so the edition is going into the mail May 17.

Governor's May Budget Revision to Propose "Terrible Cuts"

(May 12) -- We see a spokesman for Governor Arnold Schwarzenegger is claiming that the May budget revision, which will be released on May 14, is going to propose "terrible cuts." The only thing that will be "terrible" is the belief that state politicians will actually make real cuts to eliminate a deficit of almost $20 billion.

Assured Guaranty Profitable, But Muni Bond Business Declines

(May 11) -- Assured Guaranty Ltd.'s operating income rose to almost $90 million in the first quarter, up more than 40% from the same year-ago period. However, it found fewer opportunities to insure municipal bonds, with the present value of new business production down to $74 million from about $127 million a year earlier for gross premiums written, Assured Guaranty reported. "Tighter spreads" were a factor since lower-rated bond yields declined relative to higher-rated bonds, the insurer said. Taxable Build America Bonds also tended to be higher rated and didn't use insurance. Assured Guaranty said it expects to do more taxable BAB business as more triple-B and single-A issuers tap the federal subsidy.

California's General Fund Revenue $3.6 Below Estimate in April

(May 10) -- California's general fund revenue came in $3.6 billion below state estimates in April, with personal and corporate tax receipts missing targets. For the fiscal year the state is now behind estimates by $1.3 billion. “Because a surge in revenues has not come, the Governor and Legislature need to move quickly and forge the consensus needed for a balanced budget," State Controller John Chiang said in a statement. Any delay will only limit their options and expose already struggling Californians to greater harm.”

San Francisco School, San Diego Bond Sales Among New Issues

(May 6) -- The San Francisco Unified School District plans soon to sell more than $180 million of general obligation bonds with double-A credit ratings. San Diego is selling almost as many lease-revenue bonds with an A+ rating. An interesting California Infrastructure Bank $60 million bond sale will finance a research project at the University of California San Diego (known as the Sanford Consortium Project). The University of California is the ultimate guarantor on these bonds and thus they are rated Aa1, or one notch below triple-A. Our Upcoming Sales list is filling up, though we probably need to remove a few entries that might have been priced.

Judge Lets State Take Redevelopment Money; Bond Lien Safe

(May 5) -- A California superior court judge upheld the state's taking of $2 billion in local redevelopment money to balance its own budget. Judge Lloyd Connelly said the legislature was within its power to shift the funds to schools in a way that still meets redevelopment purposes. He also said the transfer won't hurt existing bond payments. The "payments are subordinated to the lien of any pledge of collateral securing payment of the principal or interest on any bonds of the [redevelopment agencies], including bonds secured by a pledge of tax increment," Judge Connelly wrote in a 24-page ruling. The state passed the law last year and several cities and a redevelopment association challenged it; they now plan to appeal Connelly's ruling. The Bond Advisor discussed this situation last year and noted that some credit ratings may face pressure, but it appears the law was written carefully enough to avoid disrupting payments on existing bonds.

California Personal Income Tax Receipts $3 Billion Short in April

(May 4) -- California's personal income tax receipts during the key month of April look to be about $7 billion, according to daily tracking by the state's controller. The governor's latest budget estimate projected about $10 billion of such revenue in April. That won't help the state close yet another multibillion-dollar budget gap ($19 billion) in fiscal 2011. There are other signs the state's economy is at least past the worst of the last recession. Still, with unemployment at 12.6% in March, it isn't surprising income-tax receipts remain depressed.

California Treasurer Says Rating System Still Unfair to Muni Bonds

(May 4) -- California Treasurer Bill Lockyer wrote to Congress about the pending financial regulation reform bill, specifically to argue that municipal bond ratings still have room to go higher if default risk is compared with other fixed-income sectors. While Lockyer acknowledges recent muni bond "recalibrations" that put the state's rating higher, "substantial discrepancies remain" for default rates of muni and corporate borrowers with similar credit ratings, Lockyer's letter said. Our May print edition will discuss this topic more. 

May Print Edition to Be Mailed for Arrival Late in the Week

(May 3) -- Just a for your information: The May print edition will be mailed in a couple days to arrive later this week.

Par Value Trading Volume of Munis Dropped Last Year for a Reason

(Apr. 29) -- The total par amount of municipal bonds traded in 2009 fell to $3.8 trillion from $5.5 trillion the year before, according to Municipal Securities Rulemaking Board statistics. However, most of the decline can be traced to a fall-off in variable-rate trades after that part of the market came to a halt following the credit crisis. Trading in fixed-rate municipal bonds fell 11% in 2009 to about $1.75 trillion. The total number of fixed-rate traded actually rose to about 9.5 million last year, up from about 9 million in 2008.

Taxable Build America Bonds Depend on "Non-traditional" Buyers

(Apr. 28) -- It is often said that taxable Build America Bonds have brought "non-traditional" buyers of municipal bonds to the market. "These new investors include life insurance companies, individual retirement accounts, public pension funds, and non-U.S. investors," Fitch Ratings noted in a recent report. Given how poorly yields on the taxable BABs often stack up next to the TEY on comparable tax-exempt securities, someone beside sophisticated "traditional" muni buyers has to be drawn in. We would guess some taxable BAB buyers like the relative safety of munis.

Municipal Bond Fund "Inflows" Weaker, Still in Positive Territory

(Apr. 26) -- Municipal bond funds reported $118 million of "inflows" in the week ended April 21, according to Lipper FMI, following $204 million of "outflows" a week earlier. There is no question the "inflow" rally has lost some steam following a torrid 2009. Added money might be going into stocks instead given the really in that market, and other "riskier" investments are drawing more cash. We also don't think muni bonds in general have been helped by a deluge of "bad press" recently, which can dampen buying interest.

Public Finance Downgrades Almost Tripled in 2009, Fitch Reports

(Apr. 23) -- U.S. public finance downgrades jumped to 226 in 2009, up from 85 in 2008 and 42 in 2007, Fitch Ratings said. Even so, 88% of its ratings outlooks were "stable" at the end of 2009, Fitch added. Negative rating actions will outweigh positive moves again in 2010 due to the lingering effect of the recession.

States Will Issue More Debt as U.S. Aid Slows; Sun to Rise in East

(Apr. 21) -- With federal stimulus help slowing and tax receipts still stagnant after the recession, look for states to turn to more borrowing to shore up budgets, Standard & Poor's said in a report. "As in prior economic cycles, we expect that revenues for states may continue to drop well after an economic recovery begins, which can also make budget stability hard to achieve and maintain," S&P said. It added that state budget gaps across the U.S. for fiscal 2011 are expected to exceed $100 billion. California already has resorted to deficit borrowing in recent years and "borrowed" from its future by lying about so-called "balanced" budgets. That governments turn to borrowing to avoid even tougher decisions is nothing new, sort of like saying the sun rises in the east.

Moody's Recalibrations Push Most States to Triple- or Double-A

(Apr. 20) -- California may be A1 instead of Baa1 under the new "recalibrated" scale for municipal bonds by Moody's Investors Service but it doesn't have any single-A company. Illinois, Louisiana, and Arizona all moved up to double-A levels. A handful of states moved up to Aaa. As our April print edition explained, investors will lose something as municipal credit ratings become more "compressed" into fewer rating categories.

Details on End-of-Week Bond Pricings; a Taxable BAB Comparison

(Apr. 19) -- After we ran our weekly review early Friday morning, a handful of new bond deals priced. The AA-minus Brea Olinda school general obligation bonds provide a good benchmark of what higher-quality debt now yields. The five-year tax-exempt maturity yielded 2.17% and the 10-year, 3.65%. Some other recent new issues in that rating range offered similar returns. San Jose's redevelopment agency priced single-A tax allocation bonds with a five-year yield of 3.29% and a 10-year, 4.70%. The 15-year yielded 5.15%. Brea priced double-A water revenue bonds that yielded 2.15% in five years. However, most of that deal came as taxable Build America Bonds, including a 10-year maturity yielding a taxable 5%. The Brea Olinda school 10-year tax-exempt yield of 3.65% translates into a better Taxable Equivalent Yield for investors than the 5% taxable, even for those in the 25% or 28% federal tax brackets. For a 33% tax bracket investor the TEY is about 6% on a 3.65% bond (for a California resident)

A Day to Give Thanks for Tax-Exempt Bonds, and Laugh at BABs

(Apr. 15) -- The infamous day of tax-sucking homage to Uncle Sam is upon us again. Stop and give thanks for tax-exempt bonds and hope for their continued preservation. And, for certain holders of taxable Build America Bonds who must pay tax on their interest earnings today, we say: Ha ha ha ha ha! Joke's on you, suckers. Hope you did your TEY calculations with great care!

Our Favorite BBB+ Electric Utility Returns to New-Issue Market

(Apr. 14) -- The Puerto Rico Electric Authority plans to sell more tax-exempt power revenue bonds this month (along with taxable Build America Bonds). Our "favorite" BBB+ utility (S&P's and Fitch's rating) is so-called because of its monopoly position in Puerto Rico as a provider of an essential service. In late March the authority sold tax-exempt bonds with a 4.76% yield in 15 years and 5.30% in 25 years. The Commonwealth's debt is tax-exempt from both state and federal income taxes for California residents. Moody's rates the bonds A3.

Muni Bond Fund "Inflows" Resume; Vanguard Tops a Separate List

(Apr. 12) -- "Inflows" into municipal bond funds resumed in the week ended April 7, helping reverse the first week of "outflows" in more than a year, Lipper FMI reported. In another statistical report by Thomson Reuters eMAXX, big institutional buyers of municipal bonds added to their holdings in 2009. Vanguard Group moved to the top of the list by adding about 28% to its overall muni bond holdings, growing to almost $80 billion, the report said. Franklin Templeton added 13% and ended with about $70 billion of municipal bonds under management. Nuveen Asset Management was third with $54 billion. Citi is the biggest municipal bond holder among banks, at about $14 billion.

California's Tax Revenue Beats Budget Estimate for Fourth Month

(Apr. 9) -- In a sign that California's economy isn't getting worse (or the state's budget estimates are more realistic), the state's general-fund tax revenue beat projections for the fourth straight month in March. General fund revenue was $356 million higher than expected in March, or 5.9% ahead of estimates, the state controller's office said. State revenue is more than $1 billion ahead of what it was at the same point in the previous fiscal year. Even so, personal income-tax and corporate tax receipts remain sluggish; sales tax collections are the main bright spot. "The State’s nagging unemployment rate, combined with the fact that personal income tax revenues are trailing last year’s by nearly $1 billion, tells us the road to recovery will be long and arduous,” Controller John Chiang said in a statement. State politicians are wrong if they think this improvement will do much to solve the state's nagging multibillion-dollar budget deficits, the Bond Advisor adds.

A Value-Added Tax Proposal That Wouldn't Hurt Tax-Exempt Bonds

(Apr. 8) -- In past years tax-exempt bond investors have fretted about trial balloons in Washington D.C. that would get rid of the federal income tax in favor of a national sales tax, or a consumption levy such as a value-added tax. White House adviser and former Federal Reserve Chairman Paul Volcker suggested this week that a value-added tax might be one option for cutting federal deficits, but it would be in addition to the income tax, not as a replacement. That is a perverse way of making tax-exempt investors happy. The Wall Street Journal, commenting on Volcker's proposal, concluded that "the U.S. can't have a European welfare state without European tax rates, and so France, here we come."

Tax-exempt Municipal Bond Funds Finally See a Week of "Outflows"

(Apr. 7) -- Last week we noted the "inflows" into tax-exempt municipal bond funds couldn't go on forever. Indeed, just a week after inflows slowed to the slowest pace since January 2009, there was a $187.2 million "outflow" for the week ended March 31, according to Lipper FMI. All streaks must come to an end and this 14 month-plus run was a good one, helping erase memories of the sour year in 2008. We aren't surprised the tide turned a little, in part because of "negative" headlines that continue to overstate the credit risk for most municipal bonds. That scares away unsophisticated investors.

Stanford Students Say State Pension Funds $500 Billion Short

(Apr. 6) -- Stanford University students put together a study for Gov. Arnold Schwarzenegger that said that the state's three biggest public pension funds are $500 billion short of meeting future obligations. The students used formulas that they say reflect more realistic returns for the pension funds. Whether or not the study is exactly right, it buttresses the Bond Advisor's recent comments that public retirement costs will affect bond credit quality for years to come unless issuers are responsible about reining in these expenses. Stanford is selling triple-A municipal bonds this week and we are more inclined to listen to student "experts" from a triple-A issuer than the state pension "experts" at a triple-B issuer. (Oh, that's right, rating "recalibration" means we must now call California a single-A issuer. Ha!)

April Print Edition Going in the Mail; Looking at "Recalibration"

(Apr. 5) -- Due to the way March ended in the middle of the week, we are mailing April's print edition on April 5 to include some comments on first-quarter trends. Credit rating "recalibration" is a big topic of discussion as April unfolds, and just one item we discuss.

Local and State Governments Take in Record Taxes in 4th Quarter

(Apr. 1) -- Tax revenue for local and state governments actually rose in the fourth quarter of 2009 (by about three-quarters of one percentage point), the first time positive growth has been registered in five quarters, according to the U.S. Census Bureau. Property tax and corporate income tax collections rose over the year-earlier period, while sales and income tax receipts still dropped. (The lag in lowering assessed valuations might explain why property tax collections were so strong.) An interesting tidbit: the $360 billion raked in by local and state governments in the fourth quarter was the highest total ever for a quarter based on U.S. Census records. Do governments have a revenue problem or a spending problem? Granted, for all of 2009, their overall revenue fell by more than $70 billion, or about 5.6%. States bore the brunt of that trend because local government revenue actually rose in 2009.

Federal Government Eats Into Another Source of Municipal Bonds

(Mar. 31) -- A new law will have the U.S. government be the originator for all federally-guaranteed student loans. This is significant in that states and nonprofits have played a past role in selling municipal bonds to finance these loans. We suppose they could still finance student loans, but without a federal guarantee the structure will have to be different. (Apparently states will still be able to service the federal loans, but that is not the same as  selling bonds for this purpose.) The federal tentacles just keep getting longer. Taxable Build America Bonds were just the start of an effort to remake the municipal bond market and usurp local power and decisionmaking.

Tax-Free Bond Funds See Slowest Inflows Since Early in 2009

(Mar. 29) -- This party of "inflows" into tax-exempt municipal bonds funds has to wind down at some point, and last week showed it won't go on forever. For the week ended March 24 these funds recorded $284 million of inflows, according to Lipper FMI. That is the slowest weekly pace since January 2009. Even so, this remarkable 14-month run of "inflows" probably still has some steam left in it as long as money keeps fleeing tax-exempt money market funds.

Ambac Action by Wisconsin Regulator Seems to Help Muni Bonds

(Mar. 26) -- A decision by Wisconsin's Insurance Commissioner to segregate certain riskier policies written by bond insurer Ambac Assurance Corp. apparently was made to help investors holding municipal bonds backed by Ambac. "I am taking action to protect policyholders, including investors in thousands of state and local municipal bond issues and other public finance securities, who rely on [the bond insurer's] guaranty," Wisconsin Insurance Commissioner Sean Dilweg said in a statement. "I have a concrete plan for rehabilitation, and details will be reviewed in court over the coming weeks." Dilweg became concerned that Ambac was being drained by payouts to settle riskier claims, including those tied to mortgage products. According to a Q&A by the regulator, Ambac policies for muni bonds issued for the Las Vegas Monorail will be put in the segregated account. Most of the "traditional" muni bonds backed by Ambac aren't going to default in the first place.

Federal Health-Care Changes Add to Credit Concerns for States

(Mar. 24) -- California can't even come to grips with the health costs for its own state employees. This week's federal health-care changes will impose an annual multibillion-dollar burden for California by expanding the list of those eligible for Medicaid. The impact will kick in by 2014. You better believe it will have credit-rating implications as well, though with the rush to "global" rating scales maybe the rating agencies won't get too rattled anymore by poor governance.

Tax-Free Bond Funds Still Seeing "Inflows" After Record Year in '09

(Mar. 22) -- While the pace is slower than in 2009, tax-exempt municipal bonds funds are still seeing more money come in than go out so far in 2010. For the week ended March 17 these funds recorded $606 million of inflows, according to Lipper FMI. Much of this money still might be coming from money market funds, which are returning almost nothing. That is a high price indeed just to stay "liquid."

California's Legislature Does It Again: A Wasted Special Session

(Mar. 18) -- With all sarcasm intended, we note that people were really on the edge of their chairs over the California "special session" to address the budget deficit. The special session has ended and produced about $200 million in savings toward a $20-billion-plus deficit. Gov. Schwarzenegger vetoed certain bills, including a gasoline sales and excise tax switcheroo, because of concern they didn't produce real cuts or provide other benefits. The only "good" news the state might receive is that tax revenue is starting to beat past estimates, so the projected deficit might be somewhat smaller when the governor's May revision is released. There isn't much "good" news in that when a chronic "structural" budget deficit remains for the state.

Extension of Taxable BABs Still on Washington's Plate; Terms Vary

(Mar. 16) -- The sausage-making process in Washington D.C. that is otherwise known as law making is in full swing on many fronts. As always, our interest is in those bills affecting the municipal bond market. One of the much-discussed bills for "jobs" includes muni bond provisions, such as extending the taxable Build America Bond program for three years. The taxable BAB language provides a gradually lower but richer subsidy for local interest costs than President Obama's administration previously suggested. Since all this could still change by the time legislation reaches a final stage, there is no use dwelling on it yet. Just remember that any plan to keep taxable BABs attractive will affect tax-exempt sales volume as well. Current legislative language also would extend certain other "stimulus" provisions, such as exempting some new private-activity sales from the Alternative Minimum Tax for yet another year. We have noted that some issuers, such as airports, have been refinancing AMT bonds with non-AMT munis during the "window of opportunity" provided by last year's stimulus bill. That window currently would expire after this year.

Yields on Capital Appreciation Bond New Issues: Another Example

(Mar. 15) -- Our table on the Yield Trends page excludes capital appreciation bond (CAB) pricings. That is because the yields posted for such "compound interest" bonds would be confusing if they are posted next to yields on current-interest debt. Once in awhile, however, we flag some recent zero-coupon pricings just to give a sense of the market. Late last week, the Menlo Park City School District sold general obligation CABs with a 2% yield in 2015 and a 3.85% yield on CABs due in 2020. The 15-year maturity yielded 5.15% and the 20-year, 5.94%. A 2040 maturity CAB was offered at 6.35%. The Menlo Park district is highly rated, with an Aa2 from Moody's and AAA from S&P.

More S&P Upgrades, These for Several Solid Waste Bonds

(Mar. 12) -- As long as we just mentioned the wave of S&P upgrades in the item below, we should note that the rating agency yesterday upgraded several solid waste bonds across California, often by three notches to double-A levels. As an example, Fresno's solid waste management revenue bonds rose to AA- from A-. A stable revenue stream because of monthly charges and strong financial operations support the Fresno bonds, S&P said. Other solid waste credits that rose a handful of notches were Monterey's regional authority; Napa; Placer County through a North Lake Tahoe financing authority; Sacramento County; Santa Cruz; a Salinas Valley authority, a Shasta authority, and Sunnyvale. Burbank's taxable 2002A waste disposal bonds also rose two notches.

Who Isn't Getting Upgraded by S&P Nowadays? Trend Continues

(Mar. 11) -- Since we focus elsewhere on a six-notch S&P downgrade today, it is worth mentioning that our heads spin watching the number of Standard & Poor's upgrades of municipal bonds. In 2009 alone S&P raised its ratings on 2,265 municipal issues and downgraded only 637 of them. We are seeing this trend continue in 2010, with many existing municipal bonds in California getting upgraded daily. Why this trend when the economy is hurting municipal revenue? Many of these upgrades are "resulting primarily from previously announced criteria changes relating to such factors as our assessment of the issuer's location, size and management," S&P said in a recent update of a default study we discuss here. (Even so, S&P notes that the recession was one reason muni bond downgrades increased 287% in 2009.) We just thought we would flag this trend since it is still going on. It will also be interesting soon to see what other rating agencies say about their previously-postponed plan to look at a "global" rating scale that might change the way municipal bonds are graded (based on default history, plenty of single-A muni bonds look as safe as triple-A corporate bonds).

As New York Goes, So Goes California; Or Is It Other Way Around?

(Mar. 10) -- We have lamented several times in recent years that the State of California's "budgets," if you can even call them that, began to lean heavily on strategies favored in New York for a long time. By that we mean deficit borrowing, lots of gimmicks and accounting tricks that didn't produce real spending cuts, and the creation of new bond-issuing authority to avoid tough decisions (including the famous "economic recovery" bonds that were simply "deficit" bonds in our book). Now it appears New York is following California's example, which of course was following New York's example. New York Lt. Governor Richard Ravitch just proposed borrowing billions of dollars to cover his state's soaring budget shortfall. He also wants to curb New York's out-of-control spending, which apparently jumped 10% this year even when the state knew times were tough. All this sounds way too familiar. To paraphrase a song, if you can make that garbage work in New York, we guess you can make it work anywhere.

We Expect Governor to Let Cash Management Bill Take Effect

(Mar. 9) -- Gov. Schwarzenegger has vetoed a bill that would cut $2 billion from California's budget deficit. He said the proposal to cut prison spending was unrealistic and wouldn't accomplish its goals. We welcome his action because the legislature has passed enough of this phony "deficit cutting" garbage in past years. That's part of the reason the state is facing chronic deficits. The veto got us thinking, will the governor oppose a  recently-passed cash management bill intended to help California's bond sale this week? No, we think he will support it because it eases some concern about the state's cash-flow situation. The bill, numbered as ABX8 5, lets the state temporarily delay certain general fund payments for some education and local government purposes. At times these deferrals can run for 30 or 60 days. The idea is to avoid certain cash-flow crunches for the state through fiscal 2011 and provide an even bigger cushion for priority payments, such as debt service. It's not a perfect approach, but it might let the state avoid some IOUs that give California a black eye.

Oceanside Wastewater COPs Removed from Rating Warning List

(Mar. 8) -- Oceanside's wastewater certificates of participation were removed from a CreditWatch list by Standard & Poor's. We said way back in November that S&P would probably do this after the city raised wastewater rates to meet an annual debt service covenant. We also said the decision wouldn't be be "made quickly" because S&P needed to study details of the rate increase. S&P also affirmed its current A+ rating on the COPs and has a "stable" outlook.

Health Care Costs Pose Long-Term Threat to States, Localities:GAO

(Mar. 5) -- The U.S. Government Accountability Office warned in a report this week that state and local governments face a long-term decline in their fiscal positions over the next 50 years absent any policy changes. The main culprit? Rising health care costs, according to the GAO's fiscal outlook for this sector. Given the need to balance local operating budgets, a future declining fiscal outlook foreshadows "the extent to which these governments will need to make substantial policy changes and other adjustments to avoid growing fiscal imbalances," the GAO report said. The Bond Advisor highlighted this issue in our March print edition in our discussion about something called GASB 45. As we explained, credit quality also could change absent budget reform. This sector also is facing near-term pressure because of "steep revenue declines," which were offset in part by last year's federal "stimulus" legislation, the GAO report noted.

Why Municipal Bondholders Want MBIA to Win This Court Fight

(Mar. 3) -- In February a judge ruled that MBIA Inc. must continue to defend its decision to segregate its municipal bond exposure in a new subsidiary, National Public Finance Guarantee Corp. MBIA wanted lawsuits over the decision dismissed, but certain financial institutions argue it was unfair to leave them with a weakened MBIA Insurance Corp. You can see why municipal bond investors want MBIA to win this case when you look at the portfolio of the new National Public Finance Guarantee. In MBIA's annual report filed the other day, we looked at the credit quality of the holdings guaranteed by this subsidiary. Of the $508 billion, 4.2% is triple-A and 46.5% is double-A. Another 39.5% is single-A and 9.3% is triple-B. The below investment-grade category is 0.5%, down from 0.6% a year earlier. Even though it is a tougher time for muni credits, the MBIA portfolio of single-A and above ratings stayed above 90% as of Dec. 31, 2009 (in fact, it grew a little over 2008). Since the default levels for those rating levels of municipal bonds remain very low, it would be a good thing if MBIA wins in court to make this a standalone subsidiary. It was the other riskier securities (mortgages, etc.) that got the insurer in hot water. Too bad MBIA didn't stick to its public financing knitting in the first place, but that's ancient history.

March Print Edition Is On Its Way: We Even Take a Jab at Atlanta

(Mar. 1) -- The Bond Advisor's March print edition was mailed February 27, which usually isn't worth noting except for our comment in January that we won't face any more delays like the ones that affected us a handful of times recently. While our focus is usually on all things California, we even take a jab at the City of Atlanta's financial management to illustrate one of our concerns about a problem facing more and more states and localities.

One Bond Insurer Sees Some Light at End of Tunnel as Income Up

(Feb. 26) -- Assured Guaranty Ltd., owner of two bond insurance subsidiaries, Assured Guaranty Corp. and Assured Guaranty Municipal Corp., yesterday reported consolidated net income of $216.7 million in the fourth quarter, compared with a $243.8 million loss in the same year-earlier quarter. "We recorded strong operating earnings for the year, despite losses in our residential mortgage-backed insured portfolio," Dominic Frederico, president and C.E.O. of the company, said in a statement. The acquisition of the former Financial Security Assurance provided added earnings power, Frederico said, and the insurer made inroads in its "core" municipal bond market business. Our weekly review notes that AGMuni insured several deals in California's market the last couple of days.

Assured Guaranty Stops Carrying Fitch Ratings Over Policy Change

(Feb. 25) -- Assured Guaranty Ltd. said that Fitch Ratings has agreed to withdraw its ratings on its two bond insurance subsidiaries, Assured Guaranty Corp. and Assured Guaranty Municipal Corp. Assured Guaranty said it made the move after Fitch decided last year to withdraw its ratings on AGC-insured bonds that don't have an "underlying" rating from Fitch. (The underlying rating is based on the credit strength of a bond without any financial guarantee.) Fitch's decision led to about 90% of its bond insurer ratings being withdrawn on the two subsidiary's insured deals, AGC said. "If, in the future, Fitch's participation in the municipal bond market should expand significantly, we would certainly consider renewing our relationship with them," AGC President Dominic Frederico said. Fitch had rated AGC AA-minus and AGMuni, AA. The change means that Fitch doesn't rate any bond insurers now. Moody's Investors Service rates AGC and AGMuni Aa3 with a "negative" outlook. Standard & Poor's rates them AAA with a "negative" outlook.

Federal Bill Would Kill Off Tax-Exempt Bonds; It Isn't Going to Pass

(Feb. 24) -- The Bond Advisor was the first to point out that all this industry gushing over taxable Build America Bonds could come at a high price if Congress starts to rethink the value of tax-exempt debt. One of our industry supporters flagged a new U.S. Senate tax reform bill unveiled this week that proposes to eliminate tax-exempt bonds after this year. The bill would replace them with tax-credit bonds. This bill isn't going anywhere because it is clear tax-credit bonds haven't been much of a hit. Indeed, some tax-credit bonds approved in the "stimulus" legislation will probably be shifted to taxable BABs instead. Nevertheless, this new legislative proposal to do away with tax-exempt bonds is troubling because it will bring attention to the fact some think it should be debated. Local and state governments better rally the troops on this front. (By the way, investors often ask what will happen to their existing tax-exempt bonds if exemption was curtailed in the future. There is typically a "grandfathering" clause that would protect the tax-exemption. Any such  change would apply to future bonds after an effective date. But let's hope we don't get to that point.)

Fitch: Lingering Stress for Muni Issuers; Reserves "Satisfactory"

(Feb. 23) -- Fitch Ratings said "financial reserve levels" for most tax-supported municipal debt will remain "satisfactory" in 2010. The rating agency added that "management" at issuers will continue to be an important factor in addressing any fiscal stress and protecting credit ratings. "While the national economy may be stabilizing following the most severe downtown since the Depression, most municipal governments will face at least another year of heightened financial pressures," Fitch said. "Stabilization of and improvement in sales and other economically sensitive taxes will likely be offset by weakness in property taxes, the cornerstone of most local governments’ revenues, as continued property value declines work their way through the property assessment system. Also, Fitch expects local governments to feel the impact of continued state budget gaps due in part to the scheduled phasing out of federal stimulus relief." Across the U.S. Fitch said that 11% of its municipal credit ratings had either a "negative" watch or outlook at the end of 2009. In California the number was 14%.

Burbank No Butt of This Joke: "Issuer" Credit Rating Up to AAA

(Feb. 19) -- The phrase "beautiful downtown Burbank" was once the butt of a joke on a television show called Laugh-In, and similar mentions by Johnny Carson. The city can now point to a mark of beauty other cities would envy, including neighboring Los Angeles. Standard & Poor's raised Burbank's "issuer" credit rating to AAA from AA (this rating is a proxy for a general obligation pledge). "The upgrade reflects our view of the city's strong local economy and steady tax base growth; convenient, attractive location; strong income levels coupled with extremely strong market value per capita; very strong financial position; very low debt levels; and strong financial management practices," S&P said in a statement. The Walt Disney Co. and Warner Brothers Entertainment are Burbank's top two employers.

A $1 Trillion Hole: States Must Pay Employees Benefits ... Someday

(Feb. 18) -- The price tag for promised public employee retirement benefits by U.S. states is $3.35 trillion. At the end of fiscal 2008 they were a trillion dollars short of setting aside resources to meet these promises, a new report by the Pew Center on the States said. This trend won't be surprising to anyone who has been reading our recent print editions. People talk about "massive" debt service costs in public budgets, but at the local and state level bond expenses pale in comparison to employee payrolls and related benefits. Overall, California's state pension plans were 87% funded through 2008, the Pew report said. (That figure isn't all that bad; however, the percentage is now lower after the economic downturn hit pension fund assets in fiscal 2009.) Also, since 2002, the state hasn't been making its "full" payments on "actuarially required pension contributions," the report added. The Pew report also raised the same red flag hoisted recently by California's controller: the state by 2008 only had set aside $3 million to cover a $62 billion long-term liability for retiree health care and related benefits. You can't talk about state budget reform without tackling such issues first.

Thousand Oaks Redevelopment Bond Upgraded Two Notches

(Feb. 17) -- Thousand Oaks Redevelopment Agency tax allocation bonds for the Newbury Road project area were upgraded to A-minus from BBB by Standard & Poor's. A "decrease in concentration" for the property tax base was one factor for the change, along with "strong debt service coverage," S&P said. Separately, the city's underlying rating for the Boulevard project area (Series 2005) tax allocation bonds rose to A from A-minus, S&P said. There are a lot of rating upgrades from S&P nowadays because of "criteria" changes for certain municipal bond categories, but sometimes that isn't the only factor for an upgrade.

Municipal Bond Funds Still Growing, Money Market Funds Shrinking

(Feb. 16) -- Municipal bond funds saw net "inflows" of about $700 million in the week ended Feb. 10, according to Lipper FMI. If you also include bond funds that report monthly, the trend for inflows is even better so far in 2010. In contrast, the Investment Company Institute says tax-free money market funds recorded "outflows" of $6.4 billion in the week ended Feb. 10. Investors keep fleeing tax-free money market funds because yields are so low. These money-market funds still have $380 billion of assets, though that is down from about $502 billion near the start of 2009.

Be Careful What We Wish For: Senate Would Boost Taxable BABs

(Feb. 12) -- We have been critical of Congressional efforts to displace tax-exempt bonds with so-called tax-credit bonds. The tax-credit debt creates a murky market in our view. Unfortunately the U.S. Senate is now pondering a bill that would let some of these tax-credit bonds be structured as taxable Build America Bonds instead. Either way, that is a lose-lose proposition for the tax-exempt market because it would siphon off billions of dollars in volume, though the purposes are limited to certain types of qualified school bonds, energy conservation debt, etc.

California Takes in $1.28 Billion More Than Expected in January

(Feb. 11) --  California's general fund collected $1.28 billion more in January than expected, a state controller report said. That is 18.6% more than the governor's fiscal 2011 budget projected. These are "positive signs," the controller's report said, though "we have only just begun the recovery process." General fund revenue was up $452 million from the same month in 2009. The state "cannot be lulled into a false sense of security" because it still faces a cash pinch this year and still hasn't fixed "chronic budget shortfalls," Controller John Chiang said in a statement.

California's Unfunded Retiree Health Cost: $51.8 Bln, Report Says

(Feb. 10) --  California Controller John Chiang said a new actuarial report shows that California's unfunded obligation for health and dental benefits for state retirees now stands at $51.8 billion. Unlike pension costs for state retirees, which are "pre-funded" so the pension fund can generate investment returns, the health and dental costs are on a "pay-as-you-go" plan. Chiang said lawmakers should "reduce the impact on future generations" by increasing annual payments to "tackle our obligation in a responsible manner." Given how well California lawmakers have tackled years of deficit-ridden budgets, don't hold your breath. Addressing these "hidden" costs of government will take voter initiatives that force the state to be honest about its budget tricks. Be thankful that accounting standards were changed a few years ago to force governments to disclose such costs. Many "public" governments fought the proposal because they don't want to acknowledge what their promises "today" actually will cost taxpayers "tomorrow."

Los Angeles School G.O. Bonds Expected to Price Next Week

(Feb. 9) --  The Los Angeles Unified School District general obligation bond sale we mentioned almost a week ago (see below) looks like it will price on February 17 for "retail" and then the next day for institutions. The bonds are rated Aa3 and AA-. Even with all the "negative" headlines about budget deficits, the school district tends to make cuts to protect financial cushions.

Buffett's Berkshire Hathaway Assurance Bond Insurer Downgraded

(Feb. 5) --  The bond insurer that was going to restore a triple-A sheen to municipal bonds has lost its top rating from Standard & Poor's. Berkshire Hathaway Assurance Corp. is now AA+. The downgrade doesn't reflect weakness at the bond insurer. Rather, the insurer is affected by parent Berkshire Hathaway's decision to purchase Burlington Northern Santa Fe Railway Corp. for $26 billion. That will reduce the parent's capital adequacy and liquidity, S&P said. BHAC hasn't been doing new municipal bond business in recent months. It remains a strong insurer for the bonds it already guaranteed.

Los Angeles Unified School District Weighs $2.2 Billion G.O. Sale

(Feb. 3) --  The Los Angeles Unified School District may sell about $2.2 billion of general obligation bonds, according to a Standard & Poor's report. The bonds, rated AA-, could be split between about $1.45 billion of taxable Build America Bonds and $744 million of tax-exempt debt, S&P said.

Revisiting Vallejo's Bankruptcy: Workout Plan and Muni Debt

(Feb. 2) --  The second part of our January print edition has quite a bit to say about the City of Vallejo's proposed workout plan for getting out of bankruptcy. It would set some bad precedent for the municipal market. We haven't said much about the city lately because a lot of its general-fund certificates of participation (COPs) that faced the most risk from the bankruptcy filing were redeemed in full by a letter-of-credit bank. Even so, the way those COPs get treated by the proposed workout plan (including a temporary suspension of interest payments) doesn't thrill us at all. Our June 2008 lengthy story about the way the rest of Vallejo's bonds would probably get treated in bankruptcy has continued to pan out since most "enterprise" debt has been paid in full and on time. Speaking of cities and bankruptcy, one of our readers flagged an essay San Diego Mayor Jerry Sanders wrote for a local newspaper. Sanders reiterated, for what seems like the millionth time, that his city doesn't need a Chapter 9 bankruptcy filing to deal with public unions and structural budget deficits.

Obama Wants Taxable BABs Extended, But With Lower Subsidy

(Feb. 1) --  The emergence of taxable Build America Bonds in 2009 was one factor helping tax-exempt municipal bond volume decline to the lowest level since 2004. It doesn't look like this taxable "stimulus" program will expire at the end of 2010. It is now widely reported that the Obama administration wants to extend the program permanently. The Bond Advisor has complained that the current federal 35% subsidy for issuers selling taxable BABs is far too generous and an unneeded giveaway of taxpayer dollars. Under the new Obama proposal the subsidy would drop to 28%. This would help cut into issuance of such taxable debt. However, the proposal also would let nonprofit hospitals and universities start to sell taxable BABs, and expand it in other ways. Our second "January" print edition that was mailed at the end of the month discusses Taxable Equivalent Yields and taxable BABs, and cites several deals from last month that included far more taxable than tax-exempt debt. We have noticed in recent "general media" stories that muni bond fund managers are confirming what we said all along: tax-exempt yields are staying lower because taxable BABs keep draining supply. In January new municipal bond sales rose but the tax-exempt portion actually declined.

Unusual: Irvine Ranch Water District Offers Fixed-Rate Securities

(Jan. 27) -- Usually we wouldn't flag a sale just because it involves fixed-rate debt. However, when the Irvine Ranch Water District soon prices $100 million of certificates of participation, the fixed-rate debt will represent quite a change. Before this sale 100% of the district's debt was in a variable-rate mode, though $130 million of interest-rate swaps helped provide a synthetic fixed rate, Fitch Ratings said in a report. After the sale 80% of the district's debt will be variable-rate. The COP sale will refund all of the district's existing variable-rate certificates of participation. The sale also is unusual because it earned an AA+ rating from Fitch. You don't see many COPs rated that high except when the issuer's other debt is at or near triple-A levels.

Fitch Confirms Negative Rating Trend, Though 87.3% Are "Stable"

(Jan. 26) -- Over on our Bond Updates page on Jan. 25, we noted the Moody's summary of growing downgrades in 2009 for municipal bonds. Fitch Ratings also confirmed this trend in a report on fourth-quarter 2009 changes. There were 70 downgrades and 58 upgrades, Fitch said. "Negative" outlooks outnumber "positive" outlooks by more than 4-to-1 and negative rating watches lead by nearly 7-to-1, Fitch said. Still, at the end of 2009, about 87.3% of its muni ratings had a "stable" outlook. In addition, 71.3% of its rating actions were "affirmations" of existing ratings in the fourth quarter, with no change in outlook. Despite the sharp economic downturn, many of the traditional "safer" muni bonds continue to benefit from decent financial cushions for protection.

Chart of Upcoming Sales Is Updated; More Looming Issues to Come

(Jan. 25) -- Our page of Upcoming Sales was very full in late 2009, then it went on hiatus briefly. We found that some financial advisers or underwriters weren't giving us updates on delayed sales and that made the list too full of "stale" entries. As a result, our current update is a bit short, mainly listing some deals we expect to price soon. The list will probably double or triple by next week as we confirm other imminent municipal bond sales in California.

Municipal Bond Fund Inflows Still Going as 2010 Follows '09 Trend

(Jan. 22) -- Municipal bond funds are still seeing "inflows" in 2010, though the pace has slowed somewhat after breathtaking growth in 2009. The muni funds recorded $79 billion of inflows last year, erasing bad memories of "outflows" in 2008. Meanwhile, tax-exempt money market funds continue to see a gigantic exodus because of non-existent yields. Some of that money is obviously flowing into municipal bonds funds.

Update: Recent Examples of Yield Trends Returns, New Sales Next

(Jan. 21) -- After a hiatus because of an unplanned trip to New York, we are catching up on a couple features people like. Our table of yields on recent new issues is being filled in again and will be caught up in a few days. We wiped clean our list of Upcoming Sales and will re-insert this calendar on Jan. 25.

Assured Guaranty Was Really the Only Insurer Game in Town in '09

(Jan. 20) -- Assured Guaranty Ltd., using two subsidiaries, provided financial guarantees on 98.2% of the insured municipal bond business in 2009. While this statistic, compiled by Thomson Reuters, isn't a shocker (everyone knew Assured Guaranty was about the only choice last year), it still is amazing. Only a handful of years ago Assured Guaranty was a bit player in the muni market until the other "former" triple-A insurers wrecked a good thing by expanding into riskier securities. Less than 10% of new muni sales were insured in 2009, down from close to 50% during the financial guarantor heyday. Who captured the other 1.8% of muni insurance business in 2009? Berkshire Hathaway Assurance Corp., the once-promising new entrant tied to Warren Buffett. However, BHAC hasn't been guaranteeing new issues for several months.

Updates Resume After a Lull; Print Edition to Announce Changes

(Jan. 15) -- As you will see, a few more updates are featured today and regular updates start again next week. We got off to a slow start in the New Year, but don't complain. You're getting it for "free." An upcoming print edition will announce several changes, including various new Web features.

State Tax Receipts Record a Decline Not Seen Since JFK in Office

(Jan. 8) -- Although we have mentioned this before, state tax collections lag an economic rebound and are still gloomy. In the first nine months of 2009 state tax revenue dropped the most, on a percentage basis, since John Kennedy was President, the Nelson A. Rockefeller Institute of Government reported. In the third quarter overall tax revenue for states dropped 10.9%. Local tax collections are far more stable and actually rose slightly in the third quarter across the U.S., the institute said. Of course, some local governments are seeing actual declines as well in year-to-year figures.

Schwarzenegger Seeks Relief from U.S.: Good Luck, Arnold

(Dec. 24) -- Recent media reports noted that Gov. Arnold Schwarzenegger wants the federal government to change certain minimum funding standards and mandates for social programs. It's a worthwhile attempt to help balance the budget. We also would be surprised if it gets far since the current federal mindset is to force everyone, including local and statement governments, to spend money they don't have.

Moody's Affirms G.O. Rating on Bankrupt Health Care District Bonds

(Dec. 23) -- Moody's Investors Service affirmed the Ba2 rating on about $20 million Sierra Kings Health Care District general obligation bonds and said payments will probably be safe during a bankruptcy process. "The next debt service payment on the bonds is in February 2010, at which point, assuming debt service is paid in full, the rating will likely be removed from Watchlist," Moody's said in a report. "The likelihood of debt service interruption as the district advances through the bankruptcy process appears improbable."

Municipal Bond Funds Still Seeing "Inflows" as 2009 Nears Close

(Dec. 21) -- Municipal bond funds recorded $663 million of "inflows" in the week ended Dec. 16, according to Lipper FMI. The muni bond funds are now close to recording "inflows" for every week in 2009 and the trend will probably continue into early next year. What a difference a year makes! Last December the municipal market was seeing a "panic" as investors threw money at U.S. Treasuries.  

Valley Health System Vote to Sell Hospitals Winning With Big Margin

(Dec. 16) -- The bankrupt Valley Health System's proposal to sell its remaining hospitals in Hemet and Menifee was getting a "yes" vote of 87% at the last posted count last night. There were a lot of mail-in ballots sent out so the percentage tally still could change, but it appears likely the proposal has passed. Physicians for Health Hospitals, a local group of doctors, will buy the system's assets for more than $162 million. A successful sale also should pay off in full all the remaining tax-exempt debt backed by the system. The Valley Health System certificates of participation (1993 Refunding Project) and the VHS Hospital Revenue Bonds (1996 Series A) would be paid off, and a recent Nov. 15 payment default would be cured. After the election results are declared final, which can take almost a month, the transfer of the assets could occur within another month-and-a-half.

California General Fund Revenue Closer to Estimates in November

(Dec. 11) -- California's general fund revenue in November was "relatively close to projections" made in the state's fiscal 2010 budget, according to the state controller's office monthly statement of cash receipts. Personal income tax revenue was still lower than projected, while corporate and sales tax collections exceeded estimates by relatively small amounts. "The next eight weeks will be far more telling of the State’s fiscal health" because December and January tax receipts tend to indicate what the trend will be for spring 2010 collections, California Controller John Chiang said in a release. "Record unemployment" remains a concern, he added.

Assured Guaranty Raised $574 Mln from Stock Sale; Schozer Going

(Dec. 10) -- Municipal bond underwriters predict $451 billion of muni bonds could come to market in 2010, with about $348 billion as long-term debt. Short-term debt could total $68 billion and variable-rate, $35 billion. These numbers come from a survey by the Securities Industry and Financial Markets Association. Taxable Build America Bonds could total $85 billion, those surveyed estimate. These taxable BABs tend to take away volume from the long-term tax-exempt market and represent the most troubling trend for the year ahead.

Assured Guaranty Raised $574 Mln from Stock Sale; Schozer Going

(Dec. 9) -- Last week we mentioned that Assured Guaranty Ltd. was selling stock in an effort to address certain rating agency concern. The net proceeds were $574 million. We would expect this will help keep bond insurer Assured Guaranty Corp. at double-A rating levels from Moody's and Fitch. Also remember, the "old" FSA is now Assured Guaranty Municipal Corp. and also is rated Aa3 by Moody's. In another development, an SEC filing made the other day indicates that Assured Guaranty Corp. President Michael Schozer is resigning. Sean McCarthy, a long-time veteran of the "old" FSA and then at Assured Guaranty's parent, will replace Schozer. The money raised by the stock sale is the far bigger "news" in our view because it specifically addresses a concern raised by Moody's.

Moody's Doesn't Threaten U.S. Aaa Rating, But Sees Testing Time

(Dec. 8) -- Moody's Investors Service said a gloomy public finance outlook for the United States and the United Kingdom may "test the boundaries" for triple-A ratings. However, "the rating agency stresses that it does not see an immediate threat to the ratings of any of the 17 nations it currently rates Aaa," Moody's said, adding that the U.S. has an "adequate reaction capacity" to face the challenge and rebound. The pace of economic growth and interest-rate trends will be monitored because of "significant debt burdens" some countries have taken on in response to a global financial crisis. The next year or two will show whether "growth potential has been structurally eroded" or whether a "sustainable" recovery is possible, Moody's added. Your local "essential" municipal bonds look better all the time, don't they?

Tax-Exempt Bond Funds See Inflows for 48th Week in a Row

(Dec. 7) -- Municipal bond funds marked their 48th straight week of "inflows" in the period ended Dec. 2, raking in another $819 million, according to Lipper FMI. The funds have now seen "inflows" of more than $73 billion this year, smashing the previous annual record of about $31 billion in 1993. One sources of "inflows" continues to be tax-exempt money market funds, where investors are fleeing paltry yields.

Assured Guaranty Stock Sale Could Help Boost Rating Prospect

(Dec. 2) -- Assured Guaranty Ltd. plans to sell 23.9 million shares of stock this week in a move that could help keep its bond insurance subsidiaries in double-A territory. Last month Moody's Investors Service downgraded Assured Guaranty Corp. to Aa3 and cautioned that its parent needed to take capital-strengthening steps. The stock sale should help alleviate Moody's concern.

Newest Print Edition Mailing Planned for December 2, We Hope

(Dec. 1) -- Due to the disruption of the Thanksgiving holiday, we hope to mail the December print edition on Dec. 2. We had planned to mail on the first but that is going to slip by at least one day if not two. The delay also might curtail Web updates for a day, although nothing was added Nov. 30 because of a slow market after the holiday weekend.

S&P Downgrades Bond Insurer Radian Asset to BB from BBB-

(Nov. 25) -- (Note: This item first appeared Nov. 24 on our Home page.) Radian Asset Assurance, which once sought to carve out a bond insurance niche with a double-A financial strength rating, now is rated double-B by Standard & Poor's. It was BBB-minus. Radian's downgrade reflects "adverse loss development" thanks to certain collateralized debt obligations (CDOs). In plain English, the insurer made a stupid foray into riskier securities and now it is paying for that mistake. Radian already is in a state of being "run off" by its parent company, meaning it isn't seeking new business and is simply dealing with existing claims. Remember, the municipal bonds backed by Radian tended to be quite solid on their own and carry the higher of the "underlying" rating or the insurance grade. That assumes, of course, that an underlying rating was obtained.

Tax-Exempt Bond Fund Weekly Inflows at Slowest Pace Since April

(Nov. 24) -- The pace of "inflows" going to municipal bond funds slowed in the latest week to a level last seen in April. The funds still reported another $518 million of "inflows" in the week ended November 18, Lipper FMI statistics show. While a half-billion dollars is nothing to sneeze at, the pace doesn't match the billion-dollar-plus gains seen for several weeks in the summer and early fall.

More Headlines, More Bad News: State Taxes Down in 3rd Quarter

(Nov. 24) -- Overall state tax revenue in the U.S. fell 10.7% in the third quarter over the same period a year ago, according to preliminary data from the Nelson A. Rockefeller Institute of Government. We saw this yesterday and hesitated to post it because it seems like this point has been made already. The Institute also is projecting a weak fourth quarter for state tax receipts. The latest decline marks four straight quarters of year-to-year declines in personal income tax and sales tax collections, the report said. Massachusetts was the only state with sales tax growth but that was because its tax rate rose to 6.25% from 5.00%. California did a little better than the national average with an overall 8.7% year-over-year revenue decline in the third quarter. The state's sales tax receipts dropped just 1%, but personal income taxes plunged 16%, fueling the budget crunch. We already have seen one California legislator say she will oppose any cuts in the state budget next year. What a surprise! You mean the state will spend money it doesn't have? Ha!

Cities Want In on "Headline Risk," Too; Forecast Tough 2010, 2011

(Nov. 20) -- Earlier this week we discussed the "headline risk" from all the doom-and-gloom stories about local and state governments. Just remember, there is a huge difference between potential downgrade risk and default risk. Since states seem to get in on most of the "headline risk," why not give cities a chance, too? A new National League of Cities survey indicates that cities will face tough budget cycles in 2010 and 2011 because a tax receipt rebound tends to lag an economic recovery. According to the report, "while income and sales taxes are typically the earlier sources of city revenue to decline as job losses increase and consumer purchases decrease, property tax collections—which make up the bulk of city revenue nationwide—decline much more slowly as real property assessments are adjusted to reflect declining housing values." Of course, only certain cities collect income taxes, New York being a prominent example. We don't disagree with the gist of this report, but want to remind readers that municipal credits have to be evaluated on a case-by-case basis. Beverly Hills is selling high-quality lease revenue bonds next week, regardless of what is happening in the economy. Concern about lower property assessments is one reason redevelopment bonds have been paying a yield penalty for quite some time. Tax allocation bonds depend on a narrower revenue stream than other city debt.

Indian Wells Redevelopment Agency Flags IRS "Audit": Stay Calm

(Nov. 19) -- Long-time readers of the Bond Advisor know how we have explained where bondholders stand when the Internal Revenue Service examines a municipal bond. Even in instances where the IRS determined a bond violated tax-exempt rules, settlements are reached with issuers to protect the tax-exempt status for bondholders. That doesn't mean settlements are guaranteed, but virtually all "traditional" issuers that plan to tap the market again will no doubt protect bondholders. We provide all this background because the Indian Wells Redevelopment Agency tax allocation bonds 2006A (Consolidated Whitewater Redevelopment Project Area) are being examined by the IRS. We should note that the IRS does random checks on various municipal bonds, and we are assuming this is just another example of that practice. In an Oct. 22 letter to the city agency, the IRS noted it "routinely examines municipal debt issuances to determine compliance with Federal tax requirements." In a recent disclosure notice, the redevelopment agency said it is cooperating with the IRS by providing documents "and does not anticipate any adverse impact with regard to the tax status of the Bonds." As with similar IRS examinations, this one could very well be "closed" without anything ever happening. In any event, bondholders should stay calm because, for a change, this is an IRS "audit" you don't have to break out in a sweat over.

Speaking of Headline Risk: New California Deficit Pegged at $21 Bln

(Nov. 18) -- Our item below mentioned the ongoing impact of "headline risk" as negative news keeps raining down on local and state governments. While some headlines and/or stories may overstate default risk, others do describe the ugly reality of how bad budget conditions are. Point in fact, today's Los Angeles Times headline about the State of California facing a $21 billion budget deficit in the current fiscal year and the next one beginning July 1, 2010. The state's annual general fund budget is a bit above $84 billion so that's still a sizable gap, with $6.3 billion expected this fiscal year and $14.4 billion the next fiscal year (assuming nothing was done). These numbers are taken from a nonpartisan Legislative Analyst's Office report expected to be released Wednesday. Interesting to note: the report is expected to project stable tax collections, so it's not like the politicians can blame plunging tax receipts again. And how much of this is really a "new" deficit, and how much of it is really coming from the fact the state never really closed past gaps to begin with, either because of too-rosy projections or other budget gimmicks that didn't pan out? [Nov. 18 Update: The report is now out and it confirms our concern: "The vast majority of the new budget problem we have identified for 2009–10 can be attributed to the state’s inability to implement several major solutions in the July 2009 budget plan," the report says. In addition, "Spending is drifting well above the levels assumed in the July budget package."] Income-oriented investors might take a second look at this week's billion-dollar bond sale by the California State Public Works Board. The "headline risk" from these new deficit stories could translate into higher yields.

"Headline Risk" and Another Report on States Facing "Fiscal Peril"

(Nov. 17) -- There seems to be no end to new reports about the stress facing states. Last week the Pew Center on the States issued yet another survey call "Beyond California: States in Fiscal Peril." We didn't bother to mention it because it seemed to re-plow territory covered ad nauseam, including the observation that California's "problems are in a league of their own." The Bond Advisor often talks about "headline risk" that can affect the trading of municipal bonds, even if the actual "risk" of a default is remote. We are going through such a period when the constant negative headlines about public finance probably help to compound certain trends, such as the higher yields on credits rated single-A or lower. Smart income-oriented investors can capitalize on this trend with a little homework. By the way, we aren't criticizing this Pew Center report per se. It used six measures of fiscal trends to develop a scorecard measuring the current distress. Of course, California ranks highest (meaning worst), even ahead of a beaten-down state such as Michigan. Neighbors (Arizona, Nevada, and Oregon) also made the top 10, in part reflecting the impact of a housing-related bust. In one of the categories on how well states manage their money, including taking a long-term perspective on fiscal issues, California got a D+. The national average was B-. On the overall scorecard of "fiscal peril" California received 30 points, with the national average at 17. Some of this isn't a revelation, but the report does show some correlation with current credit rating trends, and provides yet another good reason to demand high yields on California and state agency bonds. That is something to ponder with the State Public Works Board in the market this week.

Tax-Exempt Bond Funds Keep Gaining Cash, Money Markets Drop

(Nov. 16) -- Municipal bond funds raked in another $916 million of "inflows" in the week ended November 11, Lipper FMI statistics show. This is a healthy clip, but a bit slower compared with the frenzy of inflows during all of 2009 when the average weekly take has been $1.6 billion. A good chunk of that money has probably been coming out of tax-exempt money market funds, which in the week ended January 7, 2009, held about $502 billion of assets. That money-market total had dropped to $407 billion by the week ended November 11, the Investment Company Institute said. Yields on tax-free money market funds are at or near the lowest levels ever, giving investors a reason to move into bond funds.

States See Gloomy Revenue Outlook Through Middle of 2012

(Nov. 13) -- A report by groups representing state governors budget officers sees a tough revenue picture for at least a couple more years if not longer. "As state revenue collections historically lag any national economic recovery, state revenues will remain depressed throughout fiscal 2010 and likely into fiscal years 2011 and 2012," according to a preliminary review of a biannual fiscal survey of states. Some states, such as California, have been hit hard by a downturn in income tax collections. The Bond Advisor, citing another recent report, noted that local government revenue in general hasn't been as volatile. States are facing the toughest budget challenges in decades, according to the two state groups. Many of them might not be able to rebuild rainy day and other contingency funds for close to a decade because of the need to catch up on deferred retirement costs and other expenses, according to a release from the groups.

More Than One Bidder for COPIA Property as Deadline Looms

(Nov. 12) -- November 12 is the deadline for bidders who want to attempt to purchase the building and surrounding property of the COPIA: American Center for Food, Wine and the Arts project. We have discussed the municipal bond angle several times (California's Infrastructure and Economic Development Bank issued the bonds for the nonprofit). The center closed a year ago after visitor levels failed to raise enough money to cover operating expenses. A bankruptcy judge recently approved the liquidation plan. There has been more than one bid submitted for the property so far. Bond insurer ACA Financial Guaranty, which in "run-off" status, is on the hook to cover any bond payments aside from those that can be met with liquidation proceeds available for the debt. Of course, not all investors agree on how well ACA will fare years down the road as a "run-off" insurer.

California Oct. Revenue a Bit Brighter; Governor Sounds Sour Note

(Nov. 11) -- California's general fund revenue in October exceeded a budget estimate by $285 million, the state controller's office said. Higher-than-expected corporate taxes accounted for most of the gain, with personal income tax collections chipping in $10.5 million more than estimated. Through the first four months of the current fiscal year general fund revenue is down almost $800 million below this summer's estimate (excluding a nonrevenue item that brings it to $854 million). Sales tax came in less than expected but is up about 19% over the October 2008 level, a sign the state's economy has a little more life, the controller's report said. In a news conference yesterday, Gov. Arnold Schwarzenegger said the state will still have to make even more budget cuts because of expected multibillion-dollar deficits in the current and next fiscal years.

Municipal Bond Funds Still Taking in Cash, Just Not the Same Pace

(Nov. 10) -- From time to time we have noted how municipal bond funds have been seeing "inflows" every week this year (a fancy way of saying they are taking in more dough than the amount of redemptions). That trend continued in the week ended last Wednesday with about $735 million of gains, according to Lipper FMI. They have now taken in less than a billion dollars for four straight weeks, after almost three months of $1 billion-plus weeks. The municipal bond funds have taken in a remarkable $70 billion so far this year, double any past record for a 52-week period, according to Lipper FMI. Total assets now exceed $450 billion, with almost 10% of that total represented by gains from rising bond prices this year.

Municipal Bond Ratings and Public Pension Costs: More Attention

(Nov. 9) -- A couple years ago we noted that the costs for local and state governments in providing pensions and health-care for retired employees would emerge as a growing factor in credit quality. The other day Moody's Investors Service said pension funding will no doubt put longer-term strain on some credit ratings as local governments try to balance immediate budget needs with growing unfunded retirement liabilities. While a rebounding stock market has helped some public pension funds look better, the issue will grow in importance because of shifting demographics and other factors, Moody's said in a report. More information on these liabilities must now be provided in state and local government financial statements; Moody's plans in coming months to review this information and refine the way it is incorporated into the rating process. Of course, it isn't all bad news. Some localities, such as San Francisco, have made sure to address these liabilities and that can be a plus for their credit ratings, Moody's added.

California's G.O. Bond Sale Ends: 8% Taxable Equivalent for Some

(Nov. 5) -- California completed a $1.5 billion tax-exempt general obligation bond sale with a pricing for institutional investors yesterday. The 30-year maturity carried a 6% coupon and was priced to yield 5.63%. A bond due in 2034 with a 5% coupon was priced to yield 5.55%. Even for someone with net taxable income of $100,000, the 2034 bond would provide a taxable equivalent yield of more than 8% (married, filing jointly), and more than 9% for a heftier $500,000 taxable income. The taxable Build America Bonds that California offered this week only yielded 7.26% on a 2039 bond. The taxable equivalent yield is what an investor would want to earn on a taxable bond to match the same return on a tax-exempt basis.

Orange County Toll Road Bonds Get Moody's Ratings Affirmations

(Nov. 4) -- Moody's Investors Service has affirmed the credit ratings for two toll road projects in Orange County, even though they have been struggling with traffic declines during the recession. Moody's affirmed the Baa3 underlying rating and stable outlook for the revenue bonds of the Foothill/Eastern Transportation Corridor Agency. Moody's also affirmed the Ba2 underlying rating and negative outlook for the revenue bonds of the San Joaquin Hills Transportation Corridor Agency. We write about these projects from time to time because of all the bonds outstanding and probably will revisit some of the current issues soon.

[Update]: Legislature Backs $11 Billion Water Project Bond Election

(Nov. 4) -- California's legislature approved letting state voters decide $11 billion of water-related bonds in an election a year from now. The Assembly passed the measure and early this morning the Senate apparently agreed to the amount instead of a $10 billion bond election it approved earlier. The bonds are part of a bigger package aimed at how California manages its water resources in the future and it appears the plan is going to the governor. Half of the bond authorization couldn't be touched for about five years after the election. Considering the state's debt service as a percentage of its general fund revenue could eventually rise to 10% several years down the road, someone better figure out capital-plan priorities (or quit putting bonds on the ballot for awhile). California Treasurer Bill Lockyer had suggested looking into user-funding for most water system improvements to avoid putting even more of a burden on the general fund with G.O. bonds.

California Senate Approves $10 Billion Water Project Bond Election

(Nov. 3) -- Late last night California's Senate approved asking state voters to pass a $10 billion bond package for water-related projects. The election would occur a year from now. The Assembly now is trying to muster the two-thirds majority needed to approve the bond election. The bonds are part of a bigger package aimed at how California manages its water resources in the future, including conservation. You have no doubt heard about this debate since it has been front-page news in recent weeks, with the governor pushing lawmakers to come up with a plan.

Bond Insurer FSA Will Become Assured Guaranty Municipal Corp.

(Nov. 3) -- While this might seem confusing, there is going to be a bond insurer called Assured Guaranty Municipal Corp. to join the existing Assured Guaranty Corp. The new one, with "Municipal" in its name, isn't new at all. Assured Guaranty Ltd, the parent company of both insurers, is changing the name of FSA (Financial Security Assurance) to Assured Guaranty Municipal Corp. This summer the acquisition of FSA was finalized by the parent company, and it has continued to operate separately from Assured Guaranty Corp. So what is the difference between the two? The re-named FSA only insures municipal bonds, while AGC can still diversify and insure other types of debt. By the way, don't worry. If your existing muni bonds were backed by FSA, they still carry the same financial guarantee. Only the name is changing.

New California G.O. Sale Offers Maturities for "Really Long" Barbell

(Nov. 2) -- Our November print edition discusses a barbell strategy and notes that the long end of the barbell doesn't have to be super long. It can be 10 years or 12 years or whatever, with the key being the type of rating trade-offs you are willing to make to pick up added yield. However, if you are willing to go out really long, California's general obligation bond sale this week offers some prime candidates. The sale will feature longer maturities of roughly 23 years and above. A retail-order period is planned Tuesday (Nov. 3) with institutional pricing on Wednesday (Nov. 4). General yields on longer municipal bond maturities rose last week.

SEC Commissioners Beat the Drum for Reforming Muni Regulation

(Oct. 29) -- In a prepared speech last night with a subtitle, "Investors Are Not Second-Class Citizens," Securities and Exchange Commissioner Elisse Walter said it is time to remove certain exemptions from federal securities laws for state and local governments. Walter stressed that municipal issuers don't necessarily have to be subject to the exact same laws as corporate counterparts. However, Walter expressed concern that current law gives municipal bond investors "second-class treatment." The day before SEC Chairman Mary Schapiro said her agency will seek a federal bill next year that gives the Commission more authority over the municipal market. The Bond Advisor has argued since the 1980s that the current self-regulatory system doesn't serve investors well. We also should caution that calls for reform have been made before. Politicians haven't shown much interest in helping municipal bond investors. Local and state governments will do all they can to block attempts to hold them to improved standards for disclosure, etc. 

"Retail" Crowd Orders About $2.5 Bln of California "Deficit" Bonds

(Oct. 29) -- California's "deficit" bonds to refinance existing economic recovery debt ended up drawing about $2.5 billion of "retail" orders for the $3.5 billion sale. The two-day "retail" order period closed yesterday and bigger institutional buyers step up today. We expect demand could be strong enough to allow yields to drop a bit from preliminary initial levels.

California "Deficit" Bonds Draw Almost $1.8 Billion First-Day Orders

(Oct. 28) -- California's first-day retail offering of "deficit" bonds to refinance existing economic recovery debt drew enough orders to cover about half of the $3.5 billion sale, according to the state treasurer's office. A five-year bond tentatively yields 3.05%, a 10-year 4.65%, and the longest 13-year maturity preliminarily yields 5.00%. The 2013 to 2017 maturities are sold out, some traders told us. Just remember, the big institutions place orders on Thursday (October 29). It is possible the demand will be large enough to reduce the final yield on certain longer maturities. At that point the smaller "retail" buyer can take the lower yield or walk away. The yields appear relatively attractive considering this is a double-barreled security.

Congressional Report Slams Tax-Exempt Debt: "Regime" Change?

(Oct. 27) -- Don't say we didn't warn you. One of our recent print editions included a page one warning about the brewing U.S. Congressional hostility to tax-exempt bonds. The item that originally spurred our concern has now been formalized in a 50-page joint report from the Congressional Budget Office and the Joint Committee on Taxation. The "study," if you can call it that, refers to the "current tax-preferred regime" of using tax-exempt bonds to finance infrastructure. Regime? Doesn't that tell you all you need to know about where this "study" is going? It also talks about tax-exempt bond financing being "regressive" because of the way revenue "accrues to investors in higher income brackets." We will talk more about this in November's print edition because the times are changing, and not for the better for the historic tax-exempt bond market.

Fitch Says U.S. Assistance Would Be a Housing Agency "Positive"

(Oct. 23) -- In our item below we note that state housing agencies (and local ones as well) are hoping that a federal assistance program will help them get back in the business of providing below-market home loans. From a credit perspective Fitch Ratings says that the U.S. Treasury Department's plan for a "liquidity" and "new issue" bond program "will provide more financial stability" to housing agencies. In a release, Fitch said it "views the current proposal as a positive credit development that could provide temporary relief to the variable-rate debt challenges facing many [state] programs. Credit pressures associated with variable-rate debt and reduced access to liquidity are a key driver of Fitch's Negative Outlook on the sector." The final details of the assistance plan aren't available so it will take more time to assess the impact, including a proposal to help re-start new housing bond issuance, Fitch said.

Housing Agencies Hope Federal Assistance Will Re-Start Efforts

(Oct. 22) -- State housing agencies (and local ones as well) are hoping that a federal assistance program will help them get back in the business of providing below-market home loans. The assistance program was outlined in general terms this week and is designed to help inject "liquidity" back into the housing agencies. Fees paid by the housing agencies will apparently finance the program instead of a reliance on taxpayer funds. In a nutshell, the "credit crisis" put a damper the housing agency activity in a handful of ways. For example, agencies were locked into variable-rate bonds when banks pulled away from this market. With mortgage rates dropping, they also have had trouble providing the below-market loans that traditionally assist first-time home buyers. That has translated into a lot less tax-exempt bond issuance by these housing agencies. (The lower tax-exempt rates on the bonds help drive the mortgage financing programs.)

Municipal Downgrades Outpace Upgrades By 2-to-1 in Third Qtr. '09

(Oct. 21) -- In light of recent economic trends, it doesn't come as a surprise that municipal bond downgrades exceeded upgrades in the third quarter by a bit more than a two-to-one margin, according to rating changes made by Fitch Ratings. Given that there are thousands and thousands of municipal issuers across the U.S., you also have to remember that rating changes affected a very small sliver of the market. In the traditional tax-supported sector, for example, Fitch reported 34 downgrades and 16 upgrades in the third quarter. The water and sewer sector was notable in that upgrades exceeded downgrades, though in terms of actual numbers we are only talking about three upgrades and two downgrades. Still, you can see why the Bond Advisor has talked about essential-purpose revenue bonds as a safe option during a recession. In terms of the par dollar volume of downgrades, roughly three-quarters of the total U.S. amount can be attributed to the downgrade of about $75 billion of California state bonds in the third quarter, Fitch said. The largest par value upgrade by Fitch in the third quarter involved $5 billion of San Francisco Airport Commission revenue bonds. About three-fifths of Fitch's rating actions in the third quarter involved rating affirmations with no outlook or "watch" revisions. Almost 82% of its municipal ratings still carry a "stable" outlook.

Fitch Ratings Will No Longer Give Ratings on Bond Insurance Alone

(Oct. 20) -- Fitch Ratings won't give a credit rating to municipal bonds based only on the strength of bond insurance backing the debt. Fitch will only give an insured rating if it is accompanied by an "underlying" rating that shows the strength of the issue absent a financial guarantee. Citing the widespread downgrades of several bond insurers, Fitch noted that the guarantor rating "may not properly reflect the true credit quality of the bond." The Bond Advisor has noted repeatedly amid the bond insurance problems that municipal bond investors still hold solid debt in almost all instances. However, if an "underlying" rating was never assigned, smaller investors often worry about the credit strength of their bonds. As for existing bonds with both types of ratings (insurance and "underlying"), the higher rating continues to be the one that shows up for the debt.

Pace of Cash Pouring into Municipal Bond Funds Finally Slows

(Oct. 19) -- After weeks of seeing cash pouring into municipal bond funds at a record clip, the "inflows" finally slowed in the week ended October 14, according to Lipper FMI. The $615 million the funds gained during that week was the lowest since the middle of spring. It would be extremely healthy for the market at large to see this number slow; otherwise, funds will have to keep putting that money to work in an environment where tax-exempt yields are still puny (even after the last couple of weeks when the rally fizzled and rates rose).

State Tax Collections Plummet, But Local Receipts Stay Steadier

(Oct. 16) -- State tax collections across the U.S. dropped a record 16.6% in the second quarter of 2009 over the same period a year earlier, the Nelson A. Rockefeller Institute of Government reported. It was the largest drop in state tax receipts since John F. Kennedy was President, the Rockefeller Institute added. It was the third straight quarter of declines and the tax drop continued in July and August, the report said. As the Bond Advisor has noted, taxes "lag" any economic recovery so the picture in California and elsewhere won't brighten anytime soon. (California dropped 14% in the second quarter, a bit less than the national average.) In the second quarter 49 states saw tax drops; the exception, Vermont, reflected growth because of a one-time estate tax settlement. Local governments are faring better because they rely heavily on property tax collections, which tend to be more stable, the report said. Local tax receipts declined by only 2.8% in the second quarter (as expected, local sales taxes were down but property tax collections actually rose).

Tax-Exempt Bond Yields Keep Rising After Ridiculous Recent Lows

(Oct. 15) -- There are plenty of stories being published about the "weaker" tax-exempt bond market in recent days, a rate trend we noted last week. Just remember, yields had dropped to ridiculous levels, with some higher-rated issuers recently paying less than three percent on their 10-year maturities in new deals. So don't weep for the issuers now that yields are rising a bit, and even at current levels we don't know of many smaller investors dying to buy. We mention this because across the U.S. some issuers decided to shelve new sales, at least for now, after learning they can't get yields last seen when Lyndon Baines Johnson was president. They won't get any sympathy cards from investors over the postponed sales.

Good: Californians Still Support Passing a Budget By Two-Thirds

(Oct. 14) -- A recent poll showed the public is disgusted with the performance of state legislators (yet incumbents keep getting re-elected). In one encouraging sign, however, the Field Poll showed that 52% of respondents oppose making it easier to pass a state budget (with a simple majority instead of the current two-thirds), and 43% support that change. If California has suffered massive chronic deficits with the two-thirds threshold helping to put some limit on expenditures, we can only imagine the runaway spending that would occur if the budget could be passed by a simple majority. The only reason to change that budget passage threshold would be accompanying reform, including a mechanism that would limit general fund growth.

Puerto Rico Power Authority's Tax-Exempt Debt Lowered to BBB+

(Oct. 13) -- For Californians who buy Puerto Rico's double tax-exempt bonds, we note that the Puerto Rico Electric Power Authority's existing power revenue bonds have been downgraded to BBB+ from A- by Fitch Ratings. Reduced energy sales and weaker financial performance (which translated into lower debt service-coverage ratios) are among the factors that prompted the downgrade, Fitch said. However, the authority also is taking positive steps to address its situation, including cost cuts and more collection on delinquent accounts, Fitch added. The authority is the sole provider of power in Puerto Rico and one of the largest public power systems as compared with U.S. municipal utilities; as a result, it is an "essential" utility and we would hope it works toward recovering a single-A rating.

California's Budget in First Quarter FY 2010: Out of Whack Already

(Oct. 12) -- California already has collected about $1.1 billion less in taxes than expected in the current fiscal year that began July 1, even though the state updated all its revenue estimates for the revised budget passed this summer. Personal income tax collections accounted for the lion's share of the shortfall during the state's first quarter, coming up $934 million less-than-expected, California Controller John Chiang said. The revenue trend and "recent adverse court rulings are dealing a major blow to a budget that is barely 10-weeks old," Chiang said in a statement. "While there are encouraging signs that California's economy is preparing for a comeback, the recession continues to drag state revenues down." There will be, he added, "more difficult decisions ahead." As the Bond Advisor has often noted, even after the economy turns around, many tax collections tend to "lag" the rebound. Also remember, however, what we said in a recent print edition, when we mocked certain commentators who had predicted California would default on bond payments this past summer. (In connection with what we said, note that in the first quarter of fiscal 2010 California's general fund collected almost $20 billion. Spending priorities with constitutional protection, such as debt service, used up less than $1 billion of that amount; education spending was a bit more than $9 billion.) California may be the market's new "laughingstock" (see Louisiana item below), but bondholders should beware of inaccurate and outrageous analysis.

Louisiana Sheds Laughingstock Label, California Takes Its Place

(Oct. 9) -- Times may be tough, but even the State of Louisiana has made tough decisions that helped it land an upgrade to AA-minus from Fitch Ratings on its general obligation bonds. (Fitch rates California triple-B). Fitch said Louisiana has shown "strong financial management" in recent years, including a focus on spending control and maintaining "sizable" reserves. (Update: Moody's Investors Service today also changed the outlook on Louisiana's bonds to "positive" from "stable." Second update: S&P also has upgraded Louisiana to AA-). Louisiana, usually the butt of jokes because of past corruption scandals, has in recent years built up new credibility in the municipal bond market. Louisiana also used to be the lowest-rated among the 50 states. Now, of course, California has become the "new" Louisiana of the tax-exempt market, exhibiting weak financial management, lax (if any) spending control, and use of gimmickry to pretend budgets are balanced. The last laugh isn't on Louisiana.

More Taxable Build America Bonds, It Doesn't Matter the Issuer

(Oct. 8) -- The Brentwood Infrastructure Finance Authority plans to sell $48 million of lease-revenue bonds. However, 70% of the deal will be structured as taxable Build America Bonds. That leaves less than $15 million of crumbs for the tax-exempt market.

Los Angeles Airport "United" Bonds Finally Get Their Fair Payback

(Oct. 7) -- The other day a global settlement was finally announced to pay $75 million in claims by bondholders in two Los Angeles Regional Airport Improvement Corp. bond issues tied to leases with United Airlines, Inc. This is famous case launched by United's bankruptcy, in which United tried to weasel out of its obligation and "recharacterize" the bonds as unsecured loans. In May a U.S. Seventh Circuit appellate court finally set things right and overturned the previous United victories in lower courts. That set the stage for the global settlement. As we have noted before, $59 million of bonds remained outstanding from two issues. About $34.4 million matures on Nov. 15, 2012, and $25 million matures on Nov. 15, 2021. Los Angeles World Airports and United will pay the settlement. We called the earlier court decisions a travesty and condemned United for the way it handled this situation. Occasionally there is some bond market justice for investors. The actual court cases, legal arguments and discussion of the "lease" issues at stake would fry any normal person's brain. Just be thankful for appellate courts.

Pitzer College Plans $64 Mln Bond Sale; Rated in Single-A Category

(Oct. 6) -- The private Pitzer College in Claremont, California, soon plans to sell $64 million of tax-exempt revenue bonds through the California Educational Facilities Authority. Fitch rates the bonds single-A and Moody's, A3. While these aren't the traditional tax-backed bonds favored by some "conservative" investors, many smaller investors would do well to consider such credits for portfolio diversification.

Many Older Insured Bonds Trading Above Par, Despite Downgrades

(Oct. 2) -- We only mentioned this briefly in passing in our October print edition, but it is fascinating to see thousands of bonds backed by the downgraded insurers now trading above par. Why is that the case? Many of those bonds trade based on the "underlying" rating that in some cases is now higher than the rating of the insurer. Investors who panicked and dumped municipal bonds willy-nilly during the "credit crisis" left some real bargains on the table. The yields on those insured bonds look a lot sweeter in the current market (declining rates are lifting the value of the older bonds). So there is an upside to the current "technical" rally that has been pushing yields artificially low. Of course, there are exceptions, including insured bonds with no underlying rating or guaranteed debt that on its own is low investment-grade of worse. Still, the vast majority of these bonds shouldn't default and won't need the insurance anyway, and the rare ones that do still might benefit from a guarantee that pays. That doesn't make the debacle over the downgraded insurers any easier to swallow, but smart investors bought the guaranteed bonds with a strong emphasis on the underlying security. Those bonds will see you through a very tough time.

Will Investors Get a Bigger Say at the Muni Bond Self-Regulator?

(Oct. 1) -- In our October print edition we discuss a subject that we raised way back in the 1980s. How can the Municipal Securities Rulemaking Board be an effective self-regulatory body when the majority of its governing board comes from the dealer community? Now we note that the Securities and Exchange Commission might look at the matter and do some tinkering with the MSRB board. (Things move slow in the world of municipal bond regulation when you consider we raised this point more than two decades ago.) Oh well, better late than never.

California's Tax Reform Proposal: Dead on Arrival, No Doubt

(Sept. 30) -- This week another "blue-ribbon commission" proposed another California tax overhaul that will no doubt end up where similar proposals have gone in the past: The trash can (or we suppose the "recycle" bin). As usual, the proposal contains some worthy items to consider, but a rather daring item that would implement an untested "net" business receipts tax will no doubt be too much for legislators to swallow. The plan also proposes "flattening" the state's income tax brackets, which would affect the after-tax yields on tax-exempt municipal bonds for wealthier residents. But don't worry about doing those calculations. This tax overhaul proposal is stuck in the gate and might never move an inch.

Bond Advisor's Fund Index Now Up 25% Since Low in December

(Sept. 29) -- The Bond Advisor's California Municipal Bond Fund Index is now up 25% from its low point during the absurd "panic" last December. Muni bond funds in the United States collected another $1.85 billion in the week ended September 23, yet another record, according to Lipper FMI. (This weekly data used to be reported by AMG Data, but Lipper recently bought AMG.) A year ago the Bond Advisor said yields in the municipal bond market presented "another stunning opportunity for sophisticated investors who can capitalize on bargains." That was the time to be a big buyer. Now, however, it appears less sophisticated investors are buying "high" (they are probably the same ones who sold "low" last year).

Bond Deal Rated AAA by S&P Looms; Yields Will Be Low; Very Low

(Sept. 25) -- For quite some time we have had the East Bay Regional Park District G.O. bond sale on our calendar, noting the AAA rating from S&P. We are told the bonds could be priced in a few days. Moody's rates the bonds Aa1, one notch below triple-A. Safety-oriented investors might like the credit ratings but they won't like the yields. If there is a 10-year maturity, the only question is if it will yield all that much above 3%. (And some five-year bonds now yield below 2% tax-exempt).

Retail Investors Bought Three-Fourths of California's RAN Issuance

(Sept. 24) -- So-called "retail" investors bought about three-fourths of California's revenue anticipation note sale (about $6.6 billion). The state took $9.23 billion of orders for the $8.8 billion sale, according to the treasurer's office. Bigger institutional buyers bought about $2.6 billion. All retail buyers will see their orders filled, while some institutions won't be able to buy as many as they ordered. Retail buyers went for the June maturity ($6 billion) that yields 1.5%. The May maturity yields 1.25%. California's $5 billion general obligation bond sale in early October will be the next huge state offering, though the size could change.

Bond Advisor's Fund Index Passes $12.00 Mark; Cash Pouring In

(Sept. 21) -- The Bond Advisor's California Municipal Bond Fund Index rose above $12 for the first time since mid-2008. Falling yields mean higher prices on existing bonds and the funds are benefiting from that trend. Muni bond funds collected another $1.51 billion in the week ended September 16, staying at or around a record pace, according to Lipper FMI. (This weekly data used to be reported by AMG Data, but Lipper recently bought AMG.) This is one reason tax-exempt yields continue to collapse as the funds have to buy in a seller's market.

"Household" Ownership of Muni Bonds Nears $1 Trillion Mark

(Sept. 18) -- The "household sector" added $42.3 billion of municipal securities to its holdings in the second quarter of 2009, the Federal Reserve's latest Flow of Funds Accounts of the United States. This "household" group is always near and dear to our heart because it includes the all-important "retail" buyer of munis. Households now own almost $1 trillion of muni bonds ($997 billion), out of about $2.78 trillion outstanding, the Fed data shows. This sector's muni holdings rose 4.4% in the second quarter. Mutual funds saw their muni bond assets rise to $430.3 billion, a 5.8% increase in the second quarter. Money market mutual funds saw their muni assets drop by about 5.6% to $455.8 billion, no doubt because investors didn't like extremely low short-term rates (and the variable-rate market slowed after the credit crisis). A category called "rest of the world" saw its muni holdings rise 14% to $45.6 billion. We bet this reflects, in part at least, the sale of taxable Build America Bonds to investors who can't benefit from tax-exempt bonds.

Tax-exempt Rates Near Record Lows as Demand Swamps Supply

(Sept. 17) -- Traders tell us certain "generic" scales of tax-exempt yields are near record lows, at least based on tracking in recent decades, as strong demand continues to meet so-so supply. As we have noted, taxable Build America Bonds have siphoned away new supply at just the wrong time. Yields have dropped the most toward the shorter end of the yield curve. 

California's Economy Showing Signs of Recovery, Forecast Says

(Sept. 16) -- Several media outlets observe that the new quarterly UCLA Anderson Forecast is seeing signs of recovery in California's economy. Improved exports, growing tourism, and stabilizing home prices are among the signs the economy might have bottomed, according to the latest report. Federal Reserve Chairman Ben Bernanke said yesterday that the nation's economy also might be expanding. Even so, California's unemployment rate still could rise to 12.2% late this year from 11.9% in July, according to the UCLA report, and job growth is probably a good year away. What does all this mean for issuers of municipal bonds? Those relying on various taxes, whether the state or localities, generally see a "lag" before tax receipts bounce back. So, even if the economy is recovering, it won't show up right away in improved revenue. (Of course, certain types of municipal bonds backed by other revenue tend to do better during a recession, and we have discussed those in several print editions previously.) In the end, some recovery is better than no recovery, especially for the state because it is so reliant on income-tax revenue.

Bond Advisor's Calif. Muni Bond Index Up 22.4% Since December

(Sept. 15) -- The Bond Advisor's California Municipal Bond Fund Index continued its climb in the latest week, with the NAV rising to $11.95. The Index is now up 22.4% since the "panic" last December. Now you can see why we were telling investors that municipal bonds were a bargain late in 2008.

California's General Fund Revenue 3.6% Below Target in August

(Sept. 14) -- Even though California just amended its fiscal 2010 budget, that doesn't mean the state's economy is generating as much tax revenue as the state expected. Total general fund revenue in August was $237 million, or 3.6%, below the estimated level. Personal income tax revenue and sales tax revenue both fell short of estimates, while corporate tax collections were higher than expected. That one-month figure isn't large enough to raise red flags about the estimates themselves, but it is a sign of continuing economic weakness. The lower-than-expected revenue shows that unemployment and consumer activity are still a drag on California's recovery, State Controller John Chiang said in a release.

Across the U.S., Issuers Bowing to U.S. "Stimulus" To Grab Dough

(Sept. 10) -- We usually don't discuss out-of-state municipal bonds, but will do so in this instance to make (and re-make) a serious point. Taxable "Build America Bonds" have emerged as an ominous threat to the traditional tax-exempt bond market. The latest proof? The State of Utah has assembled the biggest general obligation bond sale in its history, at slightly more than $1 billion. However, more than $700 million of the deal will be marketed as taxable BABs so triple-A Utah can claim its 35% interest subsidy from the federal government. The other day the Chicago Board of Education priced more than $500 million of taxable general obligation bonds to take advantage of the same federal give way. Think this is just a passing fad that will disappear once the temporary federal "stimulus" giveaway goes away? We would hope so, but the bean counters in Washington D.C. must be salivating over other ways they can tinker with the muni market on less favorable terms. Meanwhile, we could give plenty of other examples, like the North Carolina municipal utility that just sold taxable BABs. The list, we fear, will grow too long too soon.

Those Detested Build America Bonds Will Have Their Own Municipal Fund, Too

(Sept. 10) -- As we note in the item below, the taxable Build America Bonds are getting their own index. Now at least one media report (The Wall Street Journal) says Eaton Vance plans to launch a mutual fund that invests primarily in these taxable municipal bonds. As we also note in the item above, there is a risk to the tax-exempt market if the taxable BABs become entrenched beyond a temporary federal "stimulus" window. For now, however, each day brings new players willing to jump on the taxable municipal bandwagon. Yuk.

Those Detested Build America Bonds Even Have Their Own Index

(Sept. 8) -- We aren't fans of the federal giveaway (ostensibly part of the "stimulus" package) known as taxable Build America Bonds. The program wasn't needed and is a waste of federal dollars. The Bond Advisor also has warned in recent editions that the policy wonks in Washington D.C. are watching how easy it is to entice municipal issuers into selling their souls for the right carrot. This could pave the way for other attacks on the traditional tax-exempt bond market. In another sign of the growth of these taxable bonds, Wells Fargo has started a Build America Bond Index. We have a gut feeling this isn't going to be just a two-year "stimulus" experiment, but the jury is still out on that one.

Vallejo Allowed to Reject Another Labor Contract in Bankruptcy

(Sept. 2) -- A labor contract with an electrical worker union can be rejected by the City of Vallejo during its bankruptcy proceeding, a federal bankruptcy court judge ruled. The city "cannot afford" the contract in its current financial situation, the ruling said. Vallejo has now been able to reject or renegotiate all its labor contracts, which will help the city develop a final plan for exiting bankruptcy.

Issuers Selling Souls for "Taxable" Bonds; the Feds Take Notice

(Sept. 1) -- The "part two" of our August print edition that will soon arrive in mailboxes mentions a disturbing federal budget "option" that talks about replacing tax-exempt bonds with a tax-credit approach instead. We make it clear this is just one of hundred of "speculative" options that are always floating around Washington D.C. It might never get much traction. Even so, the report about this "tax-credit" option also mentions how issuers have been willing to leave the tax-exempt market in favor of taxable "Build America Bonds." As the Bond Advisor has warned for several months, don't think the Feds aren't watching this trend. Local and state governments willing to sell their souls for a quick federal buck now might want to ponder how this will affect more than a century of hard-fought battles to protect the tax-exempt municipal bond market.

CalSTRS Credit Enhancement Program Loses Triple-A: Fitch

(Aug. 21) -- The disgraced bond insurers, such as MBIA, aren't the only ones to have lost their triple-A standing during the credit debacle. Now a credit enhancement program for municipal obligations sponsored by the California State Teachers Retirement System also has lost its AAA, Fitch Ratings said, which cut the long-term grade to AA+. The retirement system's short-term rating remains a top F1+, Fitch said. A steep decline in the system's "funding ratio due to investment losses" helped prompt the downgrade, along with the fact the legislature isn't likely to raise contribution rates while the economy is suffering, Fitch said. CalSTRS hasn't been a big credit enhancement player and primarily backs letters-of-credit for certain municipal issuers. We doubt the long-term rating will fall again, but this is another sign of the times when one of the biggest public pension funds is seeing some fallout from market conditions.

Insured and Single-A Still Pays Up Over a Double-A Credit

(Aug. 14) -- The Bay Area Toll Authority was in the market the other day with a $769 million sale of toll bridge revenue bonds. The West Contra Costa Unified School District was in the market around the same time with $163 million of general obligation bonds that included a financial guarantee from Assured Guaranty. The toll authority deal was rated in the double-A range, and West Contra Costa sale in the single-A category. There was a time the school district would have landed lower or at least comparable yields thanks to the financial guarantee. Those days are long gone. The school district paid 4.23% to borrow in 10 years, the toll authority, 3.60%. On a 15-year bond the school district paid 4.91%, the toll authority 4.26%. It is true that the West Contra school district has some old history (under a former Richmond school district name it once filed for bankruptcy). Nevertheless, investors willing to take on a bit more risk are getting rewarded with decent credit spreads. The toll road sale also shows how revenue bonds can still perform well during a downturn for other governmental tax receipts.

Vallejo Unions Drop Bankruptcy Appeal; City Budget Negotiations Continue

(Aug. 14) -- Two employee unions in Vallejo recently dropped an appeal that challenged the city's bankruptcy filing. The move (by firefighter and electrical worker unions) removes an impediment that probably wasn't a major threat anyway; the unions saw the legal writing on the wall and realized they weren't going to be successful in having the bankruptcy filing thrown out. The Bond Advisor long ago explained why individual investors in the city's bonds weren't threatened by the bankruptcy (even though some foolish commentators warned of "massive" defaults). Even so, everyone will breathe easier when a final plan for exiting bankruptcy is moving forward.

More Updates for This Page Coming During the Week of August 17, 2009

(Aug. 17) -- We wanted to get our new format up and running so we could begin adding several market-related updates in coming days and weeks. As a result, you will see more updates posted throughout the site soon after August 17.