MuniLand

The Port Authority of New York and New Jersey announced on Wednesday that it has awarded the contract to rebuild the Goethals Bridge to a public private partnership (PPP). Bloomberg reports:

A group led by Kiewit Corp. and a Macquarie Group Ltd. (MQG) unit won a Port Authority of New York and New Jersey contract to finance, design and build a $1.5 billion replacement for the 85-year-old Goethals Bridge…

…“As we move forward with continuing constraints on our resources, we’re financing necessary infrastructure and at the same time minimizing the use of public funds and public debt capacity,” Port Authority Executive Director Pat Foye said yesterday at a board meeting in Manhattan.

In 2010, the project was estimated to cost $1 billion. Somehow the cost went up 50 percent since that time.

I’m usually against putting public works on the hook to make payments to a private entity for decades. According to my rough math, the Port Authority will end up paying private partners over $1 billion throughout the lifetime of the 40-year contract. This is money that is sorely needed for other capital projects. However, massive cost overruns at the World Trade Center site show that the Port Authority has proven itself dysfunctional when undertaking big projects. Outsourcing the bridge to a private contract does not seem like a bad idea. From The Star Ledger last year:

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Several professionals in muniland have jumped on SEC Commissioner Dan Gallagher for his recent warnings about the possibility of an “Armageddon” for retail investors in muniland.

Anonymous blogger @munilass berates Gallagher for his statements about retail investors:

In the interview, Gallagher said his concerns mostly relate to retail investors, who hold approximately three-quarters of outstanding municipal bonds. He then called the muni market a bubble (a term that becomes less useful every time someone utters it) and said “there are a lot of investors in the municipal bond market that aren’t supposed to be there.”  I take the latter to be a reference to credit risk, not interest rate risk, but Gallagher did not elaborate, so I am not sure what he meant by that.

Philadelphia held its bond investor conference last week. Although the press was not allowed to attend, the city did post the presentations on its website. Philadelphia Inquirer reporter Joe DiStefano neatly summarized the city’s political and fiscal position, which is not as rosy as the presentations make it seem:

Philadelphia hopes to borrow more than $1 billion by selling or refinancing bonds over the next nine months. For all the city’s growth around Center City, the colleges and the Navy Yard, officials face some big challenges: the lowest credit ratings of the biggest U.S. cities (low credit ratings tend to boost borrowing costs, though current interest rates are near rock-bottom levels); the financial near-collapse at the School District; the scheduled end of the sales-tax surcharge; labor negotiations and court decisions that have mostly upheld city labor union positions and reversed Nutter administration cost-cutting schemes; a thwarted real estate tax reform; stagnant office growth; high poverty in worn city neighborhoods; and more.

Philadelphia’s most important fiscal problem is its relationship with the city’s unionized employees. The city summed up the problem in the investor presentation (page 19). Note that the city has had no new agreements with three of four municipal unions since 2009, and that most employees have the right to strike.

A canary is singing in a coal mine in California. Canyon Lake, a city of about 11,000, has announced its intention to terminate its contract with CalPERS, the statewide retirement system. The small city has outsourced most of its public services and has two employees on its payroll, which it will shift from full time to part-time employment. According to Reuters:

Canyon Lake said it has looked at Calpers’s website, which states that its unfunded liability to the fund is $661,000.

Richard Rowe, Canyon Lake’s interim city manager, said the city decided it would be cheaper to borrow money to pay off Calpers rather than continue to pay the fund.

Recently I participated in a podcast for the non-profit Freedom Works. One of the topics was how much influence public unions have on federal, state and local politicians. I said that I had not seen academic studies, but my own belief is that their over-sized political influence has allowed them to increase wages, benefits and advantages for public workers. It doesn’t look all that different from how corporations and Wall Street buy political influence through elections and legislation.

This is from a University of Pennsylvania study that maps union support to favorable fiscal decisions:

Our empirical analysis focuses on municipal elections in the 150 largest cities in the U.S. between 1990 and 2012. We find that challengers strongly benefit from [union] endorsements in competitive elections. Challengers that receive union endorsements and successfully defeat an incumbent also tend to adopt more union friendly fiscal policies.

There has been a lot of discussion about the general underfunding of public pensions in muniland. Now credit rater Moody’s is reviewing cities in light of this:

Moody’s has new take on the effect of pensions on ratings, puts cities including Chicago, Cincinnati and Portland on review for downgrade.

— Romy Varghese (@romyvarghese) April 17, 2013

The potential fiscal drag that under-funded pensions can have on cities is very important, but several other issues need to be examined further. First is the level of fees that public pensions are paying to investment managers and hedge funds, and the second is the level of risk in specific assets that the funds hold. Kevin Roose of NY Magazine wrote about the excessive fees that pension funds pay to outside “active managers”:

The SEC held a fixed income roundtable on Tuesday to discuss two important issues: market structure and ways to improve it for municipal and corporate bonds. The SEC has as much authority to regulate this market as it does for equity securities, and it appears to be finally flexing its muscles with a little structure for the $18.7 trillion fixed income market.

I tweeted the roundtable all day (you can read the whole thread here), and I’ve posted the best ones here (parentheses are my editorial comments):

Good sign… new @sec chair Mary Jo White is attending the Fixed Income Roundtable 1.usa.gov/15cEjRm

There is a glaring gap in regulation – called Regulation Fair Disclosure – when it comes to protecting municipal bond investors. It appears that issuers may be in the habit of giving material nonpublic information to preferred institutional investors, while making retail and non-preferred investors sit out in the cold. Exhibit number one is the treatment of media members who have petitioned to attend the City of Philadelphia bond investor day scheduled for this Thursday. The Philadelphia Inquirer wrote:

Several news organizations led by Bloomberg News are protesting the exclusion of the news media from a two-day conference sponsored by the Nutter administration to stimulate investor interest in the city’s municipal bonds.

The Inquirer has joined the protest, signing a letter to Nutter that criticizes the city for refusing to let reporters attend the conference, scheduled to begin Thursday at the Comcast Center.

The firing of Rutgers basketball coach Mike Rice and the surrounding controversy recalls the governance meltdown at Penn State around the Jerry Sandusky scandal. Moody’s downgraded Penn State over that scandal, which involved serious allegations of child abuse and rape. From StateCollege.com:

In its report, Moody’s said the primary factor that led to the downgrade is the uncertainty over what Penn State can expect financially from the ultimate cost of future settlements and possible judgments stemming from sexual abuse claims made by Sandusky’s victims. Moody’s report said that the stable outlook reflects expectations that the University will ultimately resolve victims’ claims and that it will continue its work to implement substantial governance reforms.

Moody’s has since placed Rutgers on negative watch. The agency said this today in its Weekly Credit Outlook (subscription required):

In a Senate Banking Committee hearing, newly elected Massachusetts Senator Elizabeth Warren asked why bank regulators protected banks, but would not assist wronged homeowners. Regulators did not have an answer to her question, but there is still another question that needs to be asked: What about the economic damages to county governments from banks using a false mortgage registration system – MERS – to avoid paying mortgage registration fees

What is MERS?

”Mortgage Electronic Registration Systems” (MERS) is a privately held company that operates an electronic registry designed to track servicing rights and ownership of mortgage loans in the United States.

MERS serves as the mortgagee of record for lenders, investors and their loan servicers in the county land records. MERS claims its process eliminates the need to file assignments in the county land records which lowers costs for lenders and consumers by reducing county recording revenues from real estate transfers and provides a central source of information and tracking for mortgage loans.