Market Outlook

As the financial markets return from the holiday and continue to digest the “Fed tapering” outlook, the focus will now shift to the next employment report on June 7th.

The tax-exempt new issue calendar will be quite light in this holiday-shortened week (only about $4 billion or so, compared to $7.5 billion last week) and will feature a $500 MM offering from the New York Metropolitan Transportation Authority (MTA) and a $369 MM G.O. deal from Columbus, Ohio. The latter is notable for the fact that it will be used to call an earlier taxable Build America Bond issue. As you may recall, a par call was triggered by a reduction in the federal BAB subsidy due to sequestration, much to the dismay of bondholders.

Every once in a while, we like to report on certain news items that would seem to defy logic anywhere else but in the municipal market.

This will also a big week for the Illinois credit, as the Prairie State prepares to return to the market with a $600 MM sales tax refunding issue. The State House and Senate have passed starkly different versions of pension reform, and no compromise bill appears to be in the works, with only days left before the current legislative session ends on May 31st.

The House plan is more substantial than the version passed by the Senate, but it unilaterally imposes changes like higher employee contributions, reduced retirement cost-of-living adjustments and a higher retirement age. The Senate plan, negotiated by Senate President John Cullerton with the tacit approval of public employee unions, gives workers a choice of altered pension benefits, which Cullerton believes will help it survive a court challenge.

The Illinois legislature is also considering shifting the cost of downstate teacher pensions to local school districts. Thus, any progress made at the state level will likely occur at the expense of local governments. This fact was driven home by a report released by the Civic Federation of Chicago last week on the woeful funding status of ten local pension systems, including those of the City of Chicago and Cook County. You can check out the report here: Status of Local Pension Funding Fiscal Year 2011.”

“Only in Munis”

Every once in a while, we like to report on certain news items that would seem to defy logic anywhere else but in the municipal market.

First, the fiscally-challenged Town of Ramapo in Rockland County, New York announced it has been forced to postpone its $39 MM G.O. bond issue, scheduled to be competitively sold this week. The problem? The FBI just raided the town’s office as part of a federal investigation on potential misuse of a local development corporation to finance a local ballpark, among other alleged fiscal abuses. The G.O. bonds were meant to take out a Bond Anticipation Note (BAN) deal coming due on May 29th. Now, the town will have to just roll over the BANs, much to the distress of current noteholders. It just amazes us Ramapo still has any kind of market access in light of these recent events.

… is a pension fund separate from the underlying government or part of it?

Secondly, it was reported this week that the Northern Marianas Islands (NMI) government is considering issuing pension bonds to fund a current shortfall of about $300 million it owes to the local pension fund. A self-governing commonwealth of the United States in the Puerto Rico mold, the Northern Marianas consists of 15 islands in the western Pacific, located between Hawaii and the Philippines, with more than 90 percent of the population of 54,000 living on Saipan.

To kick the can down the road by bonding out your pension obligations is common practice in the tax-exempt market. The only problem here? This is the same retirement fund that almost set a new legal precedent a year ago by trying to become the first U.S. public pension fund to file for Chapter 11. The island’s retirement system had been in financial trouble for years, largely because the government of the islands hadn’t kept up with the payments it was required to make into the fund but also from alleged mismanagement by the fund’s financial advisor.

The legal case hinged on a single important question: is a pension fund separate from the underlying government or part of it? Under U.S. bankruptcy law, commonwealths and some states themselves cannot file for bankruptcy. According to legal experts, should a judge rule that a pension fund can be viewed as a separate entity from the underlying governmental unit, this would potentially open the door for thousands of other systems around the country to restructure their unfunded liabilities through Chapter 11.

In the end, a bankruptcy judge did throw out the Chapter 11 filing upon finding that the pension fund is in fact a government entity.

Now, a year later, faced with the prospect of exhausting its assets by the end of 2014, the Northern Mariana retirement system has its back against the wall and is evaluating all its options, including the issuance of pension obligation bonds. As Micronesia Variety, the local newspaper, describes it:

“Last week, [the Islands’ Rep. Mario] Taitano’s committee finalized its report recommending the passage of H.B. 18-50 which authorizes the Commonwealth Development Authority to float a pension obligation bond. A government attorney who requested anonymity said the money the government owes the Fund can be pledged as a guarantee to repay the bond. It has been done before, the attorney said.

Once the CNMI government issues a $300 million pension obligation bond, that money will go to the NMI Retirement Fund which is a government entity. So the government can use what it owes the Fund as collateral, the lawyer said.

The attorney also agreed with the lawmakers that [the unoccupied island of] Pagan can be pledged if the participating financial institution demands something that already exists“(our emphasis).

To offer a real asset as collateral, now that’s a novel idea, one that rarely occurs to Wall Street bankers anymore! In this case, however, the said potential collateral is a largely uninhabited island that was struck by a 7.0 magnitude earthquake just two weeks ago, so its value is, at best, quite suspect.

Ironically, if the NMI Government does find a way to issue the bonds, and assuming the yield is high enough (but still not that high in the current rate environment), we wouldn’t bet against the deal getting gobbled up by muni investors. The same goes for Ramapo. We are in that kind of a market, where investors seem to lower their credit standards every day for a few additional basis points in yield.

Disclaimer: The opinions and statements expressed in this column are solely those of the author and Axios Advisors, who are solely responsible for the accuracy and completeness of this column. This column does not reflect the position or views of RICIC, LLC or MuniNetGuide.

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