Hard times ahead for Ogden's borrow and spend mayor. From yesterday's Los Angeles Times story:
"The credit crunch is taking a heavier toll on the municipal bond market, a favored sector for individual investors.Interesting related story from The San Jose Mercury News: Vallejo bankruptcy could have far-reaching impact. From that story:
Yields on tax-free muni bonds surged Thursday for the 12th straight session as many buyers stayed away. That's bad news for California, which plans to sell bonds next week to raise $1.75 billion for infrastructure projects.
The annualized yield on an index of 40 long-term muni issues nationwide tracked by the Bond Buyer newspaper jumped to 5.33% on Thursday, up from 5.20% on Wednesday and the highest since 2002. The yield has rocketed from 4.74% five weeks ago.
A Bloomberg News index of 20-year California general obligation bonds sported a yield of 5.16% on Thursday, up from 4.63% five weeks ago.
Bond yields rise as the market prices of the securities drop -- a sign that investors are balking at putting their money into the issues.
In many cases, muni yields are above what taxable U.S. Treasury issues pay, an unusual occurrence. A 30-year Treasury bond pays about 4.51%.
Yet "there are very few buyers out there now" for munis, said Bob Fields, an expert on the market at bond giant Pacific Investment Management Co. in Newport Beach.
The normally low-key muni market, where states, cities and other municipalities borrow to fund their operations, has suffered a series of punches since late last year that have left investors wary. [...]
"Many muni bond analysts emphasize that the main problem facing the market is excess supply at a time when nervous investors are conserving cash. Supply and demand are "deeply out of balance" in the muni market nationwide, according to a recent report from Municipal Market Advisors, a Concord, Mass.-based research firm. [...]
"Still, default worries may grow as the economy weakens, some analysts caution. The result could be that investors demand even higher yields on muni bonds to compensate for a perceived increase in risk, said Jim Lynch, head of Lynch Municipal Bond Advisory in New York. "There should be no rush to buy here," he said."
"Experts say Vallejo's case undoubtedly will raise speculation about municipal bonds that cities use to fund facility improvements and other activities because the once-certain guarantee of profitability will suddenly look poisonous to investors. [...]Yes, gentle readers, impending municipal bankruptcies are just another factor which will likely affect the marketability of municipal bonds in an already shaky bond market. Percipient municipal bankruptcies of course introduce the "wild card" of "uncertainly" into the bond market -- a market which is normally played by only the most cautious and prudent investors -- a market which is allergic to surprises.
"If bond holders are hurt by a bankruptcy, then future lenders will probably put constraints on elected officials' ability to make promises while in office that must be paid after they leave," said CPA Marcia Fritz, vice president and treasurer for California Foundation for Fiscal Responsibility, which advocates for pension reform.
"It's almost a relief that it's finally coming to this in Vallejo because it will be an example of what happens when you've got a lot of people with their fingers in the cookie jar," she said. "I saw this coming years ago."
We do hope our mayor and city council/RDA board are keeping a close eye on developments in the Muni bond market, which is showing all the signs of a market preparing to tank. Perhaps it's time to back off on the grand plots and schemes... maybe just a little bit?
We thank gentle reader Danny for this morning's initial heads-up on these stories. Definitely something to think about as Emerald City's grand plotters and schemers barrel on full speed ahead, borrowing and spending like madmen.
Comments anyone?
10 comments:
Thanks, Rudi and Danny, for bringing this issue up.
I have many of the same worries, which were only made worse by this story in The Economist last week.
Here's an excerpt:
Problems in “auction-rate” securities are causing even more alarm. In this $330 billion market, long-term bonds are, in effect, transformed into short-term ones by having the interest rate reset in auctions every week or month. The allure for issuers, including hundreds of municipal bodies, is lower interest rates than typical long-term bonds, and the ease of paying down debt if they build up a surplus, by simply taking part in the auction themselves.
This month, however, dozens of auctions have failed as investors have questioned the quality of the assets on offer. Tens of billions of dollars of bonds went unsold last week. Dealers, such as Citigroup and Goldman Sachs, have backed away from soaking up unwanted paper. This has come as a shock to corporate treasurers at firms like Bristol Myers Squibb and US Airways, who piled into auction-rate debt assuming it to be safe.
Because the interest rate automatically clicks up if the auction is a dud, hospitals, museums, universities and ports have suddenly found their debt-service bills rising sharply. New York state entities' weekly borrowing costs have climbed by more than $2m, for instance. Some rates soared to 20%—though later they fell back to a still high 8%. Issuers are scrambling to refinance into proper long-term bonds, or asking banks for letters of credit. The Treasury has even offered to make it easier for issuers to convert to other types of debt.
Now, I'm not smart (or perhaps not clever) enough to figure this out, exactly, but as best I can figure, if you are a municipality with bonds at 9% over 20 years, you go sell them at auction and buy them back at (say) 7% for a year, saving yourself the interest rate for the new, short term -- for as long as the rate goes down. But if the rate goes up, you're sunk.
Can someone with a background in finance tell me if I have that right?
Does anyone know if Ogden City or the RDA engage in such deals? It wouldn't surprise me if they did. Apparently, it's a common practice.
Mono, I'm not sure on this but it seems like just last year Ogden City did something like that, to reduce the interest on the near 100 million debt. This was what lying little matty spun to make the kool-aid bunch think that Van Hooser had been a party to this massave debt total, almost all of it created before her joining the Council.
Auction rate bonds are bonds whose rates are set and re-set periodically at auction. It's a twist on an "adjustable rate" loan.
I don't know if Ogden has any of these but a bigger problem is this: While the Fed is trying to lower interest rates, long rates and muni rates (on cities for example) are actually going UP. In fact, the Fed is letting money out the door well below their stated interest rate of 3%. See the link below.
Temporary Open Market Operations
And yet, loan rates are increasing! That’s because inflation is currently running at 5, 8, or 18% depending on whether you trust government numbers, wholesale prices, or the money supply, respectively. And it’s increasing, rapidly.
That’s the panic situation we are in. Banks are dramatically reducing lending and nobody wants to buy anything but US treasuries. The system is melting down. The Fed is running the printing presses, but their member banks won’t take the money because they don’t want to lend it. Look once again at the link above to see what I mean.
The issue is SOLVENCY. If Ogden has variable rate debt, those rates will be going up and Ogden will have to come up with the extra money. If Ogden is trying to borrow, the rates will be higher.
This could spiral out of control. Godfrey will never admit this, if he is even aware of it, that is.
He is a little boy arrogantly playing a game that is causing the hands of hardened men to tremble. He has taken us into very dangerous waters. We will all pay for it.
Good article, Mono Thanks.
As to your query, I would doubt very much that the RDA has issued any auction rate securities, or any variable rate debt instruments at all, for that matter. Up until my source, Scott Brown, departed Ogden City government last year, he made it clear that he'd been negotiating fixed rate debt instuments only. The Rec Center financing, which closed around November 2005, included a pledge of BDO income as additional security, to buy down a fixed rate, you'll remember. Perhaps that's what Bill C. remembers as having happened earlier.
But inasmuch as Brown, my former insider source, is now unavailable, it's only speculation what's happened since then.
And to Danny, I'll say this: Even if RDA debt is now and in the future limited strictly to fixed rate debt instruments only, the problem is that it's now a muni bond buyer's market, and the any future bond financing will come at an increasingly exorbitant price.
Danny's right of course. The real question is solvency, whether high priced financing is prudent in a downwardly spiraling economy.
Excellent information.
I hope Harmer and Godfrey and Arrington will become as well informed as Weber County Blog readers.
Different subject but I was delighted to read this morning in the local paper that Councilwoman Wicks is exercising her right to have open exchange of ideas in public between the Mayor and Council members and to bypass the meetings called by the Mayor in his private office.
She is doing a great job.
correction
the city has used veriable rate bonds. it used them to finance the rec center but i believe they have since been converted to fixed rate. and as bill c pointed out those refinancing efforts to convert the veriable rate bonds to fixed rate bonds were pointed out by godfrey to suggest that van hooser loved debt.
This discussion on municipal debt is worthwhile. But it's about more than that.
Click here.
I could go on all day. It's looking like it's the end of an era (and the beginning of a new one.) It's a reeeeeely bad time to be led by a borrow and spend mayor.
And click here.
Median house prices in California fell an astounding $46,000 last MONTH!
The first question that any city should ask is how we got into this position and what can we do to keep from getting in any deeper. In the City of Vallejo’s case it was stated; “Vallejo's problem is that it's spending more than it's taken in each year, and it's "creating obligations it never could afford and never should have made."
Scary similarity with Ogden in that for the last two years the city has spent more money than it has taken in via revenues. The administration has justified this by basically stating that these shortfalls represent an investment in the future. If you don’t believe me, read the city’s audited financial statements, page 71, Note 17. Contingencies. This is how Vallejo got in trouble and this is what Ogden is currently doing.
To address the second part of the comment about Vallejo creating obligations it never could afford and never should have made, I likewise worry about the Junction. The city has taken on the role of developer and the residents have been forced to take on all the risk. In economic hard times people tighten their belts and almost without exception in the past one of the first places that they cut back is in entertainment. The Rec Center is all about entertainment and we the residents own 100% of it.
What can we do to keep things from getting worst; As the country continues show signs that the economy is slowing down and Utah and Ogden will participate in that slow down, we need to ensure that our public officials do not financially over extend the residents of this city any more than they already have. At least not until the economic picture starts to brighten.
Ogden could very well face the same challenges as Vallejo if our city leaders don’t stop their spending spree, bankruptcy.
If you want to know what effects bankruptcy will have on a city just read excerpts from the City of Vallejo article posted in the lead article:
“Experts agree one thing is certain. If the city cannot pay its employees because the general fund is dry - City Manager must instruct all employees to stay home.” "They can't come to work,"
This means that city streets won’t get repaired or plowed in the winter; police, fire and medical services will be cut to bare minimums; trash will only be picked up occasionally; water line leaks will go unrepaired; parks will not be maintained; all local support and agency departments will be shut down and taxes will go up.
Think about it
Ah, but we could visit the Salomon Center, climb the ice tower, and maybe even take a flatland gondola ride. Who needs those boring city services like water, sewer, trash pickup, police and firefighters?
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