California government pays more interest than companies
From Sunshine Review
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October 28, 2009 California's government, the eighth largest economy in the world, has never defaulted on its $80 billion in taxes, yet it pays more interest than one of the largest U.S.-based oil drillers, Diamond Offshore Drilling Inc.[1]
[edit] California government
California collected about $80 billion in taxes in the fiscal year (ended June 30), compared with $3.6 billion in revenue for Houston-based Diamond. California has never defaulted on its debt. The state paid 1.5 percentage point more in interest, about $785 million in additional cost for taxpayers over the 30-year life of $1.75 billion in Build America Bonds.
California and many other states are not requiring municipalities to file timely financial information. The disclosure that state and local governments provide to investors is in the “dark ages,” said Gary Pollack, of Deutsche Bank AG’s Private Wealth Management unit in New York.
“The municipal bond market is the last bastion of hidden information,” said Timothy Koch, chairman of the finance department at the Moore School of Business at the University of South Carolina in Columbia, South Carolina.
U.S. taxpayers are paying as much as $6 billion a year because public officials’ financing is in the dark in the $2.8 trillion tax-exempt bond market, according to data and interviews from more than a dozen states. However, the recession is forcing municipal governments to cut spending or raise taxes.[1]
[edit] Exemptions
There are federal securities laws that exempt states, cities and school districts from disclosure rules that apply to corporations, creating an information vacuum. A 2008 study found that as many as 25 percent of municipal borrowers refrain from giving investors any information for as much as three years and longer.
“When disclosure is weak or sometimes nonexistent, it allows deals to come at more attractive yields,” said Michael Camarella, portfolio manager on the Rochester, New York-based team that manages about $29 billion in municipal bonds for OppenheimerFunds, Inc.
“I think it’s a great thing," Camarella said. "I wouldn’t want to see it change.”[1]
[edit] Kentucky’s issue
Kentucky sold $209.2 million of Build America Bonds in June at rates of more than 6 percent. Kenneth Monaghan helps manage $35.9 billion as a partner with Rogge Global Partners Inc. in New York and did not order any Bonds. He said avoids state and local government debt because those who issue them do not provide enough financial information.
According to trading records, Kentucky saved at least $8 million over the 20-year life of the bonds. The records show that interest rates on some bonds dropped more than 30 basis points in less than a month, a basis point being one one-hundredth of a percentage point. This amount would be able to buy, for example, textbooks for 5,400 public high school students each year.
“The interest rates on Build America Bonds should be lower,” said Peter Coffin, president of Boston-based Breckinridge Capital Advisors Inc., which oversees $10 billion of bonds.
“Buyers are uncomfortable with the perceived lack of disclosure in the municipal bond market,” said Coffin.[1]
[edit] Corporations vs. municipalities
Publicly held companies are required by federal law to issue quarterly financial statements, details of pending litigation and financial plans. Municipal borrowers are required to present an financial statement each year and update investors on material events, such as missed payments, instances in which reserve funds are tapped, credit-rating changes or other circumstances that might affect the debt.
Tom Dresslar, a spokesman for state Treasurer Bill Lockyer, said California gives investors more information than it has to.
“The notion that California pays more to borrow because of inadequate disclosure is complete bunk,” he said in a Bloomberg interview. He suggested he novelty of Build America Bonds may explain why some taxable investors avoided them. Build America Bonds have been marketed since April.
“Issuers may be paying some premium for that newness,” he said.
Localities suffer no no penalty when they refuse to disclose. Several localities fail to file, according to a 2008 study by DPC Data Inc., a Fort Lee, New Jersey-based company that tracks and supplies municipal disclosure to investors. The company found that about a fourth of issuers didn’t provide documentation for three or more years led by borrowers with the riskiest credit.
“California, the largest issuing state, has concentrated disclosure problems in the most sectors, particularly economic development, school districts, higher education, local governments, multifamily housing, water utilities and sewer/wastewater treatment,” according to the DPC study.
The study found that the sample of 1,771 out of 4,230 California issuers (almost 42 percent) were delinquent on disclosure.
Some issuers voluntarily provided detailed information, though they were tax-exempt, about their risk of losing money from interest-rate swaps or other hedging. Over the last two years, many swaps backfired, costing them billions in new debt as they paid banks and insurers to unwind the transactions.[1]
[edit] Alabama
Jefferson County, Alabama did several transactions like the above from 2002 to 2004 while it was refinancing more than $3 billion in sewer debt. The financing fell apart as the swaps -- contracts in which officials agreed to exchange payments with banks to hedge against increases in borrowing costs -- backfired and some variable rates more than tripled.
The county is on the edge of bankruptcy and the former president of the county commission, Larry P. Langford, the current mayor of Birmingham, is on trial in federal district court in Tuscaloosa. Langford is charged with accepting Rolex watches, clothing and cash from an investment banker who received $7.1 million from county debt transactions.
As municipal issuers embraced swaps tied to variable-rate debt, they shunned competition in selling their bonds. Through September 2009, public officials issued debt without seeking bids for more than 85 percent of the $308.9 billion in new issues (according to data compiled by Bloomberg).
That’s up from 17 percent in 1970 and 68 percent in 1982, according to a 1983 report by the Government Accountability Office.[1]
[edit] External links
[edit] References
- ↑ 1.0 1.1 1.2 1.3 1.4 1.5 "Governments Never in Default Pay More Interest Than Companies," Bloomberg, October 28, 2009
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