Muni Think

Tax-exempt municipal bonds have had a stellar record of safety against payment defaults, second only to U.S. Treasury bonds.

The dramatic changes in the municipal securities market leading toward a “new normal” are daunting. When significant changes are enumerated, even when one is aware of them, they are still surprising. Because the market environment is evolving rapidly, and market re-adjustments will continue well into the future, the “new normal” does not yet exist.

The Bond Buyer on Aug. 16 published a commentary of mine called “Pension 'Reform’ Plus Smart Lawyers May Help Save States” (the headline was chosen by The Bond Buyer). The main point of the commentary was that states, having attempted to balance their budgets over two to three rough fiscal years, had run out of the easier fixes, and would now turn more aggressively towards pensions as a potential source of budgetary savings.

At the conclusion of his Aug. 16 commentary in The Bond Buyer, Christopher Mier asks us to believe that with the aid of “creative lawyering,” rewriting pension contracts will solve the fiscal problems of Illinois and other states.

Whether or not you are in the camp of those who expect to see increased numbers of municipalities filing for Chapter 9 bankruptcy protection, it is important for every muni bond investor, and those who advise them, to have a basic understanding of the benefits available to a municipality seeking relief under Chapter 9 and the role of creditors in such a case.

States continue to grapple with ongoing budget imbalances.

In passing the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress has taken the first step in reforming the financial system.

In recent years, the make-whole call has become commonplace for taxable bonds, including municipal Build America Bonds.

News in The Bond Buyer that a few small issuers used reserve funds or bond insurance to pay debt service adds to concerns that a big-name issuer struggling with budget problems may be next. Then it would be news in the general press, which might lead safety-conscious investors to question whether they should own municipal bonds.

The lasting legacy of the taxable bond option program known as Build America Bonds, or BABs, is likely to be measured by the success of the securities in opening up new global credit markets to investment in American infrastructure, a feat that is long overdue.