Muni Think

Over the past few months, even the most confident municipal bond investors have seen fit to revisit the basics of municipal insolvency law. Municipal governments are in a period of once-in-a-lifetime fiscal stress, and negative headlines have stoked fears that even the sturdiest municipal issuers might go the way of Lehman Brothers.

TO THE EDITOR

Last year, Congress created the Build America Bonds program to spur infrastructure investment in our communities and to help thaw the frozen credit markets. We believe this program has been a great success and it should be made permanent, as currently considered by Congress, for the following reasons.

From the private sector's perspective, a viable and profitable new commercial real estate industry and investment asset class has emerged, one which offers considerable business opportunities in construction, property management, and real estate finance.

Twelve states, including California, impose no restrictions on municipalities’ ability to file for Chapter 9 bankruptcy. On the other extreme, there are three states that do not allow local Chapter 9 filings and more than 20 that are silent on the matter, which is generally considered a prohibition.

We decry the decrepit state of our “crumbling” infrastructure, but we have yet to adopt legal rules needed to provide for its ongoing maintenance and repair.

Water and wastewater utilities spend three to four months assembling a bond team of financial experts, reviewing financial ratios and developing the offering statement as part of their due-diligence process prior to issuing millions in debt. However, many have failed to assess the financial risks associated with the replacement costs of underground infrastructure.

Recent congressional hearings and their aftermath have led to increased and evolved discussion of financial reform and the regulation of practitioners in the field of municipal securities. The current focal point, and long-time elephant in the room, is fiduciary duty and how it should or should not apply to various participants in the municipal securities process.

Since its inception in the early 1990s, the tax-exempt swap market has allowed issuers to execute synthetic pay-fixed interest rate swaps to produce interest-cost savings relative to traditional fixed-rate bonds.

Like a snowball rolling down a hill, the idea of applying a fiduciary duty standard to broker-dealers is gaining momentum.