Muni Think

The Jan. 7 article by Michelle Kaske alleges that "questions continue" over the billing and financial practices at the University of Medicine and Dentistry of New Jersey. She refers to an October article in which the Newark Star-Ledger reported that UMDNJ "continued to overbill even during a two-year period when there was a federal monitor observing the school."

While the proposal from the Government Finance Officers Association to raise the small-issue bank-qualified limit to $30 million will be helpful in increasing the demand for smaller municipal credits, there are two major holes.

With recent financial guarantor downgrades generating headlines and destabilizing the municipal bond market, now is a propitious moment to remind fixed-income investors about the power of two-name credit support, and in particular, the improbability of joint default.

To stimulate investment in infrastructure and to boost domestic employment, Congress should permit pension fund purchasers of municipal bonds to reassign only the tax-benefit - the exemption feature - of those bonds to U.S. taxpayers seeking tax deductions.

A proposal has been made to use a portion of the monies available in the recently announced federal bailout to assist the financial guaranty industry incorporating the "good bank, bad bank" model.

There's no denying the importance of infrastructure. But the traditional infrastructure model has become problematic. The growing need to repair or replace aging infrastructure in transportation, utilities, telecommunications, and other sectors has soared to record levels in recent years. At the same time, the cost of building materials is skyrocketing, and local, state, and federal governments are faced with declining tax revenues and higher borrowing costs.

Asked five years ago what we did for a living, we got blank stares when we responded "carbon trading" and "carbon investing." Now, with everyone from PepsiCo to Google to Pearl Jam striving to offset their carbon footprints, placing a value on carbon reduction has become commonplace.

It is in the nature of things that our most valuable infrastructure projects are economically sound, but often financially unsound.

The municipal market has always had a buyer of last resort. This category of buyer had the capital and the leverage capability to buy municipal bonds when they were attractively priced relative to Treasuries or other appropriate benchmarks. In the absence of the buyer of last resort, the market was vulnerable to getting progressively cheaper relative to other fixed-income markets due to imbalances in supply and demand. From the inception of the market, this important role was filled by the nation's commercial banks.

With the Aug. 7 announcement by the Maryland Insurance Administration regarding the restructuring of ACA Financial Guaranty, there are questions in the market about how it was designed, how it will work, and whether or not it should serve as an example for future restructurings.