Scribd
Upload
14 views4 pages

State Budget Crisis Insights 2014

The State Budget Crisis Task Force final report addressed long-term fiscal sustainability concerns for states. It recommended strengthened budget oversight, reserve funds, and improved disclosure of financial information. Local economic growth is projected to continue in 2014, with most metro areas expecting over 1% real GDP growth and declining unemployment. However, critical issues around funding priorities, political willingness, and transparency remain ongoing concerns.

Uploaded by

api-245850635
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
14 views4 pages

State Budget Crisis Insights 2014

The State Budget Crisis Task Force final report addressed long-term fiscal sustainability concerns for states. It recommended strengthened budget oversight, reserve funds, and improved disclosure of financial information. Local economic growth is projected to continue in 2014, with most metro areas expecting over 1% real GDP growth and declining unemployment. However, critical issues around funding priorities, political willingness, and transparency remain ongoing concerns.

Uploaded by

api-245850635
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

T RIDENT

MUNICIPAL RESEARCH
Municipal Market Weekly Thursday, January 23, 2014 Lessons Learned The State Budget Crisis Task Force was formed in 2011 (Richard Ravitch and Paul Volcker served as co-chairs) to study the long-term fiscal sustainability of the states and structural budget imbalance in state budgets post the 2008 financial collapse. The initial report, issued in July 2012, cited several key concerns: Medicaid spending is crowding out other needs Federal deficit reduction threatens State economies and budgets Underfunded retirement programs create future budget risks Narrow, eroding tax bases and volatile tax revenues undermine state finances Local government fiscal stress poses challenges for states State budget laws and practices hinders fiscal stability and mask imbalances These issues, in retrospect, have framed the credit concerns of the past several years. We would add issues of political willingness and transparency to the list as well. The Task Force released its final report earlier this month, and its findings seek to address the concerns raised in its intial study. One prominent addition to the list of concerns is transportation/infrastructure investment. The report, not surprisingly, reiterates the need for continued fiscal vigilence, discipline and accountability by state government. There is recognition of positive actions by several states on pension reform and addressing revenue shortfalls. Of particular note is the Task Force's call for revisiting the "Tower Amendment" (a 1975 amendment to the Securities Exchange Act of 1934 that prohibits the SEC and MSRB from directly or indirectly requiring issuers to file documents with them before securities are sold) so that the SEC can require issuers to comply with sensible disclosures. Over the past few years,the SEC has brought suits against states (NJ) and localities that have provided inadequate or misleading disclosure. The success of such actions has raised awareness in the issuer community as to the need for transparency in its dealings with the marketplace and investors.

MUNIVERSES

verse one surveying the horizon

State Budget Crisis Task Force Final Report Recommendations Modified accrural budgeting by states and localities Multiyear Financial Plans Reserve (Rainy Day) funds Borrowed funds never treated as revenue Strenghthened state oversight of local financial reporting Budget standards Easily understood reports financial

Implication of federal actions on local and state finances Improved disclosure

TRIDENT MUNICIPAL RESEARCH, LLC A JOINT VENTURE OF ARBOR RESEARCH & TRADING, LLC & ALPRION CAPITAL MANAGEMENT LP

T RIDENT
MUNICIPAL RESEARCH

MUNIVERSES

Municipal Market Weekly Thursday, January 23, 2014 On a positive note, a recent survey of U.S. Metro Economies prepared for The United States Conference of Mayors 82nd Winter meeting paints a brighter economic picture for the nation's 363 metro areas. Key findings are: Nearly all (356) of the 363 metro area are projected to experience real (inflation adjusted) economic growth in 2014, up from 2013 when 97 had declining economies. 340 metros (93%) are expected to see real growth of 1.0% growth or higher, compared to 183 metros in 2013. Nearly all Metros (98%) are projected to return to job growth in 2014;only 17 will see job growth of 3.0% or higher, one-third (121) are forecast to see 2.0% job growth.. 35% of metros are projected to have an unemployment rate of 7.0% or higher; 40% are projected to have rates of 6.0% or less.

verse two following the currents

TMR supports the idea that as local economies slowly recover, credit quality will stabilize and slowly improve. We recognize that critical issues exist or may arise over the next year, but for the first time in a while we see the glass as half-full.

TRIDENT MUNICIPAL RESEARCH, LLC A JOINT VENTURE OF ARBOR RESEARCH & TRADING, LLC & ALPRION CAPITAL MANAGEMENT LP

T RIDENT
MUNICIPAL RESEARCH

MUNIVERSES

Municipal Market Weekly Thursday, January 23, 2014


Muni Market Commentary Tax exempt yields continue to drop as re-investment cash and a manageable primary calendar push investors to chase yields. As a result of the supply/demand imbalance, Muni / Tsy ratios continue to fall and could see some investors try to rotate out of weaker credits as most are seeking that extra yield as rates drop. As of mid-day Thursday, high grade yields have seen a 2-3 basis point drop so far this week with 5, 10 and 30 year yields being quoted around 1.11%, 2.57% and 3.85%. Muni /Tsy ratios levels were around 69%, 92% and 104% for the respected benchmark maturities . New issuance this week saw an increase of supply to approximately $4.5 billion. The largest deal was $1billion Port Authority NY/NJ Taxable Revenue Bonds (Aa3/AA-) which was split into two series both maturing in 2046. Evenly split the first series offered a make whole call structure and was priced @ +120/OLB. The second series offered a ten year call feature and was priced @ +155/OLB. The combined deal was oversubscribed 3-4 times and saw bid levels tighten nicely to +111 and +139 respectively as bonds broke syndicate. Another highly anticipated deal was a competitive deal from Fairfax County VA (Aaa/AAA). Citi purchased the deal which offered serial maturities 2014-2033. Final levels had coupons 3.00% -5.00% (5.00% coupons only on maturities 2022-2025) and yields 0.12% - 3.72%. Most of the longer maturities were spoken for during the pre-order period with residual balances mostly in 2017-2023 maturities.

verse three charting the course

TRIDENT MUNICIPAL RESEARCH, LLC A JOINT VENTURE OF ARBOR RESEARCH & TRADING, LLC & ALPRION CAPITAL MANAGEMENT LP

T RIDENT
MUNICIPAL RESEARCH

MUNIVERSES

Municipal Market Weekly Thursday, January 23, 2014

the end

About TMR
Trident Municipal Research, LLC ("TMR") is a joint venture of Arbor Research & Trading, Inc and Alprion Capital Management LP focused on providing high-quality, independent research for the municipal bond market. Arbor Research & Trading, LLC (Arbor) is an institutional research and brokerage firm that produces innovative research across a broad range of global fixed-income, equity, currency, and commodity markets. In addition, Arbor's trading desk provides comprehensive issue discovery and high quality execution in the fixed income and currency markets. Unencumbered by the biases of holding positions or underwriting securities, Arbor offers objective viewpoints and intelligent solutions for portfolio managers and traders world-wide through a proprietary menu of independent and innovative research products designed to work in conjunction with clients and their systems. Founded in 1988, Arbor has a long history of delivering innovative, technology-based products to many of the largest and most influential financial institutions world-wide. As the landscape of global financial markets has changed, Arbor has adhered to its mission, providing clients with timely analysis, objective opinion and first- class execution. Alprion Capital Management LP (Alprion) is a New York-based investment manager focused on the municipal sector. Alprion was founded in 2010 by a team of fixed income professionals with backgrounds in municipal credit and fundamental credit analysis.

Contributors
Bart Mosley, Co-President Rob Novembre, Co-President Jason Hannon, Capital Markets Team Ken Kollar, Capital Markets Team Steven D Schrager, Credit Consultant We, the Contributors, hereby certify that all of the views expressed in this report accurately reflect our personal views about any and all of the subject sectors, industries, securities, and issuers. No part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

DISCLAIMER
This communication is for informational purposes only. This is not an offer or a solicitation of an offer to buy or sell any instrument or security. This document contains certain forward-looking statements and projections. Such statements and projections are subject to a number of assumptions, risks and uncertainties which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward-looking statements and projections. Prospective investors are cautioned not to invest based on these forward-looking statements and projections. Certain information contained herein has been supplied to Arbor and Alprion by third parties. While Arbor and Alprion believe such sources are reliable, it cannot guarantee the accuracy of any such information and does not represent that such information is accurate or complete.

Sales & Inquiries

Max R. Konzelman Vice President Arbor Research & Trading, LLC. [Link]@[Link]

THIS DOCUMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY INTERESTS IN A FUND MANAGED BY ALPRION CAPITAL MANAGEMENT LP OR RELATED ENTITIES. AN OFFERING OF INTERESTS WILL BE MADE ONLY BY MEANS OF A CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM AND ONLY TO QUALIFIED INVESTORS IN JURISDICTIONS WHERE PERMITTED BY LAW. THIS MATERIAL IS FOR YOUR PRIVATE INFORMATION, AND WE ARE NOT SOLICITING ANY ACTION BASED UPON IT. THIS MATERIAL SHOULD NOT BE REDISTRIBUTED OR REPLICATED IN ANY FORM WITHOUT PRIOR CONSENT OF TRIDENT MUNICIPAL RESEARCH. THE MATERIAL IS BASED UPON INFORMATION THAT WE CONSIDER RELIABLE, BUT WE DO NOT REPRESENT THAT IT IS ACCURATE OR COMPLETE, AND IT SHOULD NOT BE RELIED UPON AS SUCH.

[Link]

TRIDENT MUNICIPAL RESEARCH, LLC A JOINT VENTURE OF ARBOR RESEARCH & TRADING, LLC & ALPRION CAPITAL MANAGEMENT LP

Common questions

Powered by AI

Trident Municipal Research's organizational structure facilitates high-quality research delivery through its joint venture between Arbor Research & Trading, Inc. and Alprion Capital Management LP. This collaboration combines Arbor's extensive experience in institutional research and trading across diverse markets with Alprion's specialized focus on municipal credit and fundamental credit analysis. By integrating these distinct yet complementary capabilities, Trident can provide comprehensive, independent research tailored to the municipal bond market .

In 2014, nearly all of the 363 U.S. metro areas were projected to experience real economic growth, an improvement from 2013 when 97 areas had declining economies. Additionally, 340 metros were expected to see real growth of 1.0% or higher, compared to only 183 metros in the previous year. Nearly all metros were projected to return to job growth in 2014 .

Arbor Research & Trading LLC plays a role in the global financial markets by offering institutional research and brokerage services across various sectors, including fixed-income, equities, currencies, and commodities. To maintain objectivity, Arbor is unencumbered by the biases of holding positions or underwriting securities, allowing them to provide unbiased viewpoints and innovative solutions to portfolio managers and traders worldwide. Their business model focuses on delivering timely analysis, objective opinions, and first-class execution services .

Trident Municipal Research describes the economic outlook for local economies as cautiously optimistic, indicating that as local economies slowly recover, credit quality is expected to stabilize and slowly improve. While acknowledging existing and potential challenges, Trident sees a generally positive trend—the first optimistic outlook in several years .

The Task Force's final report recommendations highlight that federal actions can significantly impact local and state finances. The implications of federal decisions, such as deficit reduction measures, can pose challenges to state economies and budgets by potentially reducing federal funding or increasing states' financial responsibilities. Thus, careful consideration of federal policies is crucial for effective state-level financial planning .

The drop in tax-exempt yields was primarily due to a combination of reinvestment cash being available and a manageable primary calendar, leading investors to pursue yields. The supply/demand imbalance further pushed Muni/Tsy ratios lower, encouraging some investors to rotate out of weaker credits in search of higher yields as rates continued to drop .

The State Budget Crisis Task Force identified several key concerns regarding fiscal sustainability: Medicaid spending crowding out other needs, federal deficit reduction threatening state economies and budgets, underfunded retirement programs creating future budget risks, narrow and eroding tax bases undermining state finances, and local government fiscal stress posing challenges for states. Additionally, state budget laws and practices were criticized for hindering fiscal stability and masking imbalances .

The Task Force recommends revisiting the 'Tower Amendment' to enhance the SEC's ability to require issuers to comply with sensible disclosure standards. This recommendation was driven by past cases where states and localities provided inadequate or misleading disclosures, leading to legal actions by the SEC. Improved disclosure is viewed as essential for transparency and accountability in fiscal dealings .

Underfunded retirement programs present significant risks to state budgets as highlighted in the Task Force's report. These programs create deferred liabilities that can severely strain future state budgets, especially as the population ages and more retirees draw benefits. Without adequate reforms or funding strategies, states may face increased financial pressures, potentially leading to cuts in other essential services or the need for increased taxes to meet obligations .

The significance of the Port Authority NY/NJ Taxable Revenue Bonds issuance lay in its size, being a $1 billion deal split into two series and maturing in 2046. The issuance was notable for the market demand it generated; both series were oversubscribed 3-4 times. The bonds featured distinct structures—one series with a make-whole call structure and the other with a ten-year call feature—and saw tightening bid levels once they broke syndicate, illustrating strong investor interest and confidence .

You might also like