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History Shows Chicago Picked a Risky Time for a Pension Bond Sale
By Danielle Moran
December 12, 2018, 2:26 PM EST
Chicago Mayor Rahm Emanuel is bullish on the stock market.
That’s one implication of the plan he offered up to bolster the city’s struggling pension funds before he leaves office in May. It calls for selling $10 billion of bonds and handing the money over to its pensions, wagering that they will make more on their investments than the city will pay out in interest. It’s like a massive margin loan, secured by Chicago’s tax dollars.
It’s a well tried tactic, and one that has met with success, according to a 2014 study by the Center for Retirement Research at Boston College, which found that governments on the whole came out ahead by doing so. But there’s a big caveat: Those that sold so-called pension obligation bonds after the dot-com and housing bubbles found themselves deeper in the hole when stock prices collapsed.
"Historically, the timing of pension obligation bonds to seize the right window has played out fairly poorly," said Dora Lee, vice president at Belle Haven Investments. "Right now, going into 2019 and 2020, it doesn’t look like you’ll have the stock market that will be able to generate the returns necessary to make it economically feasible."
Emanuel said the window on its sale is closing, given the upward shift in interest rates.
But the other side of the equation appears more iffy. U.S. stock markets have endured dramatic volatility this year, with investors worried about a widening world trade war, slowing growth and rising interest rates.
The S&P 500 Index has tumbled about 9 percent from the peak it hit three months ago. And with the economic expansion verging on a decade, two-thirds of business economists expect a recession to begin by the end of 2020, according to a poll released in October by the National Association for Business Economics.
During the last recession, state and city pension funds were hit hard when the value of their investments plummeted. Emanuel’s plan suggests he’s not worried that it will happen again. Or at least not on his watch.
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https://www.bloomberg.com/news/articles/2018-12-12/history-shows-chicago-picked-risky-time-for-pension-bond-sale?sref=dlv6Ue8o
Best Places to Work in Money Management 2018
Best Places to Work in Money Management 2018
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https://www.pionline.com/article/20181210/PRINT/181219985/belle-haven-investments
Detroit sees little bankruptcy penalty as it sells muni bonds
Detroit sees little bankruptcy penalty as it sells muni bonds
Detroit News staff and wire reports
Luck was on Detroit’s side when it returned to the municipal bond market.
A Treasury market rally, low supply and strong demand for high-yielding securities greeted the city when it sold $135 million of debt Tuesday, the first sale of bonds backed only by the city’s promise to repay since it filed a record-setting bankrupt five years ago. The conditions allowed Detroit to secure lower interest rates than initially expected, leaving it paying even less than some borrowers that haven’t reneged on their debts.
Bonds were priced with yields ranging from 3.36 percent on a 2020 maturity to 4.95 on those due in 2038, tighter than what was first offered. The city also was able to increase the size of the deal from $111 million to $135 million, an indication of strong demand.
“It’s a perfect recipe to come to market,” said Kathleen McNamara, senior municipal bond strategist at UBS Wealth Management. “They should be very, very happy.”
Saddled with $18 billion in debt, unable to pay its bills or provide basic services, Detroit in July 2013 was authorized by Gov. Rick Snyder to file the largest municipal bankruptcy in U.S. history. The bankruptcy was the culmination of a half-century of residential flight, a dwindling tax base, deferred investment and financial mismanagement.
The bankruptcy, like Puerto Rico’s which followed, unsettled the municipal bond market and raised the specter that governments would be punished by the market when they returned to borrow again.
But the penalty wasn’t that large. Last week, Chicago’s junk-rated school system sold 5-year bonds for a yield of 4.16 percent, or 1.95 percentage points more than what top-rated borrowers pay. Detroit’s 5-year bonds sold Tuesday for a yield of 3.91 percent, about 1.81 percentage points above the benchmark.
“From our perspective the bankruptcy penalty is pretty small to none,” said Dora Lee vice president at Belle Haven Investments, “I think that people just want yield right now and they’re hoping that they will get that with Detroit.”
“Investors obviously have short memory when they see a 5 percent yield,” McNamara said.
Nodding to the city’s improving financial reserves, Moody’s Investors Service in May announced an upgrade of the city’s issuer rating and outlook.
The rating agency attributes downtown Detroit’s surge in employment and tax revenue to the arrival of affluent residents and large-scale developments. Since 2014, Detroit’s rating has gone from B3, to Ba3 stable, which is considered a stable outlook.
Meanwhile, city officials have said Detroit posted four consecutive years of balanced budgets while crafting a plan to stave off another collapse by addressing looming pension obligations.
A surplus of $44 million was projected for the 2018 fiscal year, which ended Oct. 1, Detroit's Chief Financial Officer John Hill said in July. The city ended its 2017 fiscal year with a $53.8 million general fund operating surplus, and revenues exceeding expenditures by $108.6 million. In the 2016 fiscal year, the surplus was $63 million, and it was $71 million for 2015.
Income tax revenue increased 15 percent in the last four years, while the property tax collection rate has also climbed to more than 80 percent in fiscal year 2018 compared to 69 percent in fiscal year 2014, according to the Chief Financial Officer’s office.
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https://www.detroitnews.com/story/news/local/detroit-city/2018/12/04/detroit-municipal-muni-bonds-bond-market/38673439/
Puerto Rico Bonds Jump as Board Sees More Ability to Pay
Puerto Rico Bonds Jump as Board Sees More Ability to Pay
By Jonathan Levin and Amanda Albright
October 22, 2018, 11:49 AM EDT Updated on October 22, 2018, 2:04 PM EDT
Puerto Rico bonds rallied Monday after the commonwealth’s federal oversight board published an updated fiscal plan that apparently acknowledged a greater ability to repay its debt than had been previously estimated.
The latest projections suggest the island would have surpluses after contractual debt service through fiscal 2023, after accounting for a program of planned reforms, whereas previous plans had projected deficits. Without the reforms, the island is still projected to run deficits from fiscal 2021 onward, as federal disaster aid runs out.
Puerto Rico general-obligation debt with an 8 percent coupon and maturing in 2035 traded at an average of 59.3 cents on the dollar on Monday at 1 p.m., up more than 8 percent from its average of 54.6 cents on the dollar on Oct. 18. The bonds are the most actively-traded securities in the municipal market on Monday.
"In other words, Puerto Rico in the draft Fiscal Plan acknowledges that it will have the capacity required to pay its debts," said Mark Palmer, an analyst covering municipal bond insurers at BTIG.
He also said that the projections "support the case for a consensual deal with creditors and insurers of its general obligation (GO) bonds at a recovery level well above the level at which the bonds currently trade."
Puerto Rico general-obligation debt with a 5 percent coupon and maturing in 2041 traded at an average of 58.9 cents on the dollar on Monday afternoon, up more than 14 percent from its average of 51.4 cents on the dollar on Oct. 19. The bonds are the most actively-traded securities in the municipal market on Monday.
A footnote in the plan makes clear that the surplus is "for illustrative purposes only" and doesn’t represent expected future payments on restructured debt, but the bond market nevertheless took it as an improvement over past plans.
Still, Puerto Rico has a tough road ahead. The new plan calls for the commonwealth to trim financial support to municipalities and the University of Puerto Rico. It also says the island’s government should cut the number of agencies to no more than 35 from the current 114.
"Overall, this is just a plan that lays out a scenario if Puerto Rico were to implement significant reforms and cost cutting measures," said Dora Lee, vice president at Belle Haven Investments, which oversees $7.5 billion in municipal debt. "So far the Puerto Rico government has not shown a willingness to do that."
— With assistance by Yalixa Rivera
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https://www.bloomberg.com/news/articles/2018-10-22/puerto-rico-bonds-jump-as-board-acknowledges-capacity-to-pay?sref=dlv6Ue8o
With California Booming, Voters Weigh Most Bond Sales Since 2006
With California Booming, Voters Weigh Most Bond Sales Since 2006
By Romy Varghese
October 18, 2018, 11:09 AM EDT
With California’s finances reaping the benefits of a booming economy, voters will have a chance to decide whether to run up the government credit card to alleviate a housing crunch and pay for public works: There’s about $16.4 billion of state bonds on the November ballot, the most since 2006.
But don’t expect a surge of sales even if voters feel generous. California already has the legal power to issue about $33 billion of bonds that have yet to be sold. Some of it was approved more than 20 years ago, according to data from the treasurer’s office. California has about $74 billion in outstanding general-obligation debt.
"They’ve definitely shown themselves to really pick their spots in terms of the market on when to make their debt issuances work for them, which is not always great if you’re an investor looking for more yield,” said Dora Lee, vice president at Belle Haven Investments, which manages about $7 billion of municipal bonds.
California holds statewide elections every two years. In November 2016, voters approved $9 billion for schools, the only bond measure on the state ballot.
In November 2006, voters signed off on all bond measures totaling more than $42 billion.
Here are the four state bond measures:
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https://www.bloomberg.com/news/articles/2018-10-18/with-california-booming-voters-weigh-most-bond-sales-since-2006?sref=dlv6Ue8o
Chicago Mayor Halted Pension Crisis, But Leaves Big Bills Ahead
Chicago Mayor Halted Pension Crisis, But Leaves Big Bills Ahead
By Elizabeth Campbell
October 18, 2018, 12:39 PM EDT
Chicago Mayor Rahm Emanuel gave city council members a parting gift by proposing a 2019 budget that doesn’t ask them to raise taxes ahead of February’s municipal election. But it leaves a heavy lift for his successor.
The next mayor, who will take over in May, will see Chicago’s required annual contribution to the city’s four pension funds double from about $1 billion in 2018 to $2.1 billion in 2023, city documents show.
During his tenure, Emanuel has put all four retirement plans on a path to solvency and already boosted contributions to the funds, raising property taxes and utility fees to cover those bills. While that made headway toward arresting mounting financial strains that caused Moody’s Investors Service to downgrade Chicago’s bonds to junk grade, his plan delayed until after he left office a big jump in payments needed to pay down a $28 billion debt to the retirement system that built up years before he took office.
“What a lost opportunity,” said Dora Lee, vice president at Belle Haven Investments, which manages about $7.5 billion in municipal bonds, including Chicago debt. “This is the time to do something bold and expend the last of your political capital to really put Chicago on a better path, instead of waiting for the next person to deal with the problem.”
“He was so bold in his prior budgets, and he did make such great strides in years before in setting Chicago up on a more sustainable path, that this budget was kind of like ‘oh, okay,’ " Lee said. “I wanted to see given his boldness with previous budgets a little bit more vision.”
Emanuel, a two-term Democrat who has decided not to run again, on Wednesday proposed a $10.7 billion spending plan for 2019. The 2019 budget speech touted his work since taking office in 2011, highlighting investments in education, public safety and steps to steady the pensions after the city shortchanged them for years.
“There’s no doubt that the mayor can take credit for stabilizing the city’s finances,” said Laurence Msall, president of the Civic Federation. “He leaves the city after 8 years in much better financial shape than he found it, but the challenges going forward are real.”
Emanuel thanked the council for taking the hard votes to steady the city’s finances and acknowledged that there is still more work to do.
“They do not build statues for people who restore fiscal stability,” Emanuel told a packed council chamber on Wednesday. “But without sound, strong, stable finances, nothing else is possible. Breaking news, you’re not going to get a statue. But you have built something more important, more fundamental, and more lasting than any statue. You have built a foundation.”
The pension bills will jump because the city will have to pay what actuaries say is needed into the public safety funds starting in budget year 2020 and in 2023 for the municipal employees’ and laborers’ plans. That means not only covering what it owed for newly earned benefits, but making up for the shortfall that resulted from years of not paying the full amount.
While Emanuel isn’t running for re-election in February, the aldermen who have to vote to approve the budget are on the ballot.
"Politically it’s difficult to address things like that in an election year,” said Neene Jenkins, a vice president and municipal analyst at AllianceBernstein, which oversees $42 billion of state and local bonds, includes some Chicago debt.
Chicago Chief Financial Officer Carole Brown told reporters that Emanuel is planning to have a more comprehensive discussion around pensions and speak to what he thinks is necessary to help address that issue. That may happen in December, she said. Brown has said that the city hasn’t ruled out issuing pension-obligation bonds to pay off a big chunk of the pension debt.
Near the end of his final budget speech, Emanuel warned his successors to stay fiscally disciplined.
“If our leaders run up debt, run down pensions, run dry the rainy day fund, it is the next generation whose chances will run out,” Emanuel said.
Read original article:
https://www.bloomberg.com/news/articles/2018-10-18/chicago-mayor-halted-pension-crisis-but-leaves-big-bills-ahead?sref=dlv6Ue8o
Illinois Investors Endorse Fiscal Stability
Illinois Investors Endorse Fiscal Stability
BY ELIZABETH CAMPBELL
Illinois investors are endorsing fiscal stability this election.
No matter who wins the gubernatorial race next month, bondholders want the next chief
executive to avoid a repeat of the longest budget impasse in U.S. history, one that put Illinois on
the brink of becoming the first junk-rated state. That gridlock — the result of a two-year standoff
between Republican Governor Bruce Rauner and the Democrat-run legislature — drove unpaid
bills to a record $16.7 billion, forced cuts in social services, and sent borrowing costs to multiyear highs.
The fiasco also kept the state’s leaders from making any real progress on fixing its biggest
challenge — the government worker pension plans that are falling deeper into the red while
consuming more and more tax dollars.
“We don’t care if it’s a Democrat or Republican, we just want to make sure that whoever is in
the office knows how much new taxes and revenue increases are needed to make those hard
decisions of trying to deal with pensions,” said Dora Lee, vice president at Belle Haven
Investments, which manages about $7.5 billion in municipal bonds, including Illinois debt. “We
just need someone who has the vision and the political capital to make those hard choices
because time is kind of running out.”
Rauner, a former private-equity executive and multimillionaire, is running for re-election against
Democrat J.B. Pritzker, the billionaire Hyatt hotel heir. Rauner took office in January 2015 as the
state confronted a deficit amid expiring income-tax hikes. Rauner refused to raise taxes unless
lawmakers agreed to an agenda that included property-tax cuts, limits on unions and changes to
worker-compensation laws. Democrats balked. The stalemate didn’t end until July 2017, when
lawmakers, including members of his own party, overrode his veto to enact a spending plan that
raised income levies.
Rauner is calling for balanced budgets and reforms and says more tax hikes won’t solve the state’s
problems. Pritzker is campaigning for a graduated income tax — instead of the current flat tax —
that he argues will lower those on the middle class. That would require a constitutional
amendment.
Pritzker held a 20-point lead over Rauner among likely voters, according to an Ipsos, Reuters
and University of Virginia Center for Politics poll released yesterday. Likely voters favored
Pritzker 50%, compared to 30% for Rauner, the poll showed.
One party rule has worked to ease impasses in other places. California Governor Jerry Brown, a
term-limited Democrat, is leaving office after amassing an $8.9 billion surplus compared to the
$27 billion deficit when he took over for his Republican predecessor in 2011. But single-party
control is no guarantee. New Jersey’s leaders have yet to right the state’s finances since
Republican Governor Chris Christie exited office in January, with Governor Phil Murphy and
fellow Democrats struggling to find common ground.
Even though Rauner pushed for fiscal reforms that would have cut costs, none of those were
enacted, said John Miller, head of municipals at Nuveen, which holds more than $140 billion in
state and local debt, including Illinois bonds.
“The concept that there could be a better, maybe a more productive dialog where you could
actually pass some fiscal changes that require legislation, that’s got to be considered better than
gridlock," Miller said. "I actually think the bond market would respond more positively to a
change,” said Miller, who noted that his comments are from a revenue, expenses and budgeting
point of view and not a political perspective.
Investors have long punished Illinois for its fiscal woes. Yields on Illinois’s 10-year generalobligation bonds jumped to as much as 3.4 percentage points above benchmark in June 2017 as
credit-rating companies warned that Illinois could lose investment-grade status if the impasse
wasn’t resolved. That gap has since come fallen to 1.8 percentage points but is still the highest
among the 20 U.S. states tracked by Bloomberg.
“If there’s unified government, whether you view that favorably or unfavorably, it does mitigate
appropriation risk and decreases the chance of a government shutdown, and it also mitigates
the risk of not having a budget passed,” said Dennis Derby, a portfolio manager at Wells Fargo
Asset Management, which holds $39 billion of municipal debt, including Illinois bonds. “No
matter who wins, going forward, we would want to see balanced budgets, attempts at pension
reform and a reduction in the payables backlog.”