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Muni-Bond Desks Stand to See Big Wins If Trump Loses
By Amanda Albright October 31, 2019, 9:30 AM EDT
Elizabeth Warren wants to tax those she calls ultra-millionaires. Bernie Sanders has targeted the top 0.1%. And Joe Biden is seeking to reverse President Donald Trump’s tax cuts.
On the whole, Wall Street may not be very excited about the tax-the-rich push that’s front and center in the Democrats’ efforts to unseat Trump next year. But a $3.8 trillion corner of the bond market could reap big gains if one of them wins the White House.
That’s because the value of tax-exempt state and local government debt tends to rise when taxes head higher as wealthy investors buy those bonds to hold down what they owe.
The securities delivered outsize returns after President Bill Clinton took office and went on to raise the top marginal tax rate. It happened again in 2009, before President Barack Obama allowed tax cuts for the highest earners to expire. Even Trump helped: to pay for his reductions, he capped state and local tax deductions, setting off a municipal-bond buying spree by wealthy Americas looking for ways to shelter their income.
“If it looks like Democrats could take control, you’re pouring gasoline on the fire at that point,” said Matt Dalton, chief executive officer of Belle Haven Investments, which oversees more than $10 billion in municipal debt.
About 42% of the $60 billion of tax-exempt interest paid in 2017 went to Americans who make more than $500,000 a year, with another $22 billion paid to those earning between $100,000 and $500,000, according to Internal Revenue Service statistics. And demand from such buyers tends to pick up when there’s a risk that taxes will be raised.
It’s unclear yet how the wealth taxes proposed by Warren and Sanders would affect demand for municipal bonds, since much of that would depend on the details worked out in Congress, and scrapping Trump’s limit on local deductions could also weaken demand.
But municipal bonds tend to benefit early in Democratic presidencies. Tax-exempt securities became more expensive -- relative to U.S. Treasuries -- after Clinton and Obama were first elected, Barclays Plc found in a 2016 report. The opposite happened with President George W. Bush, while Trump’s surprise victory in November 2016 sent the municipal market to its biggest monthly loss since 2008 amid speculation that tax rates would be cut.
Stephanie Larosiliere, senior client portfolio manager at Invesco Ltd., anticipates heightened demand for municipal bonds if a Democrat defeats Trump, given the need for higher taxes to finance their health-care and education plans.
“We would expect those affected to seek some refuge, with municipals likely being an option for earning tax-exempt income to offset the increased tax outlay,” she said in an email.
Albert Jalso, senior portfolio manager for Russell Investments, which manages $4 billion in municipals, said the potential change of power has already started coming up with clients. “If we were to have Elizabeth Warren or Bernie Sanders or someone like that, munis will just tighten,” he said. “It’ll be a very strong place to be.”
Trump’s 2017 tax overhaul was a mixed bag for the state and local debt market. While corporate tax rates were slashed, curbing demand from banks, it also stopped states and cities from selling tax-exempt debt for a key type of refinancing, contributing to a steep drop-off in debt issuance that has only recently been reversed. And while it lowered the top marginal tax rate, that was offset by the deduction limits that spurred demand from some buyers.
The municipal-bond market may not need to worry about further tax cuts, in part because Trump’s have pushed the federal deficit close to $1 trillion.
“It’s more likely that tax rates rise than fall for our investors,” said Craig Pernick, senior managing director for fixed income at Chevy Chase Trust.
Democrats’ plans for new social programs could provide a boost to state and local governments’ finances as well, said Matt Fabian, a partner at research firm Municipal Market Analytics. States could use the help: federal grants for services like transportation and education stand at the lowest level as a percentage of the economy since 1989, according to a 2018 report by the left-leaning Center on Budget and Policy Priorities.
“The wealth tax is likely to expand federal spending, which would take some of the burden off of state and local spending,” Fabian said. But, he added: “We’re still a long way from talking about it to actually implementing it.”
Read original article:
https://www.bloomberg.com/news/articles/2019-10-31/wall-street-muni-bond-desks-stand-to-see-big-win-if-trump-loses?sref=dlv6Ue8o
Chicago Teachers Strike Extends as Sides Fail to Reach Deal
Chicago Teachers Strike Extends as Sides Fail to Reach Deal
By Shruti Singh
October 28, 2019, 2:24 PM EDT
Chicago teachers extended their strike into an eighth school day on Monday, as district officials and union representatives failed to reach an agreement to end the walkout that’s left more than 350,000 students out of class in the nation’s third-largest school system.
Classroom sizes and staffing are two of the last major items the Chicago Teachers Union and Chicago Public Schools negotiators are still working through. The union said on Sunday the difference between the two sides is $38 million a year, but district officials have put the figure higher at about $100 million. Mayor Lori Lightfoot, who took office in May, has expressed frustration that the negotiations aren’t moving faster. CPS Chief Executive Officer Janice Jackson took part in talks for the first time over the weekend.
“We are a district that just a few years ago was on the brink of insolvency,” Jackson said during a press conference on Sunday.
The junk-rated school system is struggling with climbing pension costs, years of declining enrollment and was recently saved from insolvency thanks to an influx of state aid. Illinois increased support to schools under legislation enacted in 2017, which generated $444 million in additional revenue for the city’s schools last year.
The teachers’ contract expired in June, and the union has rejected the city’s offer of a 16% raise over five years and has demanded more staffing, caps on class sizes, a shorter contract and more resources for social issues such as affordable housing. Their walkout has gotten national attention with shows of support from Democratic presidential candidates Bernie Sanders, Elizabeth Warren and Joe Biden and a shout-out from Chance the Rapper, Chicago’s Grammy award-winning musician, who wore a red CTU top as he hosted Saturday Night Live this weekend.
“It’s disappointing that talks have stalled,” said Dora Lee, director of research for Belle Haven Investments, which holds Chicago school bonds among $10 billion of municipal debt. “It remains important for the two sides to come to an agreement that fits within the confines of the budget rather than agree to something that the district can’t afford.”
The district’s pool of funds is limited, and CPS must take financially responsible actions, according to Lightfoot. The city and district’s budgets are separate, but the mayor appoints the school board and the two institutions share a tax base.
“‘Great’ CPS offer would help only one-third of schools address classroom size, while CPS staffing proposal continues to fall far short for case managers, librarians, more,” according to an emailed statement from the union on Monday.
Meanwhile, classroom assistants, security guards and custodians represented by SEIU Local 73, who also went on strike with the teachers on Oct. 17, reached a tentative deal with the district Sunday.
“This is a victory for working people in Chicago and shows what is possible when we unite and take action,” Dian Palmer, president of SEIU Local 73, said in an emailed statement on Monday. “The lowest paid support workers who are the backbone of our schools are going to see raises that mean their families won’t have to struggle living in an expensive city where costs keep going up.”
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https://www.bloomberg.com/news/articles/2019-10-28/chicago-teachers-strike-extends-as-sides-fail-to-reach-deal?sref=dlv6Ue8o
Advisors asking: Is now the time to buy high-yield bonds?
Advisors asking: Is now the time to buy high-yield bonds?
By Joseph Lisanti September 26, 2019, 5:44 p.m. EDT 3 Min Read
With income-hungry investors gorging themselves on high-yield bonds and the funds and ETFs holding them over the last decade, perhaps a backlash was inevitable.
In early January, the yield on BB-rated bonds stood at 6.04%. Eight months later, it stood at 3.97%. The price rise and concurrent yield slide is enough to give some planners pause.
“I just don’t think that investors are being adequately rewarded for taking the risks,” says Howard Pressman, an advisor and partner at Egan, Berger & Weiner in Vienna, Virginia. “We’re probably closer to the end of this expansion cycle than to the beginning. Now may not be the time to be invested in these more risky securities.”
Kevin Brosious, a planner at Wealth Management in Allentown, Pennsylvania, shares Pressman’s unease. “Right now companies are doing very well, but that can turn on a dime,” Brosious says. He will use high yield only as a “diversifier for the bond holdings” of a client that has “a large portfolio.”
But even then, Brosious says, it would be a very small piece of the asset allocation. “They make me nervous,” he adds.
Brosious’ caution extends up the credit ladder. He now avoids many former favorites among bond funds and ETFs because of weakening credit quality. Instead the advisor is parking some client assets in a federal money market fund that recently yielded about 2%.
“That’s a real option for me,” he says.
Jerry Verseput of Veripax Wealth Management in Folsom, California, took his clients out of high-yield bonds when their spreads narrowed and now seeks yield through business development companies. He says income from BDCs tends to be very stable.
“High-yield bonds tend to be illiquid when you get a credit crunch,” Verseput says. “If you’re holding those in a publicly traded fund and suddenly everybody wants to get out, it can sometimes be a time bomb waiting to go off.” Verseput grants that BDC “prices may retreat” when credit is less available. But as individual companies, he contends, “they’ll never be forced to sell their debt.”
But Michael Luong, a corporate credit analyst at the fixed-income asset management firm Belle Haven Investments in Rye Brook, New York, says he thinks many clients pressure themselves into taking on excessive risk with high-yield debt.
“The less money a person has, the more pressed they are to look for yield,” says Luong. “The asset class, in my opinion, is for those who can afford to lose a little money because you’re going to lose some money in that category.” For most clients and their advisors, he believes, the exercise isn’t worth it. Luong observes that picking up 200 basis points in yield for a year or two can be wiped out with a single default. “People want high yield until they own it and it goes from par down to 80 cents and then they don’t want high yield,” he says.
“If I had to initiate a position right now in high-yield bonds, I probably would not,” says Jeff de Valdivia, a planner at Fleurus Investment Advisory in Fairfield, Connecticut. The advisor explains his hesitation has everything to do with current conditions and nothing to do with the asset class, which in typical times adequately compensates investors for the risk they take. Nevertheless, de Valdivia says, “You can get hurt and buying them in certain situations where you pay up makes no sense.”
He recently reduced his clients’ exposure to the high-yield bond market and calls his approach to the asset class “marginally defensive.” Yet de Valdivia’s clients have anywhere from 5% to 15% in high yield, mainly through a conservatively managed fund that concentrates on BB debt.
“It has all to do with dosage,” he says.
Read original article:
https://www.financial-planning.com/news/financial-planners-wonder-is-now-the-time-to-buy-high-yield-bonds
Illinois Bonds Gain as Judge Denies Petition to Void Debt
Illinois Bonds Gain as Judge Denies Petition to Void Debt
By Shruti Singh
August 29, 2019, 5:56 PM EDT Updated on August 30, 2019, 8:51 AM EDT
Illinois bonds rallied after a judge denied an effort by the head of a conservative think tank to invalidate more than $14 billion of debt issued by the worst-rated state.
Sangamon County Associate Judge Jack Davis late on Thursday rejected the petition filed by John Tillman, head of the Illinois Policy Institute, and backed by Warlander Asset Management, a New York-based hedge fund, that sought to “restrain and enjoin the disbursement of public funds,” according to court documents. Tillman had claimed that Illinois’s record pension bond sale in 2003 and debt issued in 2017 were deficit financing that violated the state constitution, which says bonds must be issued for “specific purposes.”
“The court finds that to allow the filing of the Complaint would result in an unjustified interference with the application of public funds,” Davis wrote in an order on Thursday. “The court finds reasonable grounds do not exist for filing the proposed Complaint.”
Tillman said in an emailed statement that he plans to appeal and “strongly” disagrees with the court’s decision, adding that it was “premature for the Court to decide the case on the merits at the petition stage.”
Some of the bonds targeted by the suit, which had been trading at slightly lower prices than other Illinois securities, gained after the decision. Bonds sold for the pension system that come due in 2033, one of the most actively traded, traded for about 109 cents on the dollar early Friday, up from an average of about 106 cents before the ruling. That cut the yield to about 4.25% from 4.5% on Wednesday.
“There was an inefficiency in the market based on the potential for the bonds being invalidated,” said Brian Steeves, portfolio manager for Belle Haven Investments in Rye Brook, New York. “That risk is taken off the table.”
During a hearing on Aug. 15, Davis had said Warlander backing the case was a distraction, and the issue warranted further review. The judge had said at the time he would issue an order in 14 days.
“Tillman’s proposed Complaint is chock-full of conclusory and argumentative statements describing the financial condition of the state that are irrelevant and which the court must disregard,” Davis wrote on Thursday. “Indeed, it resembles far more of a political stump speech than it does a legal pleading.”
Illinois officials had rejected the suit as politically-motivated and said the borrowings were valid.
Bondholders Nuveen Asset Management LLC and AllianceBernstein LP had alleged that Warlander, which also owns Illinois debt, stood to profit if the case succeeded because the hedge fund purchased credit-default swaps that would pay off if the court forces the state to stop making payments on the 2003 and 2017 debt. An attorney representing Warlander and Tillman acknowledged at an Aug. 15 hearing that the hedge fund bought credit default swaps on the challenged bonds.
The case had been closely watched as litigation is a new risk for investors in the $3.8 trillion U.S. municipal-bond market, long considered a haven given that no state has defaulted since the Great Depression. Borrowers are under increasing scrutiny after high-profile municipal bankruptcies such as the one in Puerto Rico, where a federal oversight board and group of hedge funds want more than $6 billion of bonds declared null and void.
“There was no question that they were” issued legally in Illinois, said Chris Mier, chief strategist at Loop Capital. He said a trial over the bonds would have been “a television soap opera for finance people.”
Mier said the decision is reassuring because the municipal-bond market would not have to deal with the ramifications of another major lawsuit. Puerto Rico’s record-setting bankruptcy has cast doubt over the legal protections investors have in the safe-haven market.
It’s “one less sideshow that market does not need,” Mier said.
— With assistance by Danielle Moran, and Amanda Albright
Read original article:
https://www.bloomberg.com/news/articles/2019-08-29/illinois-bonds-gain-as-judge-denies-petition-to-void-state-debt?sref=dlv6Ue8o
Want A Guaranteed Negative Return?
Want A Guaranteed Negative Return?
Updated: Monday, August 19th 2019, 7:00 AM EDT
By Ryan Collier, Director of Investment Management, Bedel Financial Consulting Inc.
Here we go again! On Wednesday, August 14th, we watched the Dow Jones Industrial Average (DJIA) drop over 800 points. The previous Monday the Dow ended down over 700 points. But what you may have missed is the sharp downward move in interest rates that has intensified with the recent stock market volatility. What does this mean for your portfolio?
Negative Yields
According to an index of bonds calculated by Bloomberg, nearly 25 percent of the debt issued by governments and companies around the world is currently trading with negative yields. This equates to nearly $15 Trillion of bonds trading or issued with negative yields.
So, what does this mean? If you buy a bond with a negative yield or interest rate you are guaranteed to get back less than you invested if you hold the bond to maturity. On top of that, if the bond was issued with a negative interest rate, you receive no income along the way. Basically, you are loaning money to a government or company for the privilege of getting back less than you gave them.
Your first thought may be that these must be short-term bonds. Surely no one would give away their money for years knowing it will yield a negative return. Amazingly, you’d be wrong. As of August 5th, at least ten countries had 10-year bonds and three countries had 30-year bonds with negative yields. Imagine loaning your money for 30 years knowing you’ll receive no interest payments and less of your principal than you loaned initially!!
Why Is This Happening?
After the economic crash of 2008-2009, central banks around the world lowered interest rates to zero. Since then they’ve had a difficult time moving those rates back up. Growth around the world has been less than stellar and central banks have had to keep rates low and be creative in finding ways to keep their economies growing.
One creative measure central banks have employed was to buy up debt that was being issued to keep interest rates low and pump money into the economy. The hope was that this would spur economic growth. This measure created an indiscriminate buyer of bonds who wasn’t concerned about making money on bonds as an investment, but was more interested in keeping interest rates low and the economy flush with liquidity. Another contributing factor may be that investors believe rates could turn even more negative during the next recession, making their slightly negative bonds look like a good bargain.
Why Is This A Big Deal?
We’ve never experienced this much debt trading around the world at negative yields. It defies all our economic and market conceptions about bonds. Despite all the theories, no one is certain why this is happening. As little as nine to 12 months ago, most of the world thought interest rates were zooming much higher, only to see a quick and complete reversal. Matt Dalton, CEO of bond management firm Belle Haven, referred to this phenomenon as “the black hole of negative rates” that has a gravitational pull bigger than any other market concern at this time.
What Does It Mean for You?
So, how alarmed should you be? Maybe a little, but we’ve been here before. In 2016 interest rates went negative for a short period, but then reversed course slightly. Stock markets continued to perform well and our economic growth has continued to be positive.
However, for investors this creates a dilemma. You can get paid little interest for your safe investments or take more risk to get the yield you want or need. Unfortunately, 5 percent government bonds were replaced a while ago by lower-yielding bonds. That trend appears to be intensifying in an historical way. Now is a good time to take a look at the conservative part of your portfolio to make sure you are comfortable with the risk you are taking.
Ryan Collier, CIMA is the Director of Investment Management for Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website or email Ryan.
Read original article:
https://www.insideindianabusiness.com/story/40931257/want-a-guaranteed-negative-return
Walton Family Backs Bond-Market Experiment for Charter Schools
Walton Family Backs Bond-Market Experiment for Charter Schools
Anand Kesavan spent more than a decade as a public finance banker working with state loan funds for clean water projects before a two-year stint as chief financial officer at KIPP Austin, a network of 10 charter schools in Texas’s capital.
Now, he’s heading a non-profit backed by the family of Walmart Inc. founder Sam Walton that’s experimenting with a novel way to cut the cost of financing charter schools. On Wednesday, his Equitable School Revolving Fund will sell the first bonds ever used to finance a loan pool for such experimental schools, creating a potentially cheaper way for them to raise funds than selling higher interest-rate bonds on their own.
“Bringing down costs for schools is just as important as trying to bring up revenues,” said Kesavan, chief executive officer of the Equitable Facilities Fund, the non-profit parent of the ESRF. “One of those way is to borrow at better terms.”
Bond sales by charter schools have grown five-fold in the last decade to $3 billion, reflecting rising enrollment in the taxpayer-funded schools, which are independently run and provide an alternative for parents of children in poorly performing districts. The debt is among the riskiest in the municipal market because of the chance that students won’t enroll or weak performance will cause them to close. Most individual charter-school securities aren’t rated or carry junk ratings, causing investors to demand higher yields.
The fund, which received a $200 million grant from the Walton Family Foundation to start making loans, plans to issue about $110 million bonds through the Arizona Industrial Development Authority and the California Infrastructure and Economic Development Bank. Proceeds of the sale managed by Royal Bank of Canada will finance or reimburse $158.5 million of loans to 11 charter school operators in seven states.
Water-Fund Inspired
The ESRF was inspired by state revolving-long funds for water projects, which received initial capital from federal grants in the 1980s, said Kesavan, a former banker with UBS AG and Siebert, Brandford Shank & Co. Before those funds, municipalities had to pay higher interest rates to finance water and sewer infrastructure because they were borrowing on their own.
Like securities issued to finance water revolving funds, the ESRF will allow investors to diversify risk, while also providing greater scale and liquidity, Kesavan said.
Six of the charter school operators participating in the loan program have S&P ratings of BBB- or BBB. Three are rated BB or BB+ and two are not rated. The operators run 41 schools that are pledged to secure the bonds.
The new securities received an A rating by S&P Global Ratings Inc. because the $277 million of charter school loan repayments is greater than the $213 million debt service. As loans are repaid, the ESRF will use the money to make new loans. The fund will be able to withstand the default on 26% of its loans, assuming a 0% recovery, according to ESRF.
By contrast, a portfolio manager that had held individual charter school bonds would face the risk of losses immediately. Less than 4% of charter school bonds have defaulted, according to a 2017 study by NewOak Fundamental Credit.
“The premise of this deal is that investors can play in the charter school space but benefit from an A rating,” said Dora Lee, director of research at Belle Haven Investments. “However, it is hard for investors to be confident that that rating will be stable given that it’s an unproven loan fund and there’s going to be a lot more leverage coming down the pike.”
In addition to Wednesday’s deal, the ESRF plans to issue another $130 million of bonds in 2020 and $170 million in 2021. A minimum $600 million in school loans will be pledged to the $400 million in bonds.
ESRF spends six to nine months analyzing the charter schools applying for loans, scrutinizing factors like academic and financial performance, real estate, market position, regulatory environment and operating history.
The fund will monitor loans and can provide technical assistance, early intervention and remediation if the schools run into trouble.
“We can differentiate between the schools that are of good quality versus those that that aren’t” Kesavan said. “That’s the value that we offer to investors.”
Read original article:
https://www.bloomberg.com/news/articles/2019-08-06/walton-family-backs-bond-market-experiment-for-charter-schools?sref=dlv6Ue8o
Puerto Rican Succession Crisis Escalates as Governor Set to Exit
Puerto Rican Succession Crisis Escalates as Governor Set to Exit
By Ezra Fieser and Michael Deibert
July 29, 2019, 12:43 PM EDT
Puerto Rico’s worst political crisis in decades is intensifying after the commonwealth’s governor-in-waiting Wanda Vazquez, said she doesn’t want to take power, leaving the bankrupt island facing an unprecedented succession impasse.
On Sunday, Vazquez, the secretary of justice, said in a Twitter post that she hoped Governor Ricardo Rossello would nominate a different successor before he steps down Aug. 2. Vazquez, an ally of the outgoing governor and a member of his New Progressive Party, is next in line because the secretary of state position is vacant.
Her announcement raises pressure on Rossello, who has less than a week to nominate a new secretary of state, adding to Puerto Rico’s dysfunction and political chaos. That person would need confirmation from a majority in both houses of the island’s legislature.
The official next in succession after Vazquez is Francisco Pares, the treasury secretary, who, at 31, is not old enough to be governor. The minimum age is 35. Next in line appears to be Education Secretary Eligio Hernandez, who told a local radio station Monday that he was focused on his current role. Rossello’s office did not immediately respond to emails seeking comment.
The next governor will inherit a recession-scarred economy and citizenry angered by austerity measures as the island navigates a record bankruptcy and tries to rebuild from 2017’s devastating Hurricane Maria. He or she will have to work with the federally-appointed fiscal oversight that is negotiating with bondholders to reduce the island’s billions of dollars in debt. The political crisis may delay the restructuring.
“You need a governor in the best of times, and you especially need a leader when all this stuff is going on,” said Dora Lee, director of research at Belle Haven Investments which holds some insured Puerto Rico debt. “It’s just gone so far down the succession chain, everyone is scratching their head asking: ‘Who is next?’”
Late July 24, Rossello said he would leave office halfway through his four-year term, after weeks of massive protests over the publication of profanity-laced chats between him and his inner circle. The chat scandal forced the resignation of the sitting secretary of state -- next in line to fill a vacancy in the governor’s office -- and leaving Vazquez, the secretary of justice, as next under the constitution.
Rossello’s administration had been weakened by the resignations and the indictment this month of two officials on charges of steering contracts to favored companies. The succession fight also brings into relief just how quickly the balance of power has shifted in Puerto Rico, an island of 3.2 million people. The commonwealth’s politicians, accustomed to cutting back-room deals and horse-trading, suddenly face an energized and vocal mass protest movement that succeeded in ousting Rossello, and demonstrators have indicated they may go after other politicians and even the oversight board.
Party Clash
Vazquez faces stiff opposition on her own, perhaps explaining her reluctance to take power: from demonstrators, members of her own party -- with whom she had clashed over investigations -- and from opposition lawmakers, who complained she was part of the same corrupt system as Rossello. The antagonism from within both her party as well as the opposition weighed heavily against her appointment.
“In every scandal we’ve had on the island, she failed to investigate. She covered it up,” House Minority Leader Representative Rafael Hernandez said in a telephone interview. “That’s why nobody wanted her to become governor.”
Vazquez has denied allegations of wrongdoing, calling them “vicious” attacks. A mass demonstration has been called for Monday outside Vasquez’s office to call for her resignation.
Hernandez said leaders in the New Progressive Party are jockeying behind the scenes to be nominated secretary of state and thus next in line to be governor. Any confirmation process could be done within 48 hours, he said.
Senate President Thomas Rivera Schatz, who is among the potential candidates to replace Rossello, said party leaders would listen to the advice of well-intentioned sectors, but warned of others trying to take advantage of the situation for personal gain.
“There will be actors pushing political, ideological, and particularly business agendas, subtly disguised in the scent of ‘patriotism,’ offering unfounded insinuation and speculation,” he wrote in a note on Twitter. He did not mention the process to nominate a secretary of state and didn’t respond immediately to an email seeking comment.
Resident Commissioner Jenniffer Gonzalez, the island’s non-voting representative to the U.S. House, is also considered a possible replacement. In an emailed statement, Gonzalez said she has not been approached about the position, but is was “aware of the speculation” of the names being mentioned as possible candidates.
“In my case, nobody has contacted me or talked to me in regards to that,” she said.
On Sunday, hundreds of people gathered for a salsa celebration of Rossello’s resignation and a further cleaning of Puerto Rico’s political house. Neither Rivera Schatz nor Gonzalez are acceptable choices, according to Rosa Seguí Cordero, spokeswoman for the Citizens Victory Movement, a political group formed in March that has been active in the protests.
“The people of Puerto Rico hope that whoever succeeds Rossello in power will be someone who is not marked by corruption and who can stabilize the constitutional crisis we face,” said Miguel Ángel Rosario Lozada, a historian at the University of Puerto Rico. “A change in Puerto Rican political culture is beginning to happen. The people have realized the political power they hold.”
— With assistance by Danielle Moran
Read original article:
https://www.bloomberg.com/news/articles/2019-07-29/puerto-rican-succession-crisis-escalates-as-governor-set-to-exit?sref=dlv6Ue8o
Blue States Warned of a SALT Apocalypse. It Hasn’t Happened
Blue States Warned of a SALT Apocalypse. It Hasn’t Happened
By Martin Z Braun
May 21, 2019, 6:00 AM EDT
To listen to New York Governor Andrew Cuomo, the 2017 Republican tax overhaul that limited state and local deductions to $10,000 was a devastating blow. The rich would flee, the middle class would suffer and blue state budgets would bleed.
Perhaps this will come to pass over time, but so far, there are almost no signs of it.
New York, in fact, saw revenue rise $3.7 billion in April from a year earlier, thanks to a shift in timing of taxpayer payments, a stock market that rallied through much of 2018 and a decade-long economic expansion that’s pushed national unemployment to a 50-year low. Similar windfalls arrived in New Jersey, California and Illinois -- states that, like New York, had warned of dire consequences from the law.
And it turns out that tax refunds across the U.S. in 2019 -- those once-a-year checks from Uncle Sam that people use to pay credit card debt from Christmas or buy a washing machine -- were roughly the same size as a year earlier. In all, about 64% of American households paid less in individual income tax for 2018 than they would have had the Tax Cut and Jobs Act not become law, according to the Urban-Brookings Tax Policy Center.
“Any comment that says this is an economic civil war that would gut the middle class is overblown," said Kim Rueben, the director of the State and Local Finance Initiative at the Tax Policy Center. "If there’s going to be any effect of the SALT limit on the ability of some states to have progressive taxes it’s too early to know that yet."
Taxable Income
In some ways, the $10,000 limit on state and local tax deductions -- SALT -- is saving states money by lowering their borrowing costs. That’s because investors seeking to reduce their tax bill are plowing a record-setting amount of cash into municipal bonds, driving interest rates lower. The extra yield that investors demand to compensate for the risk of holding Illinois general-obligation bonds, for instance, has fallen to the lowest since May 2015, according to data compiled by Bloomberg.
States are also benefiting from a broader tax base because the law eliminated some exemptions and limited deductions, like mortgage interest. Since states that levy income taxes use federal adjusted gross income or taxable income as the base, they have more income to tax.
Still, the nerves of Democratic governors and their budget officers frayed in December when income tax collections plunged by more than 30 percent from the prior December. Cuomo was quick to call the tax law “politically diabolical” and an act of “economic civil war” against the middle class.
Then April came.
New York collected $3.4 billion more in personal income tax revenue last month than a year earlier, a 57% increase, according to Comptroller Thomas DiNapoli. California took in $19.2 billion in April, exceeding Governor Gavin Newsom’s estimate by $4 billion.
New Jersey had a record April with tax collections up 57%, allowing it to boost forecasts for the year by $377 million and triggering a political battle over how to spend the windfall. Illinois individual and corporate tax revenue was $1.5 billion more than projected, allowing Governor J.B. Pritzker to scrap a plan to put off pension payments.
Timing Change
April personal income tax collections in 28 states and Washington increased by $16.3 billion, or 36.2% year-over-year to $61.4 billion, Bank of America Corp. said.
“SALT caps do not appear to be a broad system risk to state credit quality at this point,” S&P Global Ratings said recently.
A big reason for the sharp bounce-back after December’s deep revenue declines in New York and other high-tax states: The SALT limits caused some people to change when they paid their taxes. Wealthy taxpayers in December 2017 accelerated big tax payments to take advantage of the unlimited state and local tax deduction before it expired. Then, with the SALT deduction capped, that incentive evaporated and taxpayers waited until this April to pay their 2018 taxes.
Also, some individuals failed to adjust their W-4s after the passage of the tax law. So people who underwithheld received more in their paychecks since then but had to pay more tax in April or received lower refunds.
Trending Inline
Still, there are some indications that residents in high-tax states are fretting about the law. Thirteen percent of house-hunters in both New York and California said they have started looking for homes in states with lower taxes, according to a recent survey by brokerage Redfin Corp.
In Westchester County, where a typical property tax bill for a single family home is more than $17,000, the average sales price declined 7.6% between the first quarter of 2018 and the same quarter this year. Sales prices for luxury homes (average price $2 million) plummeted 22% during the same period, according to appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate.
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https://www.bloomberg.com/news/articles/2019-05-21/blue-states-warned-of-a-salt-apocalypse-it-hasn-t-happened?sref=dlv6Ue8o
Save the budget, save the city
Save the budget, save the city
Chicago cannot move forward without reckoning with the consequences of its past fiscal mistakes and resetting its financial path. Here’s how
DORA LEE
Belle Haven Investments
This column is part of Crain's #Lightfoot100 project.
Bond investors are often seen as outsiders with interests in opposition to those on “Main Street,” but a strong, economically vibrant Chicago is just as good for Chicago bondholders as it is for Chicagoans. We see the path differently.
For us, all paths to a better Chicago begin and end with the budget. Save the budget, and Chicago will have a chance at a better future.
No matter the policy objective, everything will ultimately flow through the budget. Police reform? Fit it in the budget. Economic development initiatives? Paid for in the budget. Pensions? Most definitely in the budget.
To do this, Mayor-elect Lori Lightfoot must make fiscal responsibility a priority. The city cannot move forward without reckoning with the consequences of its past fiscal mistakes and resetting its financial path. Here’s how:
Use real math: No more balancing the budget with gimmicks. Respect the city enough to present its citizens with an honest, transparent budget that is truly balanced, realistic, and that addresses its pension costs. Use realistic revenue assumptions and be prepared to make course corrections along the way. Unlike policy, you cannot argue or persuade your way to a balanced budget.
Cost out initiatives: There is no reason why fiscal responsibility must be in opposition to a progressive agenda—assuming the city is able to fund it. To be sustainable in the long term, any agenda must be supported by secure funding sources, otherwise policy gains will just fall victim to the next round of budget cuts.
Build a coalition: Lightfoot may have won by being the outsider, but she’ll also have to be effective within the machine to get results, especially when it comes to pension and school reform. She cannot do this alone, nor can Chicago. Any solution will require buy-in on both the city and state levels.
Increase taxes: As Lightfoot said, “Pensions are a promise. We cannot turn our backs on those promises.” Truly honoring that promise will mean raising taxes in an economically thoughtful way, even if it’s unpopular.
Avoid the efficiency myth: As things stand today, pensions are the only true area of uncontrolled government spending. Making room for growing pension costs will require a combination of deep cuts and tax increases. After years of cuts, finding efficiencies is just rearranging deck chairs. It’s time to deal with the iceberg ahead.
Lightfoot has volunteered for the unenviable job of dealing with a problem that requires a bold multi-faceted solution. After running on change, we hope she can show that politicians can change their thinking from short-term wins to long-term fiscal health; that mayors can have the courage to make the tough decisions for a better future; and that Chicago is capable of making—and honoring—promises to its residents, workers, and investors.
Dora Lee is director of research at Belle Haven Investments in Rye Brook, N.Y.
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https://www.chicagobusiness.com/lightfoot-100/save-budget-save-city
Chicago Makes History by Electing Its First Black, Female Mayor
Chicago Makes History by Electing Its First Black, Female Mayor
By Elizabeth Campbell and Kim Chipman
April 2, 2019, 8:54 PM EDT Updated on April 3, 2019, 9:39 AM EDT
Chicago made history, electing former federal prosecutor Lori Lightfoot its first black, female mayor as the city struggles with gun violence on its streets and looming fiscal woes.
Lightfoot, who also will be the first openly gay leader of the nation’s third-most-populous city, soundly defeated Cook County Board President Toni Preckwinkle, 74 to 26 percent with nearly all precincts reporting, according to city election board returns. Lightfoot had never held elective office and will replace Rahm Emanuel, who chose not to run for a third term.
The historic outcome of Tuesday’s vote was assured after the two black women beat 12 rivals in the campaign’s Feb. 26 first round, Chicago’s most crowded mayoral ballot ever. It included Bill Daley, the son and brother of two past Chicago mayors and, like Emanuel, a chief of staff to former President Barack Obama.
“Together we can and will finally put the interests of our people, all of our people, ahead of the interests of a powerful few,’’ Lightfoot told a cheering crowd gathered at a downtown hotel. “We can and we will break this city’s endless cycle of corruption.’’
Lightfoot, 56, who Emanuel named to a police-reform task force, campaigned as an independent reformer while Preckwinkle, 72, touted her years of experience in elective office, calling the mayoral post not an entry-level job. At a time when Democratic politics is leaning left, Preckwinkle’s establishment resume didn’t sell.
In a victory speech that evoked Martin Luther King Jr. and Chicago’s first black mayor -- the late Harold Washington -- Lightfoot said her victory was a “mandate for change.” She pledged to embrace diversity, welcome immigrants, ensure the city doesn’t shrink, and combat its infamous political corruption.
Referring to President Donald Trump’s immigration policies, Lightfoot decried a “climate of hate and fear” that she said is frightening immigrants from around the globe.
In conceding defeat, Preckwinkle noted the historic nature of the night. “Not long ago, two African-American women vying for this position would have been unthinkable,’’ she told supporters.
Democratic Town
Chicago’s election, while nonpartisan, was fought between Democrats in a place that the party has dominated for decades. Preckwinkle remains the head of the Cook County Democratic organization.
In defeating Preckwinkle, Lightfoot inherits control of a city beset by $28 billion in pension debt, a shrinking population, and a murder rate far surpassing that of New York and Los Angeles. While Emanuel reassured investors in the city’s junk-rated bonds by boosting taxes, his successor will contend with the pension shortfall and projected budget deficits that put the city’s fiscal stability at risk.
"It’s going to take quite a few months to get her arms around the fiscal situation, which is the thing that matters most for investors,” said Triet Nguyen, managing partner at Axios Advisors, a bond research firm, in Lake Forest, Illinois. "On one hand you have optimism but there is a lot of uncertainty that comes with that."
Lightfoot’s campaign drew attention for her leadership of an Emanuel-appointed task force that issued a scathing review of the department in the wake of the shooting of an unarmed teenager, Laquan McDonald, by a Chicago policeman.
Challenging Emanuel
Lightfoot challenged Emanuel before he dropped his bid for a third term, announcing her candidacy in May 2018. She presented herself as the candidate who would combat Chicago’s notorious reputation for corruption. Indeed, a scandal involving allegations of attempted extortion erupted in the middle of the campaign’s first round.
Once a favored candidate, Preckwinkle was hurt by her connection to Alderman Ed Burke, who was hit with a federal corruption charge in January. Prosecutors alleged he pressured executives of a fast-food restaurant chain to become clients of his tax-specialty law firm in exchange for a remodeling permit in his ward. Burke has pleaded not guilty.
The federal complaint alleges he pressured company executives to donate $10,000 to an unnamed politician, later identified as Preckwinkle. He’d also held a fundraiser for her in his home during her campaign for county office.
Preckwinkle, a former Chicago alderman who has led the county government since 2010, also was backed by some of the largest labor groups, including the Chicago teachers union.
Neither she nor Lightfoot offered many specifics on how to handle the city’s financial problems, but Lightfoot won the endorsement of the local chamber of commerce as well as the Chicago Tribune and Chicago Sun-Times.
Financial Hurdles
Under Emanuel, the city ended its so-called scoop and toss, the process of borrowing to pay off maturing debt, and also unwound its debt portfolio of interest-rate swaps. All three major rating companies now have a stable outlook on the city’s debt. Moody’s rates the bonds one step below investment grade, while S&P Global Ratings and Fitch Ratings consider Chicago at least one level above junk.
Financial hurdles remain. The city’s retirement funds are only 27 percent funded. Emanuel put the pensions on a path to solvency by boosting the city’s contribution and raising property taxes and other fees. After he leaves office, though, the city’s required annual pension payment doubles to more than $2 billion.
The next mayor, who will be inaugurated in May, won’t have time to waste once she takes office, said Dora Lee, director of research at Belle Haven Investments, which manages $8.9 billion of municipals including Chicago bonds. The city budget is typically presented in October.
“Chicago’s financial situation does not afford any candidate a lot of runway,’’ Lee said. “It’s going to be a very short honeymoon.’’
— With assistance by Danielle Moran, and John McCormick
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https://www.bloomberg.com/news/articles/2019-04-03/chicago-makes-history-by-electing-its-first-black-female-mayor-ju0i1ocd?sref=dlv6Ue8o
Big California, NYC Bond Deals Test Demand for SALT Tax Havens
Big California, NYC Bond Deals Test Demand for SALT Tax Havens
By Romy Varghese
March 5, 2019, 8:19 AM EST
Wealthy investors from big coastal states will find an opportunity for refuge from the federal tax overhaul as California and New York City sell about $3.3 billion of tax-free bonds over the next two days.
Key Insights:
California’s $2.3 Billion Deal
New York City’s $986 Million Deal
Expectations
— With assistance by Danielle Moran, and Martin Z Braun
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https://www.bloomberg.com/news/articles/2019-03-05/big-california-nyc-bond-deals-test-demand-for-salt-tax-havens?sref=dlv6Ue8o
Gavin Newsom Moves Away From Jerry Brown’s Public-Works Ambitions
Gavin Newsom Moves Away From Jerry Brown’s Public-Works Ambitions
By Romy Varghese
February 13, 2019, 7:00 AM EST
In his first State of the State speech, an avenue for airing lofty goals, California Governor Gavin Newsom showed he won’t simply sign off on his predecessor’s expensive public works projects as he moves toward his own priorities.
The Democrat who took office last month indicated Tuesday that he was scaling back California’s ambitious $77 billion high-speed rail project linking Los Angeles and San Francisco by focusing on getting one segment completed. He also said he wants to shrink plans to build twin 30-mile long tunnels aimed at buttressing the water system down to one.
The decisions come as Newsom, 51, pivots the state away from the goals of former Governor Jerry Brown, who had championed the massive infrastructure projects -- and contrasts with the objectives of liberal lawmakers in Washington who are pushing transportation overhauls as a key aspect of fighting climate change.
Bond investors had worried that Newsom wouldn’t hold the line on spending as well as Brown, whom they credit with helping to stabilize the finances of the boom-and-bust state. The new governor is showing he won’t reflexively continue Brown’s costly holdovers.
Still, Newsom will be tested on how he would fund programs he campaigned on, such as early childhood development and affordable housing, should revenue continue to fall short of his projections. The state collected 9 percent less in revenue in January than he expected in his budget for the next fiscal year.
"He has scaled back these two projects, but he has a large social agenda," said Dora Lee, vice president at Belle Haven Investments. "This could be a precursor to finding revenue sources" for it.
Too Costly
In his speech to lawmakers, Newsom said the high-speed rail line had become too expensive. He proposed finishing roughly 120 miles of track already under construction in the Central Valley, a mostly rural agricultural interior region, and link it to other parts of the state.
Originally, backers envisioned an 800-mile network, with trains speeding as fast as 220 miles per hour, making it one of the largest, and most costly, public works projects in recent U.S. history. But since $10 billion of bonds were approved by voters more than a decade ago to jump-start the line, it’s been roiled by political controversy and escalating expenses. Only about one in five likely voters view high-speed rail as high priority, according to a poll released in December by the Public Policy Institute of California.
"Right now, there simply isn’t a path to get from Sacramento to San Diego, let alone from San Francisco to L.A," Newsom said in his speech.
Newsom did leave open the possibility that the system could one day be completed by saying he would continue some of the preliminary work on the entire line and by seeking more federal and private funding.
He was much more clear on the tunnels: He wants just one. The tunnels are intended to carry Sacramento River water to southern California, home to about two-thirds of the state’s population. The highway-wide tubes would replace pumps in the Sacramento-San Joaquin River Delta that risk drawing saltwater from San Francisco Bay, threatening the freshwater supply and ravaging wetlands.
The tunnel system had been estimated to cost $17 billion. Some area farmers, residents and environmentalists oppose it for the expense, effect on local economies and potential watershed damage.
Scaling back both projects shows that Newsom "is being more realistic" about the state’s revenue, Lee said.
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https://www.bloomberg.com/news/articles/2019-02-13/newsom-moves-california-away-from-brown-s-public-works-ambitions?sref=dlv6Ue8o