Despite the headline defaults, munis doing okay

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Allocationist
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Re: Despite the headline defaults, munis doing okay

Post by Allocationist » Thu Dec 12, 2013 6:42 pm

I'm a little confused about this thread. I was under the impression that "Mr. Market" is aware of the issues, urban legends and other fears associated with municipal bonds. If that is correct why would we embrace active management of this niche asset class?

As for California State politics and economy, there have been some significant changes in the past year or two. The State has a balanced budget with plans for a "rainy day" fund, political gridlock has been eased and inroads have been made in resolving the government "pension crisis."

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Re: Despite the headline defaults, munis doing okay

Post by jackholloway » Thu Dec 12, 2013 7:13 pm

larryswedroe wrote: Manwithnoname
All I know is many firms I know are either leaving or planning on leaving or thinking about it, DFA for one left for that very reason. And I know many wealthy people who have given up residency as well, for that reason. And one last point, I note that the studies you cited are from placing with a real agenda (very left leaning) and what other result would you expect from them? Tax rates matter a great deal and the high net worth are leaving NY and California and other states to places without income taxes and without estate taxes. Just ask which are the fastest growing states--Florida and Texas! That's where businesses are moving and jobs going.
But then you are living in Florida or Texas, when you at least initially wanted to live in CA. As my own company has discovered, we can pay a lot less in the Midwest for top tier talent that already lives there, but we cannot convince people to move there from Silicon Valley even by vastly overpaying. (We also cannot convince them to move from WA to those regions.). Personally, I would rather live here, not far from a resort area, than there, and I would want substantially more to live there.

I would be very curious to know whether the HNW individuals moving into Texas and Florida are generally retired, or are generally not. The ones I know lived there early in their lives, moved away for school or work, and are moving back in retirement, but my sample is not necessarily representative.

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Re: Despite the headline defaults, munis doing okay

Post by larryswedroe » Thu Dec 12, 2013 7:45 pm

few things
Jackholloway, companies are moving which means working people, a good example is DFA which packed up and moved to Texas for only one reason.
And retirees are definitely leaving to get away from estate taxes in the high tax states as well as the income taxes.

Acclocationist,
FWIW, IMO if you believe Cal has a balanced budget you're living in lala land. To present it as balanced they tend to make absurd assumptions, overstating revenues and vastly underestimating expenses.
What will happen is that there will be defaults of some kind--already happening as pensions being renegotiated. You cannot pay when your liabilities are 200% of true liabilities, and that is with rates at these levels. What happens when rates go back up to "normal" levels?

Larry

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Re: Despite the headline defaults, munis doing okay

Post by manwithnoname » Thu Dec 12, 2013 8:37 pm

larryswedroe wrote:
Manwithnoname
Yes revenues are up because the stock market has gone way up and taxes from that has gone way, In same way the late 90s led the politicians to believe the revenues were "permanent"
All I know is many firms I know are either leaving or planning on leaving or thinking about it, DFA for one left for that very reason. And I know many wealthy people who have given up residency as well, for that reason. And one last point, I note that the studies you cited are from placing with a real agenda (very left leaning) and what other result would you expect from them? Tax rates matter a great deal and the high net worth are leaving NY and California and other states to places without income taxes and without estate taxes. Just ask which are the fastest growing states--Florida and Texas! That's where businesses are moving and jobs going. So you get a cycle that goes with it. I'm certainly not expert on this situation but I have been told by people I believe are that there is a strong trend here.

At any rate Cal is in very difficult straights and the politics is so bad I don't see way out-you tell me how you get out of this situation-- California's ANPL ratio is 190 percent. IMO they will default almost certainly, only question is will it be bond holders or pensioners, but no way around it. Not when you have that type ratio and cannot print money.
Just my opinion of course.
But to me it's the California investors who own this stuff who are trying to convince themselves they are right==ignoring the serious crisis and taking risks for very little potential gain. The very same investors who won't invest in say small value stocks with about a 4% a year premium to TSM, will buy Cal bonds with relatively lower ratings for a few basis points more.
Best wishes
Larry
I have wealthy friends who live in LALA land who will never leave as long as CA allows them to continue to pay their taxes. As another poster has noted its not possible to convince people to move from silicon valley to the midwest, south or FL. Also CA doesn't have an estate tax. TX and Fl are the fastest growing states because retirees are moving in for the low the cost of living and no income tax.

As for your comment about companies fleeing CA DFA has a total of 700 employees. Their presence in CA will not be missed. Facebook HQed in Menlo park CA has 6000 workers and $5B in revenue. Google in Mountain View, CA has 46,000 workers and 38B in revenue. Don't see either or them leaving the land of sun.

ANPL ratios are worth bupkis. They have all the creditability of Meredith Whitney's prediction 3 years ago that there would be 50 to 100 significant municipal defaults. ANPL is just another metric to throw out to dazzle investors. My metric on state defaults is that there will be fewer defaults of state government bonds and other obligations in the current economic cycle than there were during the depression. And we all know what that number is.

Since I cant find anything of value to discuss further I will sit back and observe.

Good night and good luck.

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Re: Despite the headline defaults, munis doing okay

Post by ogd » Thu Dec 12, 2013 8:59 pm

I too think that the story of a big job migration from CA to TX is right wing myth. It's what the ideology says it should happen, and there's some desperate data mining going on to show that it is.

Fact is, Cali's economy is as vibrant as ever. 2012 GDP growth was 5th in the nation, which for a big diversified state is hard to occur by chance, much like you usually expect TSM to be in the 40th-50th percentile and never 1st. All it takes for North Dakota (and to a lesser degree Texas) to shoot to first is some shale gas or oil discoveries; that would barely move the needle in CA. Job creation is strong. Old staples of agriculture, wine and entertainment are here and won't (can't) be moving anywhere, and Silicon Valley is doing a nice job of collecting & paying 10-13% income taxes on all of your internet activities (thankyouverymuch); it too is not moving anytime soon since it turns out it's really hard to develop really good software without really good people. Real estate (a.k.a. wealthy people settling down) is some of the most expensive in the nation.

Yes, it's getting crowded and expensive in the nice areas; you won't see Vanguard setting up shop here. If I were a DFA customer, I'd be pleased with the cost-cutting move to Texas as well. As a bond holder however, I don't object to a state becoming more affluent, not one bit.

TX and FL will probably continue growing nicely as they have been since the advent of ubiquitous A/C made those places actually livable. There's nothing wrong with them. But ready California substitutes they aren't.

And that concludes my foray into politics and state pride. :beer I should add that it's none of these factors that makes me want to keep my Cali bonds (other than being able to dismiss certain words of certain colors). It's the 12% discount that I get compared to the national buyers -- for which as proof there's no "story", no "behavioral explanation" needed, just my tax return.

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Re: Despite the headline defaults, munis doing okay

Post by dmcmahon » Thu Dec 12, 2013 9:22 pm

larryswedroe wrote: Remember Swedroe"s law, it takes an awful lot of interest to make up for unpaid principal.
This is a great way to state what I've thought for a long time. At these low yields it just doesn't seem worth taking any risk. As Leif says, you gotta sleep at night.

CA's pension issue hasn't gone away. Some workers can retire in their early 50s at 90% of their final salary and collect more in retirement than they did providing services. Some cities have been openly discussing the fact that these payments are Impacting their ability to continue delivering these valuable services. The unfunded liability is huge and it's measuring in present dollars - it's not some total of future payments, it's how much you'd have to have today to make that future stream of payments, net of projected inflows. And even then the rates of return assumed for the assists they do have are quite high at 7.5%.

The budget surpluses are likely a mirage. A lot of high income individuals pulled income forward into 2012 in advance of the federal tax increases and ACA surtax. This also forces them to make high estimated payments in 2013, even if ultimately they'll have to be refunded. There's an abnormally good series of stock returns for 2012 and 2013 producing higher than normal cap gains. 20% market gains aren't going to continue indefinitely. And finally, all this easy money has VCs cashing in IPOs, with FB last year, Twitter this year, and many others. Could be repeated, but possibly also just a short term blip.

As for whether HNW individuals would leave the state for tax reasons, well, maybe. Too many people confuse high net worth with high income. You could sit on an awful lot of FB stock (no dividend) and never pay a dime of income tax, so long as you don't sell. Peel off a few shares to fund your lifestyle at relatively low rates, or better yet just borrow against it paying no tax at all until you (at some later date) move away and then sell. If you're a high paid wage slave, the actual cost of the extra tax may not be significant. The extra brackets tack on 1%,2%, and 3%. So that's what, $500 for the first new bracket, $4000 for the second - that's a $500k income if single. $4500 isn't enough to be worth moving, especially if you only have to pay it for a few more years until you retire. Well-off retirees would largely be unaffected because yields are low. On say a $10m portfolio you may be realizing 2% averaged across stocks and bonds or $200k, leaving you south of the new higher rates. If you're moving for tax reasons, it's more likely because the original rate of 9.3% was already too high for your tastes and/or the high sales tax now that you're doing more spending relative to earnings. Property tax may actually be lower if the hypothetical retiree bought long ago - rates are similar to other states, but admittedly the absolute dollars are higher because the property is so expensive. Ultimately the chance to sell an expensive property here, buy a nicer home out of state for half the proceeds, and invest the difference, is probably a bigger motivator.

So color me unsurprised that well-off people haven't left the state, but I will also not be surprised to see the budget surpluses unexpectedly reverse as the tax revenue from these people falls back to more normal levels. When that happens, it's unclear how the pension shortfall will be fixed. I share Larry's concern about CA munis. JMHO.

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Re: Despite the headline defaults, munis doing okay

Post by lostInFinance » Thu Dec 12, 2013 9:24 pm

jackholloway wrote: But then you are living in Florida or Texas, when you at least initially wanted to live in CA. As my own company has discovered, we can pay a lot less in the Midwest for top tier talent that already lives there, but we cannot convince people to move there from Silicon Valley even by vastly overpaying. (We also cannot convince them to move from WA to those regions.). Personally, I would rather live here, not far from a resort area, than there, and I would want substantially more to live there.
It's interesting how different people look at it. I would want at least a 25% raise to move to Silicon Valley to compensate for the higher COLA.

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Re: Despite the headline defaults, munis doing okay

Post by letsgobobby » Thu Dec 12, 2013 9:36 pm

for those of us in a no-income tax state, who don't want to use the national fund, can you name a few states you'd be comfortable holding - a combination of any but the big five you avoid?

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Re: Despite the headline defaults, munis doing okay

Post by jackholloway » Thu Dec 12, 2013 9:42 pm

lostInFinance wrote:
jackholloway wrote: But then you are living in Florida or Texas, when you at least initially wanted to live in CA. As my own company has discovered, we can pay a lot less in the Midwest for top tier talent that already lives there, but we cannot convince people to move there from Silicon Valley even by vastly overpaying. (We also cannot convince them to move from WA to those regions.). Personally, I would rather live here, not far from a resort area, than there, and I would want substantially more to live there.
It's interesting how different people look at it. I would want at least a 25% raise to move to Silicon Valley to compensate for the higher COLA.
Exactly. Whether it takes all kinds, we have all kinds, and it looks like most of us can optimize for what makes us happy

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Re: Despite the headline defaults, munis doing okay

Post by larryswedroe » Thu Dec 12, 2013 11:06 pm

ANPL ratios are worth bupkis.

Denial is not a river in Egypt
This to me is tells all

Sure there will be people who will never leave, and sure DFA is one company.
But there is almost certainly no way around the ANPL problem because unlike countries states cannot print money.
And they cannot raise taxes sufficiently because raising taxes at this point will probably reduce revenue, not increase it,

When it comes to ANPL states are no different than municipalities--that figure is what predicts defaults--only question is what type
Larry

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Re: Despite the headline defaults, munis doing okay

Post by Khuzud » Thu Dec 12, 2013 11:26 pm

larryswedroe wrote: At any rate Cal is in very difficult straights and the politics is so bad I don't see way out-you tell me how you get out of this situation-- California's ANPL ratio is 190 percent.
Where are you getting this number from? I read the Moody's report, and in the table of ANPL ratios they list California's as 61.8%, which is very average.

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Re: Despite the headline defaults, munis doing okay

Post by manwithnoname » Thu Dec 12, 2013 11:37 pm

larryswedroe wrote:ANPL ratios are worth bupkis.

Denial is not a river in Egypt
This to me is tells all

Sure there will be people who will never leave, and sure DFA is one company.
But there is almost certainly no way around the ANPL problem because unlike countries states cannot print money.
And they cannot raise taxes sufficiently because raising taxes at this point will probably reduce revenue, not increase it,

When it comes to ANPL states are no different than municipalities--that figure is what predicts defaults--only question is what type
Larry
As another poster has noted your ANPL number for CA does not add up. Since the Moody's study was published CA revenue is up 27% in 2012 and CA collected $43B in 2nd Qtr of 2013. Not too shabby. Tax revenue is increasing with out the need for more taxes. I don't know where you get your ideas.

If ANPL is such an accurate metric what state pension default has ANPL predicted?

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Re: Despite the headline defaults, munis doing okay

Post by larryswedroe » Fri Dec 13, 2013 12:18 am

manwithnoname
ANPL is no different than any other predictive credit metric like debt to income or debt service to income for credit cards, mortgages and so on.
And it's no different than the leverage of corporations, which increases default risks
It predicts country defaults too, probabilities go up when ratios rise
There is no way around that, if you think otherwise than there is nothing anyone can say --it's like your denying the sun rises in the east

BTW--you keep missing that it may not mean default on the DEBT, but it will predict increased risk of some type of default, just as it did in Detroit, San Bernandino, Stockton, and countries too.
Good luck to you
Larry

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Re: Despite the headline defaults, munis doing okay

Post by Jack » Fri Dec 13, 2013 12:25 am

larryswedroe wrote:ANPL ratios are worth bupkis.

Denial is not a river in Egypt
This to me is tells all

Sure there will be people who will never leave, and sure DFA is one company.
But there is almost certainly no way around the ANPL problem because unlike countries states cannot print money.
And they cannot raise taxes sufficiently because raising taxes at this point will probably reduce revenue, not increase it,

When it comes to ANPL states are no different than municipalities--that figure is what predicts defaults--only question is what type
Larry
This is quite hilarious. Okay, have it your way. So if you look at Moody's calculation of ANPL vs revenue, Texas is much worse off at 93% than California at 62%. Yes, denial is not a river in Egypt.

While absolute ANPL numbers are debatable, when they are all recalculated using the same discount rate as Moody does, the relative numbers comparing states have real meaning. There is no denying that California is in better shape than Texas.

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Re: Despite the headline defaults, munis doing okay

Post by larryswedroe » Fri Dec 13, 2013 12:38 am

yes I owe an apology,
I went back and read the report
it is Connecticut that is 190
Cal is 62%

That is much better figure.

but of course pension obligations are only one part of the expense story
My apology for not getting that right


Cal GOs are now A rated (no state is lower) after the recent actions led to upgrades, still one grade below where I would buy --though we will buy an A with 3 years or less.



Larry

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Re: Despite the headline defaults, munis doing okay

Post by manwithnoname » Fri Dec 13, 2013 12:44 pm

larryswedroe wrote:yes I owe an apology,
I went back and read the report
it is Connecticut that is 190
Cal is 62%

That is much better figure.

but of course pension obligations are only one part of the expense story
My apology for not getting that right


Cal GOs are now A rated (no state is lower) after the recent actions led to upgrades, still one grade below where I would buy --though we will buy an A with 3 years or less.

Larry
Since CT's ANPL ratio is 190 percent is it your opinion that CT will default almost certainly, only question is will it be bond holders or pensioners, but no way around it? Not when you have that type ratio and cannot print money.

Also CA no longer has the lowest credit rating of all states. That honor is now held by IL. Maybe you need to update your research.

http://www.huffingtonpost.com/2013/06/2 ... 96264.html

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Re: Despite the headline defaults, munis doing okay

Post by larryswedroe » Fri Dec 13, 2013 1:04 pm

manwithnoname
In fact we wont' buy the bonds, any bonds, from about 7 states (except prerefis) and yes my answer is of course the same, those states almost certainly will default, though it may not be on their BONDS as I have repeatedly pointed out. It is more likely IMO to be on their pension obligations, but that doesn't rule out defaulting on debt in some way--treating the unlikely as impossible is one of the worst and more frequent mistakes investors make, especially when not rewarded with much of a premium for taking the risks (small as they may be) when the consequences of being wrong are literally unthinkable

No need to update the research, we do it all the time, I just made an error in memory, happens, I'm human too. Doesn't change the fact that I personally would not buy Cal bonds anyway. I just got the ANPL wrong--getting older happens more frequently (:-))

Best wishes
Larry

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Re: Despite the headline defaults, munis doing okay

Post by Jack » Fri Dec 13, 2013 1:08 pm

I'm wondering about the supposedly smart people at DFA who moved to a state that is in much worse financial shape than the state they left.

I can only guess that they don't really care at all about the financial condition of the state or whether it collapses around them. I suspect their primary consideration is their own paychecks and taxes.

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Re: Despite the headline defaults, munis doing okay

Post by letsgobobby » Fri Dec 13, 2013 1:16 pm

larryswedroe wrote:manwithnoname
In fact we wont' buy the bonds, any bonds, from about 7 states (except prerefis) and yes my answer is of course the same, those states almost certainly will default, though it may not be on their BONDS as I have repeatedly pointed out. It is more likely IMO to be on their pension obligations, but that doesn't rule out defaulting on debt in some way--treating the unlikely as impossible is one of the worst and more frequent mistakes investors make, especially when not rewarded with much of a premium for taking the risks (small as they may be) when the consequences of being wrong are literally unthinkable

No need to update the research, we do it all the time, I just made an error in memory, happens, I'm human too. Doesn't change the fact that I personally would not buy Cal bonds anyway. I just got the ANPL wrong--getting older happens more frequently (:-))

Best wishes
Larry
not sure if you saw my question upthread, but if no state income taxes, which muni bond funds/holdings do you recommend? assuming we want to take your advice and avoid a national fund.

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Re: Despite the headline defaults, munis doing okay

Post by hornet96 » Fri Dec 13, 2013 1:27 pm

A little late to this thread, but I thought this Google search for muni bond news was pretty revealing about the nature of "misleading" headlines:

Image

So is this "good news for muni bonds," or "big trouble for muni holders?" Surely it can't be both. :oops:

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Re: Despite the headline defaults, munis doing okay

Post by ogd » Fri Dec 13, 2013 1:32 pm

larryswedroe wrote:treating the unlikely as impossible is one of the worst and more frequent mistakes investors make, especially when not rewarded with much of a premium for taking the risks (small as they may be) when the consequences of being wrong are literally unthinkable
Larry: the consequences are rather thinkable, it's just money after all. You know what's unthinkable? The worst-case consequences of flying NYC to Boston, when you could take Amtrak and lose an extra hour, two at most, spent in complete Wi-Fi enabled comfort with your dignity intact. Your version of Pascal's wager, discounting the actual magnitude of the risk, would indicate that nobody in their right mind should be doing this.

Of course we have to consider the entire risk/reward balance -- the delta risk in this case (since we're already in munis) which the market doesn't judge to be much. It's never black and white. You can't just go and say "at these reward levels I'm not taking any risk, however small" because in reality we do this all the time when the risks are small enough.

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Re: Despite the headline defaults, munis doing okay

Post by Jack » Fri Dec 13, 2013 1:37 pm

larryswedroe wrote:Doesn't change the fact that I personally would not buy Cal bonds anyway. I just got the ANPL wrong--getting older happens more frequently.
So I'm trying to follow your logic. You say that ANPL ratio is a prime indicator of probability of default. So why is California on your list yet Texas, which has 50% more pension debt burden than California not on your list? Are you making a political calculation that Texas is more likely to stiff pensioners than bondholders?

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Re: Despite the headline defaults, munis doing okay

Post by manwithnoname » Fri Dec 13, 2013 1:42 pm

letsgobobby wrote:
larryswedroe wrote:manwithnoname
In fact we wont' buy the bonds, any bonds, from about 7 states (except prerefis) and yes my answer is of course the same, those states almost certainly will default, though it may not be on their BONDS as I have repeatedly pointed out. It is more likely IMO to be on their pension obligations, but that doesn't rule out defaulting on debt in some way--treating the unlikely as impossible is one of the worst and more frequent mistakes investors make, especially when not rewarded with much of a premium for taking the risks (small as they may be) when the consequences of being wrong are literally unthinkable

No need to update the research, we do it all the time, I just made an error in memory, happens, I'm human too. Doesn't change the fact that I personally would not buy Cal bonds anyway. I just got the ANPL wrong--getting older happens more frequently (:-))

Best wishes
Larry
not sure if you saw my question upthread, but if no state income taxes, which muni bond funds/holdings do you recommend? assuming we want to take your advice and avoid a national fund.
I would purchase bonds of NY, NJ, CA, MA, CT simply because these states are constantly borrowing from the credit markets and they will not default on the bond obligations for any reason since that would result in paying even higher interest rates to borrow once they figure out to how pay 100% on any defaulted issues. I would watch MI to see if the ruling allowing reduction of Detroit employee pension benefits is upheld by the Supremes. From a bankruptcy law standpoint the court's ruling makes perfect sense because if pension benefits have priority over all other parties then there would be no money left to operate the municipal government. The purpose of bankruptcy law for municipalities is to give the debtor (Detroit) a fresh start to run its government operations, not liquidate the city's assets to pay creditors. If pension benefits can be reduced MI should also be considered.
Last edited by manwithnoname on Fri Dec 13, 2013 1:47 pm, edited 1 time in total.

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Re: Despite the headline defaults, munis doing okay

Post by larryswedroe » Fri Dec 13, 2013 1:44 pm

hornet
Good news. means that more can go to BOND holders and pensions not sancrosanct

RE national funds, I'd look at the Baird fund I think due to quality and about right on maturity BMBIX, Vanguard fund is cheap and well diversified, so it's lesser of evils if you will if don't buy individual bonds
For liquidity we use the DFA ST muni fund
Larry

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Re: Despite the headline defaults, munis doing okay

Post by larryswedroe » Fri Dec 13, 2013 1:48 pm

jack
When it's over 100% it surely is as that doesn't leave room for other expenses
But you have to look at total picture, total expenses, not just pension obligations
You'll note Texas is AAA on their GOs, Cal A

Larry

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Re: Despite the headline defaults, munis doing okay

Post by larryswedroe » Fri Dec 13, 2013 1:50 pm

ogd
That "we" do it all the time doesn't make it right. That's where we differ in our views on managing risks.
Best wishes
Larry

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Re: Despite the headline defaults, munis doing okay

Post by Jack » Fri Dec 13, 2013 2:23 pm

larryswedroe wrote:
Jack wrote:You say that ANPL ratio is a prime indicator of probability of default.
When it's over 100% it surely is as that doesn't leave room for other expenses.
I think you have a misunderstanding about ANPL to revenue ratio. There is nothing magical about the number 100%. It doesn't mean that 100% of revenue must be spent on pensions. It is just an arbitrary metric that may have relative meaning but has no absolute meaning. The debt doesn't have to be paid in one year. It could be paid over 30 years or 50 years.

Instead of revenue you could use a different denominator such as state GDP or population and come up with a completely different number.

Do you believe that if the federal government's debt to GDP ratio is 100% that means 100% of national production must go to debt and there is nothing left to spend? It is an arbitrary number that only has meaning in relative terms or as a time series.

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Re: Despite the headline defaults, munis doing okay

Post by Van » Fri Dec 13, 2013 3:55 pm

Thanks Larry for the nice article. This was welcome reassurance for someone with 1/3 of their assets in muni funds.

lostInFinance
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Re: Despite the headline defaults, munis doing okay

Post by lostInFinance » Fri Dec 13, 2013 3:56 pm

manwithnoname wrote: If ANPL is such an accurate metric what state pension default has ANPL predicted?
I don't know about ANPL predictions, but from the point of view of state retirees, the states that have stopped providing their retirees with COLAS are in partial default on their pensions.

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Re: Despite the headline defaults, munis doing okay

Post by larryswedroe » Fri Dec 13, 2013 4:14 pm

jack
With GNP, its how much can you generate from GNP to pay debt--at 100% and 1% interest and economy growing 3%, not problem, but if interest rate is 10% it is, inevitably you won't be able to pay

And the fact that you don't have to pay it tomorrow (it's the present value of the assets and liabilities) only means that if you can continue to borrow you can delay the day of reckoning, but that's all. And one day the market's may not lend any more or they drive rates up so you cannot afford to borrow---see Greece

Best wishes
Larry

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Re: Despite the headline defaults, munis doing okay

Post by manwithnoname » Fri Dec 13, 2013 4:21 pm

lostInFinance wrote:
manwithnoname wrote: If ANPL is such an accurate metric what state pension default has ANPL predicted?
I don't know about ANPL predictions, but from the point of view of state retirees, the states that have stopped providing their retirees with COLAS are in partial default on their pensions.
NJ suspended COLAs two years ago.

States can adjust in future years COLAs by legislation the same as any other laws such as taxation. Saying that COLAS cannot be prospectively reduced is like saying that a state can never lower tax rates in a future year.

See excerpt of defendants ( state gov. and PERA) brief from Colorado case

In their motions, the defendants noted that the basis for the lawsuit is that the COLA could never be adjusted, despite the fact that it has been adjusted numerous times. “All of the Plaintiff’s claims are premised on their singular objection to the Legislature’s modification of the [COLA],” according to the motions.

The state and PERA motions point out that the COLA has changed a dozen times in the past 40 years, ranging from a low of 1.5 percent from 1970 to 1973 to a high of 3.5 percent from 2001 through 2009. In addition, the COLA has been set to compound only since 1994; prior to that it was a non-compounding adjustment. Of interest in that 2001-2009 period is that the CPI-W was only at or above 3.5 percent twice, in 2005 and 2007. During the other seven years the CPI-W ranged between a low of -0.7 percent in 2009 to 2.7 percent in 2001. So a cost-of-living adjustment for seven of the nine years exceeded the rate of inflation.

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Re: Despite the headline defaults, munis doing okay

Post by larryswedroe » Fri Dec 13, 2013 7:02 pm

manwithnoname
Just to repeat --changing cola's to reduce payments is DEFAULTING on promises, no different than say lowering the interest rate they promised to pay on a loan
Larry

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Re: Despite the headline defaults, munis doing okay

Post by manwithnoname » Fri Dec 13, 2013 7:49 pm

larryswedroe wrote:manwithnoname
Just to repeat --changing cola's to reduce payments is DEFAULTING on promises, no different than say lowering the interest rate they promised to pay on a loan
Larry
Where is the default on a promise? Colas are enacted by the legislature as a valid law.

It is an axiom of judicial interpretation that all statutes can be amended by the legislature at any time in the future. If states can lower tax rates they can lower colas.

If it was true that Colas were guaranteed forever at a particular rate then there would be no legal basis for the proposals to reduce Social Security colas by using chained cola. Colas are not protected from future reductions or even termination.

Are you claiming that it would be a default for Congress to substitute Chained Cola for the current Cola provision?

lostInFinance
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Re: Despite the headline defaults, munis doing okay

Post by lostInFinance » Fri Dec 13, 2013 9:34 pm

manwithnoname wrote:
larryswedroe wrote:manwithnoname
Just to repeat --changing cola's to reduce payments is DEFAULTING on promises, no different than say lowering the interest rate they promised to pay on a loan
Larry
Where is the default on a promise? Colas are enacted by the legislature as a valid law.

It is an axiom of judicial interpretation that all statutes can be amended by the legislature at any time in the future. If states can lower tax rates they can lower colas.

If it was true that Colas were guaranteed forever at a particular rate then there would be no legal basis for the proposals to reduce Social Security colas by using chained cola. Colas are not protected from future reductions or even termination.

Are you claiming that it would be a default for Congress to substitute Chained Cola for the current Cola provision?
If Congress eliminated COLAs for current SS recipients, I'm sure most people receiving SS would view that as a default. Only a few states have constitutional provisions that would prohibit states from abolishing pensions to their existing retirees altogether. If you go by the strictly legal definition, it's impossible for most states to default on their pensions, as far as I know. If you want to use that definition fine, but then it becomes absurd to even ask the question of what states have defaulted on their pension. Illinois's constitution is one of the few exceptions, which reads:

Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.

Based on that, I think that eliminating COLAs probably would be a default in Illinois. It's an axiom of judicial interpretation that the legislature can't amend a statute to be unconstitutional.

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Re: Despite the headline defaults, munis doing okay

Post by larryswedroe » Fri Dec 13, 2013 10:00 pm

manwithnoname
Your kidding right?
Now if you are the beneficiary of the promise of cola and you negotiated that in good faith (just like a bond holder negotiates an interest rate) and the promise is broken clearly it's a default on a promise. That's English, not theory
As to your other point about chain linked, that is just changing how the CPI is calculated, so FWIW IMO that would not be a default--
Larry

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fishnskiguy
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Re: Despite the headline defaults, munis doing okay

Post by fishnskiguy » Fri Dec 13, 2013 11:10 pm

This thread has run its course. Everything that can be said has been said, and we are well into politics.

Time to lock.

Chris
Trident D-5 SLBM- "When you care enough to send the very best."

Locked