Munis and Stockton California

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cks
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Munis and Stockton California

Post by cks » Mon Apr 01, 2013 8:06 pm

news on the Stockton bankruptcy:

http://www.reuters.com/article/2013/04/ ... GP20130401

Those with minicipal bond holdings need to pay attention. From a quick Google search, it's estimated that states and local governments have between $500 billion to over $4 trillion dollars in UNFUNDED pension and health care obligations. If courts decide that Calpers stands before bond holders, expect some excitement in the muni market.

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gasman
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Re: Munis and Stockton California

Post by gasman » Mon Apr 01, 2013 8:09 pm

Anybody know what Stockton's bonds were rated yeserday, 6 months ago, 1 year ago, etc.?

sscritic
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Re: Munis and Stockton California

Post by sscritic » Mon Apr 01, 2013 8:10 pm

How about a quick search of bogleheads?
http://www.bogleheads.org/forum/viewtop ... 0&t=113965

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Re: Munis and Stockton California

Post by Elbowman » Mon Apr 01, 2013 8:42 pm

cks wrote:Those with minicipal bond holdings need to pay attention.
A long term, buy-hold-and-rebalance investor with diversified mutual funds NEEDS to pay attention to current events? I'm not sure about that...

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Re: Munis and Stockton California

Post by abuss368 » Mon Apr 01, 2013 8:46 pm

Another reason why I have no interest in individual bonds and state specific tax exempt bond funds.
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sscritic
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Re: Munis and Stockton California

Post by sscritic » Mon Apr 01, 2013 8:48 pm

Agree. Just look at the hit Vanguard California Intermediate-Term Tax-Exempt took today as a result.

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Clever_Username
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Re: Munis and Stockton California

Post by Clever_Username » Tue Apr 02, 2013 1:49 am

sscritic wrote:Agree. Just look at the hit Vanguard California Intermediate-Term Tax-Exempt took today as a result.
VCAIX ... didn't move today... or is that your point?

(I can be dense sometimes)
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_

cks
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Re: Munis and Stockton California

Post by cks » Tue Apr 02, 2013 5:51 am

gasman wrote:Anybody know what Stockton's bonds were rated yeserday, 6 months ago, 1 year ago, etc.?
Moody's had Stockton rated at Aa3 until January 2011 at which time they downgraded to A1:

http://blogs.esanjoaquin.com/stockton-c ... cument.pdf

Another article on what may be at stake:

http://www.governing.com/columns/public ... edent.html


FYI, I'm not touching my AA based on this. It's just that some people may feel that current after-tax muni yields compared to taxable bonds make them a more atttractive investment. Just pointing out that there's a risk to everything and there may be a reason for the relatively higher yields.

Gleevec
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Re: Munis and Stockton California

Post by Gleevec » Tue Apr 02, 2013 7:48 am

Stockton's bankruptcy as well as the elucidation of all the other at risk municipalities (Detroit, etc) is probably already priced into the muni bonds, especially after the Whitney scare. Im not too worried about it, I think in the current interest rate and tax environment muni bonds are an excellent investment and that the 2 greatest risks to munis are:

1. Interest rate risk- though this is for all bonds, but may make you consider changes to bond length. Then again, people have been saying this since 2008
2. Congress decides to tax muni bond income. This is less likely I feel because cities have been hit hard by the recession and reallocation of federal/state budgets, I doubt the Feds want to deliver the knockout punch, but you never know.

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Re: Munis and Stockton California

Post by richard » Tue Apr 02, 2013 8:22 am

cks wrote:Those with minicipal bond holdings need to pay attention. From a quick Google search, it's estimated that states and local governments have between $500 billion to over $4 trillion dollars in UNFUNDED pension and health care obligations. If courts decide that Calpers stands before bond holders, expect some excitement in the muni market.
"Unfunded obligations" is one of the most misleading claims out there.

No time period is given (is this per year, over an infinite horizon or what?), no context is given (is $500 billion over a long time period a lot in a $15 trillion a year economy?), almost no obligation is funded (what's your unfunded food and shelter obligations?), etc., etc. The numbers seemed designed to scare rather than inform.

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Re: Munis and Stockton California

Post by DaveS » Tue Apr 02, 2013 8:47 am

The default rate on muni's is practically non existent. Last time I looked which was more than a year ago it was .003% At the state level there has not been a Governmental Operation bond default since Arkansas in the dust bowl era. Think of all the municipalities in the US and I can practically name the ones who have filed Chapter 9's in the last three years, Stockton, Vallejo, Jefferson County Ala. one city in western Pa was close to it. I cant remember if it went over the hill. Revenue bonds have defaulted more frequently. Those are bonds that are not tax free under the Alternative Minimum Tax. If you have a non AMT fund you don't own any revenue bonds. For example limited term tax exempt, intermediate term tax exempt at Vanguard are AMT free. The Vanguard high yield muni fund is 12% AMT. Your typical revenue bond default is something like an airport authority which goes into technical default if an airline files bankruptcy but still pays on it's gates. So maybe the best thing to realize is that the talking heads are the people talking about Stockton and what your hearing is the kind of noise you should be tuning out. Dave

cks
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Re: Munis and Stockton California

Post by cks » Tue Apr 02, 2013 10:43 am

richard wrote:
cks wrote:Those with minicipal bond holdings need to pay attention. From a quick Google search, it's estimated that states and local governments have between $500 billion to over $4 trillion dollars in UNFUNDED pension and health care obligations. If courts decide that Calpers stands before bond holders, expect some excitement in the muni market.
"Unfunded obligations" is one of the most misleading claims out there.

No time period is given (is this per year, over an infinite horizon or what?), no context is given (is $500 billion over a long time period a lot in a $15 trillion a year economy?), almost no obligation is funded (what's your unfunded food and shelter obligations?), etc., etc. The numbers seemed designed to scare rather than inform.
You're right and I can't find the full answer as to what time period we're talking about. But here's an article that sheds some light on NJ:

http://reason.com/archives/2011/03/11/t ... state-pens

I believe there are other states whose pension funds could run dry within the next 5 years. Again, this is not to scare, just inform.

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Re: Munis and Stockton California

Post by richard » Tue Apr 02, 2013 4:06 pm

cks wrote:
richard wrote:
cks wrote:Those with minicipal bond holdings need to pay attention. From a quick Google search, it's estimated that states and local governments have between $500 billion to over $4 trillion dollars in UNFUNDED pension and health care obligations. If courts decide that Calpers stands before bond holders, expect some excitement in the muni market.
"Unfunded obligations" is one of the most misleading claims out there.

No time period is given (is this per year, over an infinite horizon or what?), no context is given (is $500 billion over a long time period a lot in a $15 trillion a year economy?), almost no obligation is funded (what's your unfunded food and shelter obligations?), etc., etc. The numbers seemed designed to scare rather than inform.
You're right and I can't find the full answer as to what time period we're talking about. But here's an article that sheds some light on NJ:

http://reason.com/archives/2011/03/11/t ... state-pens

I believe there are other states whose pension funds could run dry within the next 5 years. Again, this is not to scare, just inform.
A rather political publication and author, with a long history of not favoring public employees.

New Jersey is an odd case, as in the mid 1990s it made a decision to underfund pensions and use the savings to cut taxes. Basically, then governor Whitman balanced New Jersey's budget and paid for a big tax cut by diverting more than $1 billion from the state's pension fund.

In any event, the article doesn't appear to answer my questions.

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Re: Munis and Stockton California

Post by dmcmahon » Tue Apr 02, 2013 11:34 pm

richard wrote: "Unfunded obligations" is one of the most misleading claims out there.

No time period is given (is this per year, over an infinite horizon or what?), no context is given (is $500 billion over a long time period a lot in a $15 trillion a year economy?), almost no obligation is funded (what's your unfunded food and shelter obligations?), etc., etc. The numbers seemed designed to scare rather than inform.
The figures given are present values - that is, the amount you'd need to have today to service the obligations from a stream of investment returns plus depletion of the principal all the way to zero. If anything, the numbers are low since they assume rates of investment returns that may be unrealisticaly high. Stanford did a study that you can find by googling, and it's sobering. I believe another national study also exists, not sure who by.

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Re: Munis and Stockton California

Post by Valuethinker » Wed Apr 03, 2013 3:55 am

dmcmahon wrote:
richard wrote: "Unfunded obligations" is one of the most misleading claims out there.

No time period is given (is this per year, over an infinite horizon or what?), no context is given (is $500 billion over a long time period a lot in a $15 trillion a year economy?), almost no obligation is funded (what's your unfunded food and shelter obligations?), etc., etc. The numbers seemed designed to scare rather than inform.
The figures given are present values - that is, the amount you'd need to have today to service the obligations from a stream of investment returns plus depletion of the principal all the way to zero. If anything, the numbers are low since they assume rates of investment returns that may be unrealisticaly high. Stanford did a study that you can find by googling, and it's sobering. I believe another national study also exists, not sure who by.
Present Value doesn't correct for time problems. In the sense that worrying about a state of the world 50 years out is more or less academic, because the world will be so different (and US GDP will be at least 2.5-3 times as large in real terms, if it grows at 2% pa real). There are two many factors, like retirement age, life expectancy, GDP per capita, that will move around.

Kotlikoff does this. He creates scary numbers based on discounting back (from memory) the next 100 years. Then announces we are broke now because of it.

But markets are efficient. If the markets were genuinely worried about future US pension liabilities, they'd be pushing the yield on US government securities through the roof NOW. After all, bond investors could always switch their holdings to the bonds and assets of other countries.

Japan is your case in point. Japan has a demographic crisis *now*. And yet the lowest yields in the world.

What's a much more useful calculation is to work out what pension contributions are likely to be needed to sustain the pensions promised, on reasonable estimates of future returns (Warren Buffett was using 6% in all his pension funds, but may have reduced it). You can also look at pension payments to GDP.

Then you get a couple of things. One that some places (Illinois I think) are in scary shape-- cuts coming. That is not universal, but many states and municipalities have made extravagant pension promises, and it's not reasonable that future taxpayers find that 50%+ of all tax revenues go to pay pensions rather than to pay for services.

Two that as the Baby Boom ages and dies off, pensions come back into balance in a lot of cases.

I think Richard's point about the biases of the publication (which is rabidly anti-government) and author are well taken.

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Re: Munis and Stockton California

Post by richard » Wed Apr 03, 2013 5:23 am

dmcmahon wrote:
richard wrote: "Unfunded obligations" is one of the most misleading claims out there.

No time period is given (is this per year, over an infinite horizon or what?), no context is given (is $500 billion over a long time period a lot in a $15 trillion a year economy?), almost no obligation is funded (what's your unfunded food and shelter obligations?), etc., etc. The numbers seemed designed to scare rather than inform.
The figures given are present values - that is, the amount you'd need to have today to service the obligations from a stream of investment returns plus depletion of the principal all the way to zero. If anything, the numbers are low since they assume rates of investment returns that may be unrealisticaly high. Stanford did a study that you can find by googling, and it's sobering. I believe another national study also exists, not sure who by.
A present value means a one-time payment. A one-time payment of $500 billion in an economy that generates $15 trillion a year and is growing is not a significant amount.

Plus, as Valuethinker says, "Present Value doesn't correct for time problems. In the sense that worrying about a state of the world 50 years out is more or less academic, because the world will be so different (and US GDP will be at least 2.5-3 times as large in real terms, if it grows at 2% pa real). There are two many factors, like retirement age, life expectancy, GDP per capita, that will move around."

cks
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Re: Munis and Stockton California

Post by cks » Wed Apr 03, 2013 6:22 am

I think the underlying issue here is not if but how much of a haircut bond holders (and insurers) are goin to take going forward. If local governments are going to be allowed to reorganize and discharge some of their obligations without having to touch their retiree benefits, then the bond holders are going to take a bigger haircut. If it's determined that cities like Stockton have to discharge some of their pension obligations along with obligation to bond holders, then the bond holders will take a smaller haircut. In the former case, the borrowing cost of local governments (i.e. yields) will rise since investors (like me) are going to demand higher reward for higher risk. This is the reason Rhode Island passed a law recently basically placing bond holders first in line to be paid in case of municipal bankruptcies- a law that I believe is currently being challenged in court.

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Re: Munis and Stockton California

Post by Grt2bOutdoors » Wed Apr 03, 2013 7:38 am

Valuethinker wrote:
dmcmahon wrote:
richard wrote: "Unfunded obligations" is one of the most misleading claims out there.


What's a much more useful calculation is to work out what pension contributions are likely to be needed to sustain the pensions promised, on reasonable estimates of future returns (Warren Buffett was using 6% in all his pension funds, but may have reduced it). You can also look at pension payments to GDP.

Then you get a couple of things. One that some places (Illinois I think) are in scary shape-- cuts coming. That is not universal, but many states and municipalities have made extravagant pension promises, and it's not reasonable that future taxpayers find that 50%+ of all tax revenues go to pay pensions rather than to pay for services.

Two that as the Baby Boom ages and dies off, pensions come back into balance in a lot of cases.

I think Richard's point about the biases of the publication (which is rabidly anti-government) and author are well taken.
You're right on Illinois - yesterday they marketed 10 year tax-exempts that priced at 3.30%, 1.41% more than the comparable benchmark. They also sold a 30 year bond, priced at 4.44%, 1.44% higher than the comparable benchmark. Risk free?, I think not.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
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Re: Munis and Stockton California

Post by Grt2bOutdoors » Wed Apr 03, 2013 7:40 am

cks wrote:I think the underlying issue here is not if but how much of a haircut bond holders (and insurers) are goin to take going forward. If local governments are going to be allowed to reorganize and discharge some of their obligations without having to touch their retiree benefits, then the bond holders are going to take a bigger haircut. If it's determined that cities like Stockton have to discharge some of their pension obligations along with obligation to bond holders, then the bond holders will take a smaller haircut. In the former case, the borrowing cost of local governments (i.e. yields) will rise since investors (like me) are going to demand higher reward for higher risk. This is the reason Rhode Island passed a law recently basically placing bond holders first in line to be paid in case of municipal bankruptcies- a law that I believe is currently being challenged in court.
I agree - yields will have to rise dramatically to compensate for the risk - municipal managers have not proven themselves to be astute when it comes to finances.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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