Trusted Bond Advisers Need to Act Accordingly: Muni Week

Before the credit crisis and the Great Recession, banks did well spreading risk and folly. The municipal-bond business was no exception.

For years, banks and financial advisers sold public officials on derivative-laden debt deals that promised to hold down costs, so long as all the pieces held together. They didn’t.

It wasn’t pretty. In Jefferson County, Alabama, which filed the biggest municipal bankruptcy until Detroit’s, the carnage was grist enough for a country song, “Jefferson County Flush.” Other local governments dipped into taxpayers’ coffers to pay billions.

Whether banks were rendering advice or just pitching their wares wasn’t always clear, nor were the obligations of the advisers hired to guide public officials. When it was stung by a deal that went south, the school district in Butler, Pennsylvania, near Pittsburgh, unsuccessfully sued JPMorgan Chase & Co., saying it was hoodwinked by a banker it considered a “trusted adviser.”

With the passage of the Dodd-Frank act four years ago, Congress ushered in the first rules for municipal advisers, which take full effect tomorrow. Chief among them: Firms that render advice need to act in client’s best interests (isn’t that what they were hired for in the first place?). If banks hold themselves out as trusted advisers, they will be covered by the new rules, too.

It all comes a bit too late for Butler.


It’s a slow time for bond sales with the holiday-shortened calendar. (Personal to USMNT: USA! USA!) There are about $2.7 billion in deals set for the four-day week, down from $8.8 billion in the prior period. The biggest is a $555 million auction tomorrow by the Alabama Public School & College Authority.

The proceeds will refinance part of a $1 billion bond sale from 2007, the biggest ever for the Yellowhammer State.


Time bombs. Tape worms. Grisly metaphors flourished about the risk that America’s underfunded state and local government pensions pose to the body politic. Yet how large are those shortfalls? It depends on the math. Critics say pensions use optimistic assumptions about investments to understate costs.

Accounting rules kicking in for the new fiscal year, which begins tomorrow in most states, require plans set to go broke to use new estimates that will push up the stated debts.

According to the Center for Retirement Research at Boston College, the change could cut leave combined pensions reporting assets to cover about 70 percent of their liabilities, 5 percentage points less than under the old rules. Yet they have an out, according to the researchers: Governments can always claim they will boost contributions enough down the road to keep their pensions afloat.

In that case, nothing much would change.


The U.S. economy passed a milestone of sorts in May: It finally replaced all the jobs lost since the recession.

The same can’t be said for local governments, which cut 595,000 jobs from 2008 to 2013. Their finances on the mend, they’ve added jobs from February through May. They’ve still recovered fewer than one-fifth of the jobs that were cut. The latest look at the pace of employment growth will be released by the Labor Department on July 3.

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