Those pesky Washington lawmakers

In its mid-year municipal market review released to sbscribers this week, Janney Montgomery Scott noted it was “dead wrong” half a year ago in its 2014 outlook when analysts surmised that interference from Washington, D.C. lawmakers “could be a hot topic.” Instead, it turns out the 16-day government shutdown in October 2013 was enough to convince political leaders on the right that a fight over the debt ceiling was a bad way to begin 2014. And, with mid-term elections this year, these lawmakers aren't eager to remind voters that they were willing to hold the nation’s checkbook hostage because of political differences.

But next year, said Janney analyst Tom Kozlik, will be another story. “Observers should not count on Republican lawmakers to use such a restrained strategy at the beginning of 2015,” Kozlik wrote in the Aug. 27 report, adding he expected debate to heat up politically as the March 15 debt ceiling deadline approaches. He predicted that this year’s elections will leave the Republican Party retaining control of the U.S. House of Representatives and possibly gaining seats in the Senate. “In other words, he wrote, “the Republicans might have retreated in 2014 with the expectation that they will come out with guns blazing in 2015.”

For munis, this means that – once again – the municipal bond tax-exemption will be threatened. But Congress is unlikely to act quick enough to change the tax exempt status next year, meaning that governments would still be able to pay lower interest rates to investors of their bonds because those investors aren't paying federal taxes on those earnings.

But another threat, the projection that the Social Security disability insurance program will be exhausted by the end of 2016, is real. That, plus the fact that the Congressional Budget Office projects the federal deficit to start rising in 2017, will likely kick off more serious talk about tax reform (including municipal bonds), Kozlik said.

Wheelin’ and Dealin’

Detroit continues to prove its doubters wrong, this week by striking a $275 million financing deal with Barclays Capital. The money will help the city exit bankruptcy by paying off a "quality of life” loan the city took out after filing for bankruptcy last summer. The rest will go toward the reinvestment priorities the city identified in its exit plan, which Detroit will present to a judge in September for confirmation.

The loan and the fact that the city snagged lower-than-expected interest rates on its $1.8 billion water and sewer bond sale this week mark two big wins for the city. And, noted the Detroit Free Press, it “helps refute what many feared at the beginning of Detroit’s bankruptcy: that major banks and financial institutions would avoid lending money to the city and would be locked out of the bond markets.”

Here’s another counterintuitive piece of news

On a related note, Moody’s this week issued a report that demonstrated poor cities aren’t necessarily poor credit cities. In fact, 27 of the 50 largest high poverty cities are rated Aa3 or higher, just a notch below the median rating of Aa2 for all 210 cities with population over 100,000, the Aug. 27 report found.

“Although large cities often have high rates of poverty, they generally play a central role in a regional economy, providing significant employment opportunities and retail activity,” the report said. “Nine of the 50 cities with the highest poverty rates are state capitals, while large cities are often home to corporate headquarters or a large business presence. These economic drivers often draw a large daytime population that brings in revenue from income, sales and parking taxes.”

For example, Cincinnati (rated Aa2) has a high poverty rate of 29.4 percent but is home to a number of corporate headquarters, healthcare organizations and higher-education institutions. Approximately 70 percent of its annual General Fund revenue comes from income taxes, much of it comes from commuters living outside the city.

Additionally, many of these cities are benefiting from an influx of young professionals who want to live near their jobs. This creates “pockets of higher incomes likely to increase city revenue and help mitigate effects of the poverty rate,” Moody’s said. For example, Atlanta (Aa2 stable), with a poverty rate of 25.4 percent, is a major economic hub for the State of Georgia and entire Southeast. The city has seen its population increase 6.6 percent since 2000, and as a result, residential and commercial development has increased, leading to growth in property tax revenues over the same time period, the report said.