It’s all about perspective

The Delaware State Auditor released a much-anticipated report this week focusing on the state’s travel spending. It was prompted by the resignation of a deputy treasurer who was caught charging personal trips to her state-issued credit card. But the results of the audit depend on who you talk to. The Delaware News Journal ran a story the day of the audit’s release on July 30, noting that it singled out top state officials, including Gov. Jack Markell and Treasurer Chip Flowers, for “regularly [ignoring] rules for authorizing out-of-state taxpayer-funded travel, making it difficult to track the purpose and validity of the spending.”

Hours later, Flowers fired off a release, “Audit Clears State Treasurer,” and commended the audit office for affirming the treasury’s claims that his travel has always been for business reasons. Flower took it a step further and called the News Journal article “an intentional effort to mislead the public.” He added that he has asked the Gannett Company, which owns the paper, to remove and replace all individuals assigned to the Treasury, including the paper's investigative editor. “Action will be taken,” Flowers warned.

It’s been a tough month for Flowers. A Democrat who is running for re-election this year, Flowers was not endorsed by his own party when the executive committee of the Delaware Democrats voted to remain neutral in the contest. (The committee also declined to endorse Flowers the first time around when he ran unopposed.)

How Taylor Swift can help munis

Tom Doe, the founder of Municipal Market Advisors, pulled off the seemingly impossible this week and made a legitimate comparison between the municipal bond market and a pop star. In his piece, featured in the July 28 MMA Issuer Brief, he noted the problems faced by the music industry that Swift highlighted in a recent op-ed in the Wall Street Journal are quite similar to what municipal governments also face with changing technology. Swift said that the Internet’s impact has meant that musicians have had to turn more to social media to give their fans the constant connection they demand. And while their core product -- song recordings -- are making them less money, they're still critical to promoting an artist and pave the way for more live events, which are now making many artists more money than before.

Similarly, Doe said, the Internet has increased the demand from investors for more disclosure (constant contact) from municipal issuers. And the municipal market’s business structure is also changing. Doe noted that municipal bond traders in the 2000s primarily made most of their money off of derivatives earned from the bonds, rather than the initial interest rate. Much like interest rate swap deals, which are a type of derivative, investment strategies based on getting a higher rate of return with short term deals have not only become unattractive, they've also been the subject of an antitrust lawsuit. But that kind of money-making and trading has now all but died off. And with new regulations regarding who can advise municipal governments, and a slower market in general, “the municipal industry’s business model is under considerable stress,” Doe said. He added that if it becomes harder for municipalities to fund underwriters for their bond issuances, “change will have to occur -- old ways of doing business will become extinct and new participants and practices will emerge. The good news is that the basic need for capital and provision of capital will remain, it simply will be different.”

Much like the music industry is now dominated by deals that monetize every nook and cranny of an artist’s brand, not simply the recording, perhaps the municipal issuer and its relationship with its banker will similarly evolve, Doe suggested. In fact, he said, that relationship is already in the process of transforming from “being less defined and driven by the bond deal and more by the variety of services a financial institution provides to an issuer.”

An act of good faith

The Securities and Exchange Commission is extending the deadline for governments to admit wrongdoing as part of the commission’s Municipalities Continuing Disclosure Cooperation (MCDC) Initiative. The deadline has been extended to Dec. 1 (it was Sept. 10). The extension is an acknowledgement that many governments are working hard to cull through their records to see if they should file a disclosure with the program. Announced in March, the SEC, through its Enforcement Division, is encouraging “issuers and underwriters of municipal securities to self-report certain violations of the federal securities laws rather than wait for their violations to be detected.” In exchange, the SEC is promising favorable settlement terms. “These adjustments to the program are designed to encourage as much participation as possible,” said Andrew Ceresney, director of the Enforcement Division.

The commission also said that, in an effort to assuade smaller firms’ fears about participating, it would apply a tiered approach to penalties for underwriters making a disclosure under the initiative. (The deadline for underwriters is still Sept. 10.) The SEC is placing caps on penalties levied on underwriters in any settlement as a result of this program. The penalty for large firms (total annual revenue of more than $100 million) will be capped at $500,000. The penalty for medium firms (total annual revenue between $20 million and $100 million) are capped at $250,000 and for small firms (total annual revenue of less than $20 million) the cap will be $100,000.

An earlier version of this story contained a reference to a Delaware bill clarifying the treasurer's management of the state's cash portfolio.