Dissolving the bond
If love makes the world go ‘round, then a lack of credit can stop it on a dime. Private loans to local and state governments are drying up faster than the tax revenues that would be used to repay them, and at least two state governments, California and Massachusetts, are standing at the doorstep of the U.S. Treasury in case they can’t secure loans elsewhere to keep operating.
Looming in the background of the current credit crisis is another financial problem that, if not addressed, could prove just as detrimental to communities’ ability to raise funds by issuing bonds. A provider of municipal bond disclosure data studied the issuers and firms responsible for repayment and found a significant number of them failed to file annual disclosures, and a growing number filed them late. Ft. Lee, N.J.-based DPC Data, one of four such Securities and Exchange Commission-designated organizations, reviewed disclosure practices of more than 35,000 bonds issued between 1995 and 2005 that were subject to secondary market disclosure practices. It found that investors (most of whom are individuals) who hold the $2.6 trillion in outstanding municipal bond debt often do not have access to current information on changes that might be of concern, for example a possible credit rating agency downgrade.
The study said that 76 percent of the delinquencies for one or more years were found in a handful of areas, including primary and secondary education, various government purposes, multi-family housing, single family housing, higher education, water and sewer, economic development and wastewater. However, areas traditionally considered more risky, like single and multi-family housing, student loans and nursing homes, had a much higher percentage of non-compliance, considering that fewer of those bonds were issued. The study noted that the problem was found in all categories, including issue size, market sectors and geographic regions.
The fact that the disclosures are voluntary is perverse and unique in a financial world where secondary market disclosure is otherwise an obligation. “At a minimum, it is a breach of the fundamental principles of investor protection, suggesting hidden problems or potential fraud,” said Peter Schmitt, chief executive of DPC Data and the study’s author. He says about 54,000 municipal issuers have outstanding debt, and a little more than half of those issue debt about every two years.
Municipal bonds are frequently traded, and the people who trust their safety deserve more transparency from those who issue and repay them. An even more serious consequence of a cavalier attitude toward the buyer is the possibility of a loss of credibility in a wildly unstable financial world.
Today, considering the nervousness of investors, it will only take a few instances of local governments defaulting on their bonds to destabilize one of the remaining safe havens for money. Or, as banks and other lenders have discovered lately, just because you got away with it for years, doesn’t mean you won’t ultimately pay the price.