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Muni bond primer for researchers

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Muni bond primer for researchers

  1. 1. WELCOME
  2. 2. PHILLY POWER RESEARCH Conducting research to support activism, organizing, and progressive political candidates. We work closely with Little Sis and 215 People’s Alliance. littlesis.org 215pa.com
  3. 3. Municipal debt has dramatically increased over time Outstanding municipal bonds in billions From under $500 Billion in 1980 to nearly $4 Trillion in recent years!
  4. 4. Why has municipal debt dramatically increased? What happens when…. You have less money coming in But you have bills that you have to pay? You borrow.
  5. 5. Why do our cities have less money?
  6. 6. So, the same people... Force us to cut and borrow by not paying taxes… …Then make profit when we borrow from them… …Then tell us we have to “live within our means” and cut even more!
  7. 7. Toxic swaps
  8. 8. Debt crisis in Puerto Rico
  9. 9. “Police Brutality Bonds”
  10. 10. OBJECTIVE To learn how to use the Electronic Municipal Market Access database to find financial information for research to support activism and organizing, and to learn how to interpret that information.
  11. 11. AGENDA • We’re going to talk about municipal debt — what it is and how it’s funded. • You’ll learn how to navigate the EMMA database, and how to find and read two types of documents: offering statements and financial reports. • We’re going to learn about revenues (income), expenses, and debt repayment (amortization). • To practice our new skills, teams will compete to find information to win a sense of accomplishment.
  12. 12. WHAT IS A BOND? • A debt security, or investment vehicle, sold to investors to raise funds. • An investor, who is like a lender, buys the bond. The seller, or issuer, gets cash up front, and repays the loan over time with interest.
  13. 13. Bonds used to be issued on paper but now they are electronic. They can be purchased via private sale, or on a public market. Often one or more banks negotiate to buy an entire bond issue. They are called underwriters. Then they can sell pieces of the bond, called tranches, to individual investors. They can make a profit on the
  14. 14. HOW BONDS ARE MADE - HIGHLY, HIGHLY SIMPLIFIED• The government develops a plan, such as a capital plan for infrastructure improvement. • The governmental unit decides to issue the debt. Sometimes council decides. Sometimes voters decide. Sometimes, it’s a complete mystery who decides. • Lawyers and financial advisors negotiate with banks for underwriting. • They draft the documents. • The transaction closes once the legalities are confirmed, and the city receives the bond proceeds.For more detail: https://www.slideshare.net/AmsaleBumbaugh/e-interactivestepstoamunicipalbond
  15. 15. ANATOMY OF A BOND • Principal, interest, and costs of issuance. WHO PAYS? LIFE CYCLE OF A BOND • Once the bond is sold, the city receives the money. The terms dictate how long it takes to pay back over time. Once it’s paid off, it’s gone. • Sometimes, a city can refinance a bond, either for a better interest rate, or if payments are too high.
  16. 16. HELLO, AVERAGE PHILLY TAXPAYER Estimated population: 1.6 million Median household income: $36,770 Mean per capita income: $23,696 Poverty rate: 25.9% https://www.census.gov/quickfacts/fact/table/philadelphiacitypennsylvania/PST045 216 *
  17. 17. HOW MUCH DO YOU OWE? • Total city general obligation debt was $5.312 billion in FY17, and school district debt was $4.612 billion. • Divided by 1.6 million residents (for simplicity’s sake, we are not including businesses that pay taxes or other revenue generators) • Every resident is liable for roughly $6,203 in debt • But the city’s debt story is much bigger and more complicated than that…
  18. 18. WHAT DO YOU MEAN, I OWE? • Anywhere you live, there are government units that can issue debt on your behalf. • Those units range from the federal government to states, counties, utility districts, cities, and school districts. • Philadelphia issues bonds for the city, school district, airport, gas works, and water department.
  19. 19. • Bonds are issued for the public good, to build and maintain infrastructure such as school buildings, highways, transportation facilities, and public works such as water treatment plants. • There are gray areas where municipalities issue debt for private enterprises such as hospitals, nursing homes, and charter schools.
  20. 20. • Then you get deals such as stadiums and private development, which clearly benefit private enterprises but are touted as economic boosts for the area. • Why fund public works with debt rather than saving money for them? Infrastructure could fall into disrepair faster than the time it takes to raise the money by saving. With debt, the people who use the bridge or road are the ones who pay for it.
  21. 21. ARE YOU SAYING PEOPLE WHO RECEIVE TAX ABATEMENTS GET TO ENJOY SERVICES AND INFRASTRUCTURE EVEN THOUGH THEY DON’T PAY FOR THEM?
  22. 22. TYPES OF DEBT • General obligation = full faith and credit of the taxing authority • Revenue/lease = paid only by revenues from the designated enterprise Instruments can include bonds or short-term notes. For example, every year Philadelphia issues tax anticipation notes, which is a short-term loan that covers expenses prior to tax revenue receipts. The city pays costs of issuance and interest on these notes.
  23. 23. HOW DEBT IS FUNDED • General obligation (GO) bonds are funded with the city’s general fund revenues, including property, wage, business, and sin taxes; leases; fees; interest; and state and federal aid. • Revenues bonds are funded from the proceeds of the enterprise they funded. Examples include water rates, airport profits, ticket sales, hospital profits.
  24. 24. A SAMPLE OF INSTRUMENTALITIES HOLDING DEBT• City of Philadelphia • School District of Philadelphia • Pennsylvania Intergovernmental Cooperation Authority (PICA) • Philadelphia Municipal Authority (PMA) • Philadelphia Authority for Industrial Development (PAID) • Philadelphia Gas Works (PGW)
  25. 25. DEBT ISN’T FREE • Borrowing money costs money - interest and fees. • The people who loan the money, investors, receive the interest. Underwriters are institutions who purchase the bonds in bulk and sell them to individual investors. On top of earning interest, they make money in their markup, or spread, and frequently get discounts on the bond price. • The financial professionals and lawyers who put the deals together get fees.
  26. 26. IS EVERYONE OK SO FAR?Questions?
  27. 27. DISCLOSUR ES The entity selling the debt is called the “issuer.” Issuers are legally required to disclose a lot of information to potential investors. The contract laying out terms of a debt deal and disclosing important financial information is the “offering statement.” After selling debt, the issuer is required to supply investors with periodic updates. issue amount type of debt underwriter(s)
  28. 28. LET’S GO TO EMMA city of philadelphia
  29. 29. OFFERING STATEMENTS
  30. 30. CONTINUING DISCLOSURE
  31. 31. PHILADELPHIA SCHOOL DISTRICT
  32. 32. QUIZ
  33. 33. In FY17, how much did the city spend on prisons? $387,647,000
  34. 34. Did the city spend more, less, or the same amount of money on prisons in FY17 as FY16? More: the city spent $381.6 million on prisons in FY16.
  35. 35. How much tax revenue was lost in FY17 due to its rehabilitation and new construction tax abatement for commercial properties? $22,452,636
  36. 36. How much tax revenue was lost in FY17 due to its tax abatement for new residential construction? $14,439,754
  37. 37. How much property tax revenue did Philadelphia realize in FY17? $578.7 million
  38. 38. How much property tax revenue did the school district realize in FY17? $703.9 million
  39. 39. How much total governmental activities revenue did the school district realize in FY17? $3.24 billion
  40. 40. How much money did the school district spend in FY17 for governmental activities? $3.08 billion
  41. 41. How much revenue did the school district lose out on due to commercial property tax abatements in FY17? $27.3 million
  42. 42. How much revenue did the school district lose out on due to property tax abatements for residential new construction in FY17? $17.6 million
  43. 43. How much total general obligation bond debt does the school district have, including principal and interest? $4,612,211,000
  44. 44. How much debt service will the city pay on general fund-supported debt in FY18? $392.80 million
  45. 45. HOW TO CREATE ALERTS ON EMMA

Editor's Notes

  • Corporate profits (esp in the financial sector) are up, paying less taxes, 0.01% not paying their fair share
    We’ve seen what this means--cuts and disinvestment in education, housing, healthcare programs, transit
  • Last year to service its debt, the School District paid commercial banks 9% of its
    budget, a staggering $272 million.This cost is excessively high because rating
    agencies downgrade the District’s credit rating due, in large part, to stereotypes
    about urban districts. A public bank chartered by the city would rate the School
    District without that bias. Coupled with its lack of interest in making superprofits,
    the bank could save the District tens of millions of dollars annually in
    debt service. Indeed, the Bank of North Dakota charges its government
    borrowers at a 2% interest rate, drastically lower than Wall Street.
  • Ask audience who has debt?
    Then ask to name types of debt.
  • Note: If you wanted to, you could buy municipal bonds through a brokerage, such as your 401(k) or IRA.
  • Note: swaps are complicated debt instruments that we are not going to get into here, but they are debt instruments that a government can purchase from a bank that swaps a floating interest rate for a fixed one. Many governments that entered into swaps before the financial crisis found themselves losing money in the low interest market after the recession. These contracts can be costly to get out of.
  • Go to: https://emma.msrb.org/Home/Index
  • 2017 GO: https://emma.msrb.org/ES1040722-ES809931-ES1211330.pdf

    Note the city officials.

    Example: top ten taxpayers - scroll to page A30
    Example: debt outstanding - CTRL+F debt outstanding, page 28
  • Return to https://emma.msrb.org/IssueView/IssueDetails.aspx?id=EP378062

    Governmental vs. business
    Statement of net position page 20
    Operating results page 23

    Go to continuing disclosure, CAFR; page 37 begins general fund financials

    Difference between governmental activities and general fund — general fund is the city’s operating fund/checking account; grants, for instance, will be in a different fund, but they are still “governmental activities.” Page 199 has a list of other governmental funds, such as streets, debt service, capital improvements, behavioral health, economic development, etc.
  • Note: page 35 total program; page 37 would be governmental funds; difference is likely business-type activities
  • Note: page 35 total program; page 37 would be governmental funds; difference is likely business-type activities
  • Page 98 has the tax abatement program disclosures.
  • Page 68
  • Page 68
  • Page 71
  • Page 12 of 2017 GO OS
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