Rocky Mountain Economic Summit Natalie Cohen Head of Municipal Research natalie.cohen@wellsfargo.com 212-214-8014
July 11, 2014 Please see the disclosure appendix of this publication for certification and disclosure information
Current Themes in the Municipal Securities Market
Supply/demand factors continue to trump credit.
Investor hat switch from H2 2013 to H1 2014: from the expectation of higher rates – to persistent low rates; add reinvestment proceeds, global inflows, the search for yield and spreads compressed.
State/local revenues are improved; some positions that were cut are being added back, particularly at the local school level. But consider: The “pull forward” of earnings and income at the end of 2012 in advance of higher tax rates in 2013; as a result, Q1 2014 revenues are down 7% from Q1 2013 according to Rockefeller Institute. High income tax and capital gains states did well in 2013 – such as California These events are driven by tax policy – and require careful budget forecasting – some places had YoY gains but budget deficits -- such as New Jersey and even Puerto Rico
We may gain some clarity on treatment of bonds in bankruptcy in H2 – Particularly important is the treatment of retiree benefits vs. debt repayment.
Ratings volatility likely to continue – frequently due to criteria changes and not credit
Other headwinds: Public pension underfunding crowding out other services in some places – a key reason for low volume for infrastructure despite low rates We see the $1 trillion student loan debt dampening first-time homebuyer demand Pre-election year politics create policy uncertainty and make planning difficult – e.g. Highway Trust Fund re-authorization
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The Shape of Municipal Bond Volume 2001-2008 Resembles the Housing Boom and was Propelled by Low Rates • Volume jump in 2012 was largely due to an increase in refundings and mirrors 10-years ago (10-year call) • Going forward: volume is likely to return to pre-2001 levels • Volume would have been lower in 2009-2010 if not for the Build America Bond program New Issue Volume (1980-2014) and the Percentage of Bond Insurance $500
60% New Issue Bond Volume Refunding Bond Volume
$400 $350
40%
Percentage
$300 30%
$250 $200
20%
Dollars (in Billions)
50%
$450
$150 $100
10%
$50 0%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
$0
Year As of June 30, 2014 Source: Bond Buyer, Assured Guaranty, Thomson Reuters and Wells Fargo Securities, LLC
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Issuance in 2014 is down; “new issue� volume is identical to H1 2013; the difference is the drop in refunding activity
Long Term Bond Volume, 2011-2014
Month
Amount
June
$ 39,555
July
35,219
August
38,713
September
17,242
Source: As of 6/15/14; Bloomberg, Wells Fargo Securities, LLC
$50 $45
2011 2012 2013
$40
2014
$35
Dollars (in Billions)
Maturities, JuneSeptember, 2014 ($millions)
$30 $25
$20 $15
$10 $5 $0
Month As of June 30, 2014 Source: Bond Buyer and Wells Fargo Securities, LLC
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Fund Flows – It’s All Relative
• April 2011 U.S. rating on negative watch S&P; August downgrade = Treasury rally/equity sell-off • Fiscal Cliff drama in December 2012 – once resolved the equity markets took off
$50,000
Monthly Net New Mutual Fund Cash Flows by Broad Asset Class (January, 2010 - Present)
$40,000 $30,000
Dollars (in millions)
$20,000 $10,000 $0 ($10,000) US rating on watch for downgrade ; debt ceiling debate
($20,000) ($30,000)
Equity Taxable Bond Tax-exempt Bond
($40,000)
Fiscal Cliff debate and resolution “Taper Tantrum” followed by tightening
($50,000)
Through 5/31/14; May values are based on weekly estimates. Source: Investment Company Institute and Wells Fargo Securities, LLC
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Fund Flows, Fixed Income Only Monthly Net New Cash Flows by Select Fixed Income Class (January, 2013 - Present) $25,000 Tax-exempt Bond $20,000
Investment Grade Bond High Yield Bond
$15,000
Govt Bond World Bond
Dollars (in millions)
$10,000 $5,000 $0 ($5,000) ($10,000) ($15,000) ($20,000) ($25,000) ($30,000)
As of April, 2014 Source: Investment Company Institute and Wells Fargo Securities, LLC
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Global Market Influences, continued In 2013, note mid-year shift in municipal holdings from sell-off to increase – opposite the flow in U.S. preand post “taper tantrum” US Long Term Securities Held by Foreign Residents
Millions of dollars Date
11-Dec
Total
$
Treasury
Agency
Corporate Debt*
$
2,567,266
Equity
$
3,841,901
Municipal Debt*
11,861,747
$ 4,356,681
$ 1,046,310
12-Jan
12,176,623
4,449,925
1,034,692
2,582,362
4,048,988
$
49,589 60,656
12-Feb
12,459,556
4,470,555
1,057,924
2,635,977
4,232,863
62,237
12-Mar
12,591,085
4,510,887
1,046,544
2,612,512
4,355,167
65,975
12-Apr
12,580,150
4,594,212
1,016,647
2,585,582
4,319,192
64,517
12-May
12,337,866
4,635,590
1,013,230
2,561,184
4,061,913
65,949
12-Jun
12,556,061
4,680,774
1,001,461
2,547,386
4,261,853
64,587
12-Jul
12,603,754
4,760,456
995,529
2,562,344
4,217,611
67,814
12-Aug
12,794,650
4,788,103
1,000,765
2,611,841
4,327,284
66,657
12-Sep
12,988,063
4,793,665
1,014,427
2,639,003
4,473,987
66,981
12-Oct
13,000,466
4,854,545
1,001,445
2,666,375
4,414,839
63,262
12-Nov
13,092,218
4,861,617
997,488
2,681,004
4,488,645
63,464
12-Dec
13,218,220
4,909,828
979,363
2,698,924
4,567,524
62,581
13-Jan
13,454,571
4,947,523
950,494
2,708,359
4,786,098
62,097
13-Feb
13,537,051
5,000,614
929,262
2,708,596
4,836,918
61,661
13-Mar
13,732,531
5,001,076
935,588
2,718,730
5,015,813
61,324
13-Apr
13,903,736
5,003,227
941,108
2,774,661
5,121,904
62,836
13-May
13,945,624
4,990,606
910,993
2,753,814
5,229,893
60,318
13-Jun
13,672,483
4,920,352
880,889
2,686,413
5,128,262
56,567
13-Jul
13,949,907
4,939,525
899,710
2,732,788
5,322,031
55,853
13-Aug
13,825,635
4,925,215
893,318
2,726,295
5,223,624
57,183
13-Sep
14,174,450
5,008,572
901,354
2,777,690
5,428,489
58,345
13-Oct
14,433,037
5,025,345
905,094
2,814,961
5,627,650
59,987
13-Nov
14,601,111
5,065,587
893,271
2,823,483
5,759,760
59,010
13-Dec
14,715,533
5,107,068
858,532
2,821,261
5,871,949
56,723
14-Jan
14,639,261
5,165,033
859,874
2,833,527
5,722,459
58,368
14-Feb
15,042,821
5,211,019
859,432
2,887,616
6,025,668
59,086
14-Mar
15,102,528
5,260,617
835,338
2,903,104
6,043,112
60,357
%∆ Dec 11-Mar 14
27.32%
20.75%
-20.16%
13.08%
57.29%
21.71%
%∆ July 12-July 13
10.68%
3.76%
-9.62%
6.65%
26.19%
-17.64%
%∆ Aug 13-Mar 14
9.24%
6.81%
-6.49%
6.49%
15.69%
5.55%
* Normally Municipal Debt is grouped within C orporate Debt; for the purpose of this table, that component is separated out. Source: US Department of the Treasury and Wells Fargo Securities, LLC
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Market EKG: Traditional Relationships Changed Dramatically After 2008-2009 AAA GO Municipal-Treasury Ratios (2003 - Present)
350% 2005-2007 2008-Present 201 4 Y TD
300%
Av erage Muni-T reasury Ratios 1 Y ear 1 0 Y ear 7 4% 83% 1 31 % 97 % 1 59% 90%
30 Y ear 92% 1 07 % 1 02%
Ratio
250%
200%
150%
100%
50%
Muni-Treasury Ratio, 1 Year Muni-Treasury Ratio, 10 Year Muni-Treasury Ratio, 30 Year
0%
05
06
07
08
As of June 6, 2014 Source: Thomson Reuters and Wells Fargo Securities, LLC
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10
11
12
13
14
Date
7
A Proxy for Retail Supply/Demand: IShares MUB—9/10/07-07/07/2014 ($3.29 billion market cap) •Note the sell-off beginning November 2010 through mid-January 2011 also note increased trading volume •Investors that bought on the sell-off saw double-digit returns in 2011 •Note sell-off following the “taper” discussion
Positive gains through 2011
Q4 Sell-off
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Quick Employment Snapshot: A Visual on the Lag in State/Local Government Some Previous Cuts are Being Restored
Period 2007 2008 2009 2010 2011 2012 2013 2014* ∆2007-2009 ∆2009-2014 ∆2013-2014
June 2007 - June 2014, seasonally adjusted June Employment Total Nonfarm Private Total Govt Total Federal 138,017 115,810 22,207 2,729 137,631 115,114 22,517 2,759 130,944 108,368 22,576 2,815 130,457 107,696 22,760 3,194 131,836 109,680 22,156 2,859 133,951 112,028 21,923 2,824 136,285 114,433 21,852 2,768 138,780 116,872 21,908 2,713 -5.12% 5.98% 1.83%
-6.43% 7.85% 2.13%
1.66% -2.96% 0.26%
3.15% -3.62% -1.99%
State 5,131 5,179 5,176 5,139 5,079 5,056 5,034 5,065 0.88% -2.14% 0.62%
Local 14,347 14,579 14,586 14,428 14,219 14,043 14,051 14,130 1.67% -3.13% 0.56%
* preliminary Source: US Department of Labor, Bureau of Labor Statistics and Wells Fargo Securities, LLC
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Public Pensions: First, A Lay of the Land In 1981 the ratio of active members/retirees was 2.8. In 2012 it was 1.6. State and Local Public-Employee Retirement Systems and Membership Fiscal Year 2012 Mem bership State and type of governm ent
Num ber of system s Total
Active m em bers
Inactive m em bers
Total beneficiaries receiving periodic benefit paym ents
Ratio of Active m em bers to beneficiaries
Mainland United States 3,998 19,587,970 14,374,391 5,213,579 9,012,347 1.6 State (including agent and cost share plans managed by state on behalf of local government) 227 17,544,912 12,643,450 4,901,462 7,622,748 1.7 Local 3,771 2,043,058 1,730,941 312,117 1,389,599 1.2 County 174 561,808 473,523 88,285 320,720 1.5 Municipality 2,534 1,217,193 1,031,784 185,409 901,367 1.1 Township 710 44,419 37,437 6,982 26,092 1.4 Special district 334 146,411 128,889 14,522 94,801 1.4 School district 19 73,227 59,308 13,919 46,619 1.3 Puerto Rico Employee Retirement System 1 252,427 134,566 117,861 1.1 Teachers Retirement System 1 79,950 42,707 738 36,505 1.2 Source: Census.gov: United States membership is as of Fiscal Year 2012; Puerto Rico figures are as of June 2012 audit of the General Retirement System and Teachers Retirement System; Deloitte. Note: this does not include the three other Puerto Rico pension plans: the Judiciary Retirement System; the Puerto Rico Electric power Authority Retirement System; the University of Puerto Retirement System. Wells Fargo Securities, LLC
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Public Pensions: Key Elements to Look For States Paying 100% or More of the Annual Required Contribution, 2012
States Paying Less than 80% of the Annual Required Contribution, 2012
Funded What assumptions are they Ratio Alabama 70 making about amortizing 53 unfunded liabilities? What kind of Connecticut Georgia 85 cost of living adjustments do they Maine 70 grant? What discount rate is Mississippi 64 New York 94 used? North Carolina 96 How objective is governance? Oklahoma 56 (i.e. are plan sponsors valuing Rhode Island 49 South Carolina 66 assets themselves? Are they South Dakota 66 granting special bonuses?) Tennessee 96 Are mortality tables up-to-date? Utah 82 West Virginia 58 Wisconsin 100 Source: Pew Charitable Trusts
Funded Ratio California 77 Florida 82 Illinois 40 Kansas 56 Kentucky 47 Montana 64 New Jersey 64 North Dakota 63 Ohio 67 Oregon 91 Pennsylvania 64 Texas 82 Virginia 65 Washington 95 Source: Pew Charitable Trusts
Are they paying in? Are they meeting target returns on assets?
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Public Pensions: The Importance of Earnings Revenues of Total Government Employee Retirement Systems, 1993-2012 100% 80% 60%
Revenue Share
40% 20% 0% Government Contributions
-20%
Employee Contributions Earnings on Investments
-40% -60% Total Revenues ($ billions) Earnings as % of Total Assets
-80% -100%
1993
1994
1995
1996
1997
1998
$125.9 8.9%
$133.3 7.9%
$148.8 8.0%
$190.5 10.2%
$227 $261.3 10.9% 11.5%
1999
2000
2001
$263.2 10.4%
$297 10.7%
$123.2 2.7%
2002
2003
2004
2005
2006
2007
($7.5) (3.5%)
$147.7 $407.3 $354.3 $392.8 $578.8 3.3% 12.6% 9.8% 10.2% 14.3%
2008
2009
2010
2011
2012
$44.9 ($490.7) $471.6 $616.1 $239.5 (2.4%) (25.7%) 12.9% 15.8% 3.1%
Source: US Census and Wells Fargo Securities, LLC
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Public Pensions: The Importance of Earnings Quarterly Market Value Change in 100 Largest State and Local Government Pension Plan Assets (2006 - 2014, 1st Quarter) 10.0% 2006
2012 2011 2010
2007
5.0%
2013 2014
0.0%
-5.0%
2008 2009
-10.0%
-15.0% Year Based on data as of June 24, 2014 Note: 100 largest plans from 2009 to present. Source: US Census Bureau and Wells Fargo Securities, LLC
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Public Pensions: A Few Examples Illinois Teachers' Retirement System Dollars in Millions
Year 2013 2012 2011 2010 2009 2008 2007
Actual Contribution $ 2,858 $ 2,559 $ 2,324 $ 2,250 $ 1,602 $ 1,170 $ 817
Annual Required Contribution $ 3,582 $ 3,430 $ 2,743 $ 2,482 $ 2,109 $ 1,949 $ 2,052
Percent Contributed 80% 75% 85% 91% 76% 60% 40%
Actuarial Value of Plan Assets $ 38,155 $ 37,945 $ 37,770 $ 37,439 $ 38,026 $ 38,431 $ 41,909
$ $ $ $ $ $ $
Actuarial Accrued Liability 93,887 90,025 81,300 77,293 73,027 68,632 65,648
Unfunded Actuarial Accrued Liability $ 55,732 $ 52,080 $ 43,530 $ 39,854 $ 35,001 $ 30,202 $ 23,739
Funded Ratio 41% 42% 46% 48% 52% 56% 64%
Unfunded Actuarial Accrued Liability $ 20,111 $ 19,220 $ 17,569 $ 16,154 $ 12,034 $ 10,331 $ 7,376
Funded Ratio 41% 42% 44% 46% 54% 59% 68%
Unfunded Actuarial Accrued Liability $ 22,843 $ 21,614 $ 20,235 $ 18,348 $ 14,298 $ 12,846 $ 10,202
Funded Ratio 34% 35% 36% 37% 43% 46% 54%
Source: Teachers' Retirement System of the State of Illinois and Wells Fargo Securities, LLC
Illinois State Universities Retirement System Dollars in Millions
Year 2013 2012 2011 2010 2009 2008 2007
Actual Contribution $ 1,402 $ 986 $ 774 $ 697 $ 452 $ 345 $ 261
Annual Required Contribution $ 1,794 $ 1,702 $ 1,519 $ 1,278 $ 1,147 $ 972 $ 968
Percent Contributed 78% 58% 51% 54% 39% 36% 27%
Actuarial Value of Plan Assets $ 14,263 $ 13,950 $ 13,946 $ 13,967 $ 14,282 $ 14,586 $ 15,986
$ $ $ $ $ $ $
Actuarial Accrued Liability 34,373 33,170 31,514 30,120 26,316 24,918 23,362
Source: Teachers' Retirement System of the State of Illinois and Wells Fargo Securities, LLC
Illinois State Employees' Retirement System Dollars in Millions
Year 2013 2012 2011 2010 2009 2008 2007
Actual Contribution $ 1,530 $ 1,396 $ 1,125 $ 1,093 $ 805 $ 588 $ 358
Annual Required Contribution $ 1,741 $ 1,615 $ 1,289 $ 1,177 $ 1,003 $ 986 $ 824
Percent Contributed 88% 86% 87% 93% 80% 60% 43%
Actuarial Value of Plan Assets $ 11,877 $ 11,477 $ 11,160 $ 10,962 $ 11,000 $ 10,995 $ 12,079
$ $ $ $ $ $ $
Actuarial Accrued Liability 34,721 33,091 31,395 29,309 25,298 23,841 22,281
Source: State Employees' Retirement System of Illinois and Wells Fargo Securities, LLC
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Public Pensions, Continued Puerto Rico Employees' Retirement System ($000s)
Year
Annual Actuarial Unfunded Actual Percent Actuarial Value Accrued Funded Required Actuarial Contribution Contribution Contributed of Plan Assets Liability Accrued Liability Ratio 2012 $ 589,743 $ 2,019,467 29% $ 1,237,532 $ 27,645,786 $ 26,408,254 5% 2011 $ 701,709 $ 1,734,979 40% $ 1,723,811 $ 25,457,354 $ 23,733,543 7% 2010 $ 534,275 $ 1,459,774 37% $ 1,664,991 $ 17,501,761 $ 17,836,770 9% 2009 $ 594,509 $ 1,258,695 47% $ 1,842,143 $ 18,943,586 $ 17,101,443 11% 2008 $ 581,285 $ 1,191,275 49% $ 2,607,086 ND ND NA 2007 $ 566,524 $ 816,472 69% $ 2,891,501 $ 16,769,512 $ 13,878,011 21% Source: Deloitte 2012 audit of Employee's Retirement System and Milliman actuarial report for 2007 Puerto Rico Teachers' Retirement System ($000s)
Year 2012 2011 2010 2009 2008 2007
Annual Actuarial Unfunded Actual Percent Actuarial Value Accrued Funded Required Actuarial Contribution Contribution Contributed of Plan Assets Liability Accrued Liability Ratio $ 174,571 $ 659,334 26% $ 2,099,000 $ 12,350,836 $ 10,251,836 20% $ 161,528 $ 528,170 31% $ 2,386,000 $ 11,448,609 $ 9,062,746 26% $ 166,384 $ 477,213 35% $ 2,222,000 $ 9,280,000 $ 7,058,000 31% $ 172,841 $ 393,871 44% $ 2,158,000 $ 8,722,000 $ 6,564,000 33% $ 159,101 $ 341,495 47% ND ND ND NA $ 147,597 $ 341,160 43% $ 3,163,000 $ 7,756,000 $ 4,593,000 69% Source: Deloitte 2012 audit of Employee's Retirement System
California State Teachers' Retirement System- Defined Benefit Program Dollars in Millions
Year 2013 2012 2011 2010 2009 2008 2007
Actual Contribution $ 2,925 $ 2,855 $ 2,796 $ 2,693 $ 2,867 $ 2,864 $ 2,649
Annual Required Contribution $ 6,629 $ 6,230 $ 5,985 $ 4,924 $ 4,547 $ 4,362 $ 3,980
Percent Contributed 44% 46% 47% 55% 63% 66% 67%
Actuarial Accrued Liability
Actuarial Value of Plan Assets $ $ $ $ $ $
144,232 142,930 140,291 145,142 155,215 148,427
$ $ $ $ $ $
214,765 207,770 196,315 185,683 177,734 167,129
Unfunded Actuarial Accrued Liability $ $ $ $ $ $
70,533 64,840 56,024 40,541 22,519 18,702
Funded Ratio 67% 69% 71% 78% 87% 89%
Note: ARC for given year may be based on earlier valuation period. For example, 2013 ARC is based on June 30, 2012 actuarial valuation. ARC s for 2008, 2010 and 2012 are based on valuations at years 2006, 2008 and 2010, respectively. Source: C alifornia State Teachers' Retirement System and Wells Fargo Securities, LLC
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And Some Plans that Maintain Funding Discipline North Carolina Teachers' and State Employees' Retirement System Dollars in Millions
Year 2013 2012 2011 2010 2009 2008 2007
Actual Contribution $ 1,095 $ 988 $ 659 $ 483 $ 472 $ 403 $ 332
Annual Required Contribution $ 1,053 $ 988 $ 903 $ 483 $ 472 $ 407 $ 332
Percent Contributed 104% 100% 73% 100% 100% 99% 100%
Actuarial Accrued Liability
Actuarial Value of Plan Assets $ $ $ $ $ $
59,912 58,125 57,102 55,818 55,128 55,283
$ $ $ $ $ $
63,630 61,847 59,876 58,178 55,519 52,815
Unfunded Actuarial Accrued Liability $ $ $ $ $ $
3,718 3,722 2,774 2,360 391 (2,468)
Funded Ratio 94% 94% 95% 96% 99% 105%
Source: North C arolina and Wells Fargo Securities, LLC
Wisconsin Retirement System Dollars in Millions
Year 2013 2012 2011 2010 2009 2008 2007
Actual Contribution
Annual Required Contribution
$ $ $ $ $ $
$ $ $ $ $ $
826 781 742 697 677 645
826 781 687 646 645 614
Actuarial Accrued Liability
Percent Actuarial Value Contributed of Plan Assets 100% 100% 108% 108% 105% 105%
$ $ $ $ $ $
78,613 78,940 80,627 78,911 77,159 79,792
$ $ $ $ $ $
78,683 79,039 80,759 79,105 77,412 80,080
Unfunded Actuarial Accrued Liability $ $ $ $ $ $
70 99 132 193 253 288
Funded Ratio 100% 100% 100% 100% 100% 100%
Source: Wisconsin Department of Employee Trust Funds and Wells Fargo Securities, LLC
Maine Public Employees Retirement System- Defined Benefit Plan Dollars in Millions
Year 2013 2012 2011 2010 2009 2008 2007
Actual Contribution $ 292 $ 275 $ 352 $ 342 $ 332 $ 318 $ 314
Annual Required Contribution $ 292 $ 275 $ 346 $ 330 $ 332 $ 318 $ 314
Percent Contributed 100% 100% 102% 103% 100% 100% 100%
Actuarial Value of Plan Assets $ 11,452 $ 11,076 $ 10,915 $ 10,415 $ 10,467 $ 10,893 $ 10,437
$ $ $ $ $ $ $
Actuarial Accrued Liability 14,394 14,012 13,603 14,799 14,410 13,675 13,089
Unfunded Actuarial Accrued Liability $ 2,942 $ 2,935 $ 2,688 $ 4,384 $ 3,943 $ 2,782 $ 2,652
Funded Ratio 80% 79% 80% 70% 73% 80% 80%
Source: Maine Public Employees Retirement System and Wells Fargo Securities, LLC
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Which States Authorize Chapter 9 Filings? (We draw from the Bond Dealers Association “Final BDA Bankruptcy White Paper” published after the Detroit filing and prepared by Nixon Peabody, although there are many summaries available on the Internet) There are four basic approaches to authorization: Specific Prohibition: Georgia No Specific Authorization: Alaska, Delaware, Hawaii, Indiana, Kansas, Maine, Maryland, Massachusetts, Mississippi, Nevada, New Hampshire, New Mexico, North Dakota, South Dakota, Tennessee, Utah, Vermont, Virginia, West Virginia, Wisconsin and Wyoming, along with the District of Columbia. Specific Authorization: Care should be taken here to examine the statute since some states provide authorization for only certain types of municipal entities while others are excluded. For example, the Arizona, Colorado, Idaho, Kentucky and Washington statutes authorize “taxing districts,” Montana excludes counties, New York only authorizes its counties, cities, towns and villages, and Oregon authorizes only its irrigation or drainage districts. Conditional Authorization: Some states impose specific conditions for filing. Each state differs in approach so we suggest review of the specifics. For example, Connecticut and Illinois, New Jersey, North Carolina and Ohio require the consent of a state official before a Chapter 9 filing is authorized. Other states, like Michigan, Pennsylvania and Rhode Island, impose a rigorous state oversight process. The process may include appointment of a receiver and the approval of the receiver or other state official may be required before a filing is authorized. In Michigan, Public Act 436 allowed the governor to appoint Kevyn D. Orr as Detroit’s Emergency Manager to take over control of the City. Similarly, Rhode Island’s authorizing statute required the town of Central Falls to have a receiver to assume responsibility for the town’s financial dealings before a filing. Still other states, like California, require that the municipality engage in a 60-day meditation process (or certify that an emergency exists that does not allow time for mediation) before a Chapter 9 filing is authorized. Conditional authorization may make the beginning of the Chapter 9 process litigious—with various parties arguing over the eligibility standards in state as well as federal law. For example, the City of Stockton engaged in the mediation process, was not successful and a Chapter 9 filing occurred. Creditors objected to the Chapter 9 filing asserting that the city had not negotiated in good faith, because it had refused to negotiate with CalPERS, one of its largest creditors. The city responded by saying that it had negotiated in good faith. At the heart of this dispute is a set of California state laws that the city and CalPERS assert protect CalPERS from municipal bankruptcies. Bondholders have contested that assertion. Without resolving the dispute, the bankruptcy court found that the city was eligible for Chapter 9 relief stating that “[n]egotiation is by definition a two-way street. You cannot negotiate with a stone wall.”
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Disclosures Additional information is available on request. This report was prepared by Wells Fargo Securities, LLC. About Wells Fargo Securities, LLC Wells Fargo Securities, LLC is a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the New York Stock Exchange, the Financial Industry Regulatory Authority and the Securities Investor Protection Corp. Wells Fargo Bank, N.A. and Wells Fargo Securities, LLC are each registered with the U.S. Securities and Exchange Commission and the Municipal Securities Rulemaking Board as municipal securities dealers. Important Information for Non-U.S. Recipients EEA The securities and related financial instruments described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. For certain non-U.S. institutional reader (including readers in the EEA), this report is distributed by Wells Fargo Securities International Limited (“WFSIL”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (“the Act”), the content of this report has been approved by WFSIL a regulated person under the Act. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. This research is not intended for, and should not be relied upon, by retail clients. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. Australia Wells Fargo Securities, LLC is exempt from the requirements to hold an Australian financial services license in respect of the financial services it provides to wholesale clients in Australia. Wells Fargo Securities, LLC is regulated under U.S. laws which differ from Australian laws. Any offer or documentation provided to Australian recipients by Wells Fargo Securities, LLC in the course of providing the financial services will be prepared in accordance with the laws of the United States and not Australian laws. Hong Kong This report is issued and distributed in Hong Kong by Wells Fargo Securities Asia Limited (“WFSAL”), a Hong Kong incorporated investment firm licensed and regulated by the Securities and Futures Commission to carry on types 1, 4, 6 and 9 regulated activities (as defined in the Securities and Futures Ordinance, “the SFO”). This report is not intended for, and should not be relied on by, any person other than professional investors (as defined in the SFO). Any securities and related financial instruments described herein are not intended for sale, nor will be sold, to any person other than professional investors (as defined in the SFO). Japan This report is distributed in Japan by Wells Fargo Securities (Japan) Co., Ltd, a Japanese financial instruments firm registered with the Kanto Local Finance Bureau, a subordinate regulatory body of the Ministry of Finance in Japan, to conduct broking and dealing of type 1 and type 2 financial instruments and agency or intermediary service for entry into investment advisory or discretionary investment contracts. This report is intended for distribution only to professional customers (Tokutei Toushika) and is not intended for, and should not be relied upon by, ordinary customers (Ippan Toushika). Important Disclosures Relating to Conflicts of Interest and Potential Conflicts of Interest Wells Fargo Bank, N.A., Wells Fargo Securities, LLC and certain of their affiliates are registered municipal securities dealers and may trade the securities named herein on a principal or agency basis, may act as underwriter for one or more of the issuers or securities named herein and may receive compensation for such services or other investment banking services provided to one or more of the issuers named herein. Wells Fargo Securities, LLC Municipal Research analysts interact with the firm’s trading and sales personnel in the ordinary course of business.
Wells Fargo Securities, LLC
Disclosures
Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC research analysts receive compensation that is based on and affected by the overall profitability of their respective department and the firm, which includes, but is not limited to, investment banking revenue. Analyst’s Certification The research analyst(s) principally responsible for the report certifies to the following: all views expressed in this research report accurately reflect the analysts’ personal views about any and all of the subject securities or issuers discussed; and no part of the research analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst(s) in this research report. This report, IDs, and passwords are available at www.wellsfargoresearch.com Securities discussed herein may be rated below investment grade and should therefore only be considered for inclusion in accounts qualified for speculative investment. This report is for your information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments named or described in this report. Interested parties are advised to contact the entity with which they deal, or the entity that provided this report to them, if they desire further information. The information in this report has been obtained or derived from sources believed by Wells Fargo Securities, LLC, to be reliable, but Wells Fargo Securities, LLC does not represent that this information is accurate or complete. Any opinions or estimates contained in this report represent the judgment of Wells Fargo Securities, LLC, at this time, and are subject to change without notice. For the purposes of the U.K. Financial Conduct Authority's rules, this report constitutes impartial investment research. Each of Wells Fargo Securities, LLC, and Wells Fargo Securities International Limited is a separate legal entity and distinct from affiliated banks. Copyright © 2014 Wells Fargo Securities, LLC. SECURITIES: NOT FDIC-INSURED * NOT BANK-GUARANTEED * MAY LOSE VALUE
Wells Fargo Securities, LLC