Issuu

U.S. State & Local Government Debt Markets Global Interdependence Center March 25-27, 2012

Peter Demirali

David R. Kotok

Managing Director & Portfolio Manager

Chairman & Chief Investment Officer

John Mousseau, CFA Managing Director & Portfolio Manager

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

U.S. State & Local Government (Sub-Sovereign) Debt Market • $3.8 Trillion in U.S. Dollars • State and local general obligations, state and local agencies (housing, public utilities, water, education, economic development, others) • Build America Bonds Revisited • Historical Default Rates • Meredith Whitney Whiplash

• State of the States Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

What is a Municipal Bond? • It is a bond issued by a state, state or local agency, or local government (city or town)  2 types of Municipal Bonds

• General Obligation (G.O.)  The bond is secured by the issuer’s full faith, credit, and taxing power

• Revenue Bond  The bond is secured by revenue from tolls, user charges, or rents derived from the facility financed. Examples include turnpikes/toll roads, water and electric authorities, education and dormitory authorities, housing authorities, economic development authorities, port authorities and others.

• Historically, most municipal debt issued is exempt from federal income taxes. Recently, the Build America Bond (BAB) has significantly increased the amount taxable municipal supply and attracted substantial interest internationally.

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

Quarterly Data 3/31/1952 - 12/31/2011

Components of US Government Debt as Percentage of GDP 95 90 85 80 75 70 65 60 55 50 45 40 35

Total Marketable and Nonmarketable Federal Government Debt as % of GDP (

44 40 36 32 28 24 20 16 12 8 4

Government-Sponsored Enterprises (GSE) Debt as % of GDP (

21 20 19 18 17 16 15 14 13 12 11 10 9 8

State and Local Government Debt as % of GDP (

1955

1960

1965

1970

) 12/31/2011=99.36

95 90 85 80 75 70 65 60 55 50 45 40 35

) 12/31/2011=40.69

44 40 36 32 28 24 20 16 12 8 4 21 20 19 18 17 16 15 14 13 12 11 10 9 8

) 12/31/2011=19.63

1975

1980

1985

1990

1995

2000

2005

2010

See NDR Disclaimer at

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

www.ndr.com/copyright.html

. For data vendor disclaimers refer to

www.ndr.com/vendorinfo/

(800) 257-7013

Build America Bonds Federally Subsidized Taxable Municipal Bonds • Build America Bonds (BABs) were created by the America Recovery Reinvestment Act of 2009 (“ARRA” or “Stimulus Act”) in February • Permits state and local governments to sell taxable bonds instead of tax-exempt bonds and receive periodic payments from the US Treasury equal to 35% of the interest on the bonds for the life of the debt • Congress created BABs to broaden the market for municipal debt and to provide a more efficient subsidy than tax exemption

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

Build America Bonds - Continued Federally Subsidized Taxable Municipal Bonds • BABs program expired December 31, 2010 • There were no limits on the amount of debt that may be sold as BABs and no restrictions on their structure or maturity beyond the rules applicable to tax-exempt bonds • From an investor’s perspective, BABs are simply taxable municipal bonds. The Federal interest subsidies are paid directly to the issuers, not to investors, and are generally not material in the analysis of the creditworthiness of BABs.

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

Does Sub-Sovereign = Subprime?

• No! Historically, investment grade municipal bonds have had exceptionally low default rates.

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

Default Rates: Muni vs. Corporates Average Cumulative Default Rates, 1970-2011, Municipal vs. Corporates All Municipals Rating 1 2 3 4 5

Aaa

0.00%

0.01%

0.00%

0.01%

0.02%

0.03%

0.04%

Baa

0.01%

0.04%

0.07%

0.11%

0.14%

0.19%

0.24%

0.28%

0.33%

0.37%

0.28%

0.80%

1.32%

1.83%

2.29%

2.76%

3.26%

3.60%

3.82%

3.92%

3.21%

6.27%

9.18%

12.21%

15.20%

17.12%

18.19%

19.06%

20.15%

21.85%

Caa_C

9.17%

13.01%

15.39%

16.65%

17.58%

18.72%

20.15%

21.97%

23.68%

Investment-Grade

0.00%

0.01%

0.02%

0.03%

0.04%

0.05%

0.06%

0.07%

0.08%

Speculative-Grade

1.33%

2.47%

3.49%

4.45%

5.35%

6.08%

6.71%

7.19%

7.59%

7.94%

All Rated

0.01%

0.03%

0.04%

0.05%

0.07%

0.08%

0.09%

0.10%

0.12%

0.13%

Rating

Aaa

0.00%

0.01%

0.04%

0.10%

0.17%

0.24%

0.31%

0.39%

0.48%

0.02%

0.06%

0.13%

0.24%

0.35%

0.46%

0.57%

0.67%

0.76%

0.86%

0.06%

0.19%

0.39%

0.58%

0.80%

1.04%

1.30%

1.61%

1.93%

2.22%

Baa

0.18%

0.50%

0.91%

1.38%

1.89%

2.42%

2.92%

3.44%

4.03%

4.71%

1.12%

3.10%

5.44%

7.91%

10.15%

12.21%

14.02%

15.83%

17.67%

19.54%

4.25%

10.01%

15.73%

20.74%

25.27%

29.51%

33.50%

36.97%

40.16%

43.00%

Caa_C

17.32%

28.95%

38.27%

45.67%

51.97%

56.23%

59.21%

62.60%

66.22%

70.24%

Investment-Grade

0.09%

0.26%

0.49%

0.74%

1.02%

1.32%

1.61%

1.92%

2.26%

2.61%

Speculative-Grade

4.56%

9.35%

13.89%

17.87%

21.34%

24.35%

26.99%

29.37%

31.60%

33.69%

1.61%

3.27%

4.82%

6.14%

7.26%

8.22%

9.04%

9.79%

10.50%

11.17%

Global Corporates

All Rated Source: Moody’s Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

Default Rates: GO and Non-GO Average Cumulative Default Rates, 1970-2011, GO and Non-GO Non-General Obligation Rating 1 2 3 4 5 6 7 8 9 10 Aaa 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Aa 0.00% 0.00% 0.01% 0.01% 0.01% 0.01% 0.02% 0.02% 0.03% 0.03% A 0.00% 0.01% 0.02% 0.02% 0.03% 0.04% 0.05% 0.06% 0.08% 0.09% Baa 0.02% 0.07% 0.14% 0.22% 0.29% 0.38% 0.48% 0.58% 0.68% 0.77% Ba 0.38% 1.16% 1.96% 2.75% 3.50% 4.29% 5.15% 5.76% 6.15% 6.36% B 3.95% 7.74% 11.38% 15.25% 19.18% 21.78% 23.30% 24.59% 26.33% 29.24% Caa_C 9.43% 13.36% 15.79% 17.06% 18.00% 19.17% 20.63% 22.51% 24.29% 24.29% Investment 0.00% 0.02% 0.03% 0.05% 0.06% 0.09% 0.11% 0.13% 0.16% 0.18% -Grade Speculative 1.83% 3.44% 4.92% 6.33% 7.69% 8.85% 9.86% 10.67% 11.36% 12.01% -Grade All Rated 0.03% 0.06% 0.09% 0.12% 0.15% 0.18% 0.21% 0.24% 0.27% 0.30% General Obligation Rating 1 2 3 4 5 6 7 8 9 10 Aaa 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Aa 0.00% 0.00% 0.00% 0.00% 0.00% 0.01% 0.01% 0.01% 0.01% 0.01% A 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.01% 0.01% 0.01% Baa 0.00% 0.01% 0.01% 0.02% 0.02% 0.03% 0.03% 0.03% 0.04% 0.04% Ba 0.08% 0.08% 0.08% 0.08% 0.08% 0.08% 0.08% 0.08% 0.08% 0.08% B 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Caa_C 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Investment 0.00% 0.00% 0.00% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% -Grade Speculative 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% -Grade All Rated 0.00% 0.00% 0.00% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% Notes: 1. The first cohort considered is the one-year cohort starting on January 1, 1970. The last cohort considered is the one-year cohort starting on January 1, 2011. 2. Transition rates are averaged over cohorts spaced one month apart. Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

Credit Default Swaps (CDS): MI

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

Credit Default Swaps (CDS): CA

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

Credit Default Swaps (CDS): IL

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

Credit Default Swaps (CDS): MD

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

Credit Default Swaps (CDS): TX

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

Meredith Whitney Whiplash

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

State & Local Gov’t Employment Declining

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

State & Local Gov’t Employment Far Worse

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

Local Gov’t Education Employment

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

State Tax Revenue

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

Muni’s & Treasuries: January 1, 2007 8

Taxable Equivalent

Interest Rate

U.S. Treasury 5

Municipal Market Advisors AAA

0 0

Source: Bloomberg and Cumberland Advisors. Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

Years (800) 257-7013

Muni’s & Treasuries: December 29, 2008 9.00

8.00

Taxable Equivalent Yield

Interest Rate

7.00

6.00

Municipal Market Advisors AAA

5.00

4.00

U.S. Treasury 3.00

2.00

1.00

0.00 0

Source: Bloomberg and Cumberland Advisors. Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

Years (800) 257-7013

Muni’s & Treasuries: April 20, 2009 8

Build America Bonds 7

Taxable Equivalent Yield

Interest Rate

Municipal Market Advisors AAA 4

U.S. Treasury 3

0 0

Source: Bloomberg and Cumberland Advisors. Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

Years (800) 257-7013

Muni’s & Treasuries: October 20, 2009 8

Taxable Equivalent Yield

Interest Rate

Build America Bonds

Municipal Market Advisors AAA

U.S. Treasury 3

0 0

Source: Bloomberg and Cumberland Advisors. Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

Years (800) 257-7013

Muni’s & Treasuries: April 20, 2010 8

Taxable Equivalent Yield

Build America Bonds

Interest Rate

U.S. Treasury 5

Municipal Market Advisors AAA 3

Source: Bloomberg and Cumberland Advisors. Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

Years (800) 257-7013

Muni’s & Treasuries: November 2, 2011 8

Taxable Equivalent Yield

Interest Rate

Build America Bonds

Municipal Market Advisors AAA

U.S. Treasury 2

0 0

-1

Source: Bloomberg and Cumberland Advisors. Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

Years (800) 257-7013

Muni’s & Treasuries: March 19, 2012 8

Taxable Equivalent Yield

Interest Rate

Build America Bonds

Municipal Market Advisors AAA

U.S. Treasury

0 0

Source: Bloomberg and Cumberland Advisors. Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

Years (800) 257-7013

About Cumberland Advisors Cumberland Advisors supervises over 1.9 billion dollars in separate account assets for individuals, institutions, retirement plans, government entities, and cash management portfolios. Cumberland manages portfolios for clients in 49 states, the District of Columbia, and in countries outside the U.S. Cumberland Advisors is an SEC-registered investment adviser. Munis, Taxables, ETFs Cumberland’s portfolio management efforts emphasize long-lasting relationships and continuous dialogue among clients, their consultants, tax advisors, accountants, estate planners, and their assigned portfolio management contact at Cumberland. Cumberland offers several different investment portfolio management styles. Our investment strategy is described in detail on our website. Fixed Income All of our fixed-income offerings are total return strategies, but can take the client’s current income needs into consideration. Our fixed income styles are Tax-Free Municipal Bonds, Taxable Bonds, and Short-Term Investment Program Stocks Cumberland uses Exchange-Traded Funds to manage global equities. Exchange-Traded Funds (ETFs) are securities that mimic the price performance and dividend yield of an index, or a basket, of securities. Cumberland uses ETFs as building blocks in crafting a portfolio, investing in attractive equity sectors, industries, market capitalization strata, styles, and regions. Our equity portfolios are U.S. Exchange-Traded Funds (ETF) Equity, International Exchange-Traded Funds (ETF) Equity, Emerging Markets ExchangeTraded Funds, and Global Multi-Asset Class Exchange-Traded Funds.

Balanced Accounts Cumberland can blend the strategies presented above to create a balanced mix of stocks and bonds. For further information about Cumberland Advisors, please visit our website at www.cumber.com. Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013