Leave it to Levitt
When I came to work at Food & Water Watch I expected to have to learn quite a bit about drinking water and sewer systems, about watersheds and green infrastructure, but one thing I didn’t expect was having to learn about municipal bonds. But . . .
The former head of the Securities and Exchange Commission under Bill Clinton , Arthur Levitt , published an opinion piece on Bloomberg.com today that points to concerns with the municipal bond market. He argues that municipals bonds are overpriced. When they ought to be cheaper than corporate bonds, they often aren’t.
Why is this relevant to the work we do at Food & Water Watch? Just look at the example he chooses:
‚For example, the AAA-rated Metropolitan Water Reclamation District of Greater Chicago sold $600 million in [Buy America Bonds] in August. Bonds due in 2038 were priced to yield 5.72 percent. During this same period, AAA-rated Johnson & Johnson had similar bonds trading at an implied yield of 5.33 percent. Had Chicago‚ authorities borrowed at the same rate as J&J, they would have saved taxpayers $68.6 million over the lifespan of the bonds.” [emphasis added]
One of the ways that large cities fund water infrastructure projects is through the municipal bond market. It is vitally important to the financial health of cities, and to water projects, that the bonds they offer they offer bonds that are priced to take full advantage of the cheap, financing available financing.
A weakness in the municipal bond market highlighted by Levitt is fear among investors that fear of local governments might defaultting on their debts. If a locality does default, anyone who purchased a bond will lose out.
That would be bad news, but it has yet to happen with never happened before for water bonds. Of all the more than 16,000 issuers of Moody‚ rated general obligation and water & sewer bonds, not one defaulted from 1970 to 2000. These municipal bonds are looking pretty good compared to corporate bonds, which experienced 819 defaults during the same period. Even several Aaa-corporate bonds defaulted. These highest-rated bonds had a 10-year weighted-average default rate of 0.675 percent.
Food & Water Watch strongly supports a vibrant, transparent, and secure municipal bond market. That‚ why we have endorsed H.R. 1669, the ‚Federal Municipal Bond Marketing Support and Securitization Act of 2009.” The bill provides federal guarantees for municipal bonds. If municipal bonds were federally guaranteed, they could be sold immediately at record-low interest rates, thus saving taxpayers millions of dollars over the lifespan of the bonds.