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Author:  W. Bartley Hildreth.

Source: Volume 37, Number 03, Fall 2016 , pp.1-92(92)

Municipal Finance Journal

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The fiscal challenges of state and local government pension systems garner wide attention and concern. Much of the literature focuses on aggregate-level analysis, and few studies examine the probability of meeting accrued liabilities. Economics professors Erick M. Elder and Gary A. Wagner (now at the Federal Reserve Bank of Philadelphia) examine Pennsylvania’s two largest pension systems and compute probability estimates that take into account market volatility. The simulation methods they employ offer suggestions for further disclosures by public pension systems. Small denomination municipal bonds, often termed “mini-bonds,” are often discussed but little analyzed because there are so few issuers that use them frequently. Public affairs professors Todd L. Ely and Christine R. Martell provide a detailed analysis of the City and County of Denver’s use of mini-bonds from 1990 to 2014. They point out that the use of mini-bonds is more than a choice of a financing mechanism in that mini-bonds require a political decision to accept higher costs of borrowing (about 10% higher) for perceived benefits that are harder to value. The Municipal Finance Journal is pleased to publish edited transcripts from the 2016 California Debt and Investment Advisory Commission (CDIAC) Pre-Conference held before the California Public Finance Conference. I extend a special thanks to Mark Campbell, executive director of the CDIAC in the State Treasurer’s Office, for organizing the panels, permitting the use of their transcripts, and coordinating with the various presenters to turn their work into this printed version. Robert Doty alerted us to this outstanding set of panels and got the process started. Two key market participants in the bond transaction are the broker-dealer, or underwriter, and the municipal advisor. Separate CDIAC panels explore recent changes in their responsibilities and their work with issuers going forward. The audience was mostly issuer officials. Regulatory burdens on broker-dealers have increased in recent years in line with the goal of better protecting investors and issuers. In response, underwriters overhauled their policies and procedures but often in ways that issuers were unaware of until late in the bond transaction process. A panel of public finance bankers and attorneys explores these changes and their impact on debt issuance. Bond counsel Dan Deaton facilitates the session with underwriters Stephen Heaney and Chris Mukai and underwriter general counsels Peg Henry and Andy Sears. They explore many topics, including the impact of the SEC Risk Alert warning underwriters that they need to maintain written documentation of their due diligence efforts, and the related enforcement action targeting the banker individually. The panel outlines how these regulatory burdens now ripple down to the issuer. Municipal advisors continue to digest the extensive set of regulations to implement their new federal registration and fiduciary standards. The panel, facilitated by Susan Gaffney, executive director of the National Association of Municipal Advisors, discusses the types of information issuers may now see from their municipal advisors, as well as how those advisors are having to document their relationship and work with the issuer. Municipal advisors David Leifer and Terry L. Maas are joined by attorney Dave Sanchez. The panel explores the fiduciary duty of municipal advisors to issuers, payment for service options, the scope of services, documentation by municipal advisors of their work, and suitability concerns, among other issues.

Keywords: Public-sector pensions, defined benefit, investment return risk, social capital, mini-bonds, underwriters, MSRB, SEC, MA Rule, MCDC Initiative, Rule G-42

Affiliations:  1: Georgia State University.

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