Public Finance Update - September 2010 September 17, 2010
In This Issue

Tentative Prohibition Against Trading Permits for Votes

A Sonoma County Superior Court judge recently issued a tentative ruling in the case Building Industry Association of the Bay Area, fka Home Builders Association of Northern California, Inc., v. City of Santa Rosa, indicating that he is likely to rule against the City of Santa Rosa in the case. The plaintiff filed suit challenging the constitutionality of the City’s Ordinance No. 3902, which requires property owners to vote in favor of annexation into a Mello-Roos community facilities district, and thereby become subject to the special taxes levied in such district, before the property owners can obtain a land-use permit to construct new homes on their property.

The plaintiff argues that the City’s ordinance constitutes an unconstitutional interference with a land owner’s right to vote for or against annexation, which violates a fundamental voting right and denies the property owner equal protection under the law. In its tentative ruling, the court indicated that it would grant the plaintiff summary judgment and deny the City’s cross-motion.  The judge has requested both sides to provide additional briefs regarding certain procedural issues, and plans to issue a final ruling near the end of September.

Dodd-Frank and Municipal Bonds

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). The complete text of the law is available here.

The Act addresses a broad range of financial regulatory topics in an effort to address the causes of the current economic crisis.

The following are some of the provisions that affect the municipal bond industry:

  • Office of Municipal Securities – The Act creates an Office of Municipal Securities within the Securities and Exchange Commission (“SEC”) to administer the rules related to municipal securities brokers, dealers, issuers, and advisors.
  • Municipal Securities Rulemaking Board – The Act broadens the authority of the Municipal Securities Rulemaking Board so it can better assist the SEC and the Financial Industry Regulatory Authority with regulation and enforcement.
  • Credit Rating Agencies – The Act creates an Office of Credit Ratings within the SEC and imposes several new rules affecting rating agencies, including rules regarding independent representation on boards, conflicts of interest, disclosure of credit ratings, and filing requirements designed to minimize false, misleading, or insufficient information.
  • Swaps and Derivatives – Although the exemptions contained in the Commodity Exchange Act for state and local obligations should continue to apply to state and local municipal swaps, the Act includes new reporting requirements for derivatives and swap transactions that will also apply to municipal swaps.
  • Exemptions for Municipal Securities – The Act exempts municipal securities from the prohibitions on bank propriety trading (by insured institutions) and exempts municipal securities dealers (and any other entity required to be registered under the Securities Exchange Act of 1934) from the jurisdiction of the newly created Bureau of Consumer Financial Protection.

The Dodd-Frank Act does not, however, address the extension of certain programs enacted pursuant to the American Recovery and Reinvestment Act of 2009 (“ARRA”). Absent additional legislation in 2010, the following public finance programs and provisions, originally provided for in ARRA and related legislation, will expire on December 31, 2010:

  • The Build American Bonds program. (As of this writing, both the House and Senate are considering bills to extend the Build America Bond program.)
  • The Recovery Zone Bonds program.
  • The exemption from the alternative minimum tax (“AMT”) for interest earned on certain private activity bonds.
  • The liberalization of the “bank-qualified” bonds rules that increased the annual bank qualified limit to $30 million, permitted treatment of each 501(c)(3) borrower as an issuer for Section 265 purposes, and provided a 2% de minimis exception.
  • The extension of the program permitting Federal Home Loan Bank guarantees for tax-exemption for non-housing bonds.
  • The provisions that would permanently exclude Water and Sewer Exempt Facility Bonds from state volume caps.

ARRA Update from Council of Economic Advisors

The President’s Council of Economic Advisors (the “CEA”) released its latest quarterly report on July 14, 2010, regarding the impact of the American Recovery and Reinvestment Act of 2009 (“ARRA”).  The full text of the report can be found here.

The following is a list of some of the highlights noted in the executive summary of the report:

  • The magnitude of ARRA fiscal stimulus increased from $80 billion in the fourth quarter of 2009 to $108 billion in first quarter of 2010 to $116 billion in second quarter of 2010.
  • Government investment in infrastructure, clean energy, and communications technology increased by approximately 50% between the first and second quarters of 2010.
  • Following implementation of ARRA, real gross domestic product (“GDP”) began to grow steadily beginning the third quarter of 2009 and private payroll employment increased by nearly 600,000 since its low point in December 2009.
  • The CEA estimates that ARRA has raised GDP as of the second quarter of 2010 (relative to what it otherwise would have been) by 2.7% to 3.2%
  • The CEA estimates that ARRA has raised employment (relative to what it otherwise would have been) by 2.5 to 3.6 million.
  • Approximately two-thirds of the $319 billion available for public investment available under ARRA have been obligated and more than one-quarter have been outlayed.
  • The CEA estimates that public investment under ARRA has saved or created more than 800,000 jobs as of the second quarter of 2010, a 30% increase over the first quarter.
  • Nearly 14,000 projects have been awarded under the transportation infrastructure provisions of ARRA in areas ranging from highway improvements to new airport runways and public transit.
  • The CEA estimates that approximately $100 billion of ARRA funds have leverage provisions, which will enable these funds to support more than $380 billion of total investment spending, the majority of which is expected to come from the private sector.

Bond Market Snapshot

Municipal Bonds and Treasuries

The September 2010 yield on AAA-rated municipal bonds dropped slightly from 4.31% to 4.08% for 30-year bonds and from 2.64% to 2.30% for 10-year bonds. Yields on 30-year treasury bonds held relatively steady at 3.74%, and yields on 10-year treasury notes rose slightly from 2.63% to 2.67%, rising above munis for the first time since June 2010.

 

Source: Bloomberg (www.bloomberg.com)

Recent Municipal Bond Transactions

Issue DateBondsLast MaturityYield
August 19, 2010 $66,300,000 Jurupa Public Financing Authority Revenue Bonds, 2010 Series A (Superior Lien Bonds) (Insured by Assured Guaranty Municipal Corp.) September 1, 2039 5.100%
August 19, 2010 $20,085,000 Jurupa Public Financing Authority Revenue Bonds, 2010 Series B (Subordinate Lien Bonds) September 1, 2040 6.250%
August 19, 2010 $9,240,000 Community Facilities District No. 3 (Eastvale Area) of Jurupa Community Services District Special Tax Refunding Bonds, Series A of 2010 September 1, 2039 8.625%
August 17, 2010 $2,285,000 City of Desert Hot Springs Community Facilities District No. 2006-1 Improvement Area 1, Special Tax Refunding Bonds, Series 2010 September 1, 2038 6.540%
August 11, 2010 $24,975,000 City of Orange Community Facilities District No. 06-1 (Del Rio Public Improvements), 2010 Special Tax Bonds October 1, 2040 6.070%
August 11, 2010 $12,670,000 Community Facilities District No. 2008-1 of the Tejon Ranch Public Facilities Financing Authority (Tejon Industrial Complex Public Improvements – East), Special Tax Bonds, Series 2010-A September 1, 2040 7.375%
August 11, 2010 California School Finance Authority Educational Facilities Revenue Bonds (High Tech High Chula Vista K-8 Project), Series 2010 Qualified School Construction Bonds (Direct Subsidy Bonds) September 1, 2020 5.041%


Source:
Goodwin Procter LLP

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