Month: March 2024

Muni Bond Games and the IRS’ Lurking Arbitrage Vampires

Mary Pat Campbell

Link: https://www.governing.com/finance/muni-bond-games-and-the-irs-lurking-arbitrage-vampires

Excerpt:

For example, Oakland, Calif., cleverly figured out in 1985 that it could issue tax-exempt bonds to fund its underwater pension plan, the proceeds of which it in turn would invest in normal pension portfolio holdings like taxable stocks and corporate bonds with a higher long-term return. It was a strategy almost certain to make a profit over time, even with the ups and downs in the stock market, but it didn’t take long for the IRS to put an end to that ploy as an abuse of the tax exemption. Thereafter, the IRS ruled, such pension bonds must be taxable.

Likewise, the arbitrage police have played cops-and-robbers with clever public financiers who invest their cash during construction periods at interest rates higher than their tax-exempt cost of money. Using today’s interest rate levels, for example, a tax-exempt 20-year AAA-rated bond can be issued with coupons around three-and-a-half percent and the proceeds reinvested in Treasury bills and notes at 4 to 5 percent. In almost any year like this one, there’s a profit to be gleaned when borrowing tax-exempt and reinvesting at taxable rates.

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There is also a new controversy brewing in a niche sector of the muni bond market, in which issuers of taxable bonds are finding an opportunity to refinance at lower tax-exempt rates. Investors are suing them. It’s premature to guess how this issue will be resolved in the courts, but worth watching.

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As interest rates drift lower in tandem with hoped-for disinflation, muni bond professionals are starting to chat up the idea that soon we’ll see a wave of advance refundings, in which a municipality can refinance its debt at a lower interest rate. In corporate America, the finance team must usually wait until the issue’s maturity or call date before refinancing. In muni-land, however, there is a unique situation that is peculiar to the tax-exempt world: the opportunity to issue new bonds to replace the old ones at a lower interest rate before their scheduled call date — typically within 10 years after issuance — by setting up an escrow fund to pay off the original debt when it is callable.

It doesn’t take a math or market genius to figure out that this advance refunding strategy is susceptible to abuses. In theory and previously in practice, it could be repeated several times over the life of the original bonds: wash, rinse and repeat. So the IRS caught on to this and Congress put a limit — of one — on such deals. To accommodate this unique feature of the muni market, the Treasury Department even created a special class of its own securities, known as the State and Local Government Series (SLGS, or “slugs” in industry jargon), which bear interest rates equal to the new borrowing rate to preclude the arbitrage profit gambit.

The political challenge for municipal officials today is that underwriters and advisers are keen to promote these advance refundings as soon as they become feasible. Some will compete with each other to make the first pitch to win an engagement even if it’s not optimal longer term. The motto of some hucksters is “whoever gets to the decision-makers first, wins.” All they really want is the engagement fees; to them, a dollar earned today is worth more than a dollar tomorrow, so they get lathered up without necessarily showing their clients the potential to save even more if they wait a couple years for even lower rates. This year and next could be just such a time period, depending on when you think the next national recession will occur.

Mostly it will be the muni bonds sold in 2022 and early 2023, when interest rates were peaking (above 4 percent on AAA paper and maybe 5 percent for lower ratings), that the advance-refunding promoters will pitch. Just remember that the IRS rules now prohibit multiple advance refundings: It’s one bite of the apple, and there will be an opportunity cost for jumping the gun ahead of lower long-term interest rates in future years. Although short-term interest rates are expected to decline, it’s not so obvious that the longer end of the Treasury and muni bond yield curves will follow in this business cycle, at least until the next recession. Refundings are almost always timely in recessions, but can be premature in the middle of an interest rate cycle.

Author(s): Girard Miller

Publication Date: 13 Mar 2024

Publication Site: Governing

Mounting research shows that COVID-19 leaves its mark on the brain, including with significant drops in IQ scores

Mary Pat Campbell

Link:https://theconversation.com/mounting-research-shows-that-covid-19-leaves-its-mark-on-the-brain-including-with-significant-drops-in-iq-scores-224216

Excerpt:

From the very early days of the pandemic, brain fog emerged as a significant health condition that many experience after COVID-19.

Brain fog is a colloquial term that describes a state of mental sluggishness or lack of clarity and haziness that makes it difficult to concentrate, remember things and think clearly.

Fast-forward four years and there is now abundant evidence that being infected with SARS-CoV-2 – the virus that causes COVID-19 – can affect brain health in many ways.

In addition to brain fog, COVID-19 can lead to an array of problems, including headaches, seizure disorders, strokes, sleep problems, and tingling and paralysis of the nerves, as well as several mental health disorders.

Author(s): Ziyad Al-Aly

Publication Date: 28 Feb 2024

Publication Site: The Conversation

Can Baby Bonds Fight the Wealth Gap and Racial Inequality? Connecticut Aims to Find Out.

Mary Pat Campbell

Link: https://www.ineteconomics.org/perspectives/blog/can-baby-bonds-fight-the-wealth-gap-and-propel-racial-equality-connecticut-aims-to-find-out

Excerpt:

Connecticut has made history as the first state to implement a baby bonds program — fully funded for 12 years of babies.

The state will invest $3,200 for each baby covered by HUSKY, the state’s Medicaid program – that’s about 15,000 babies a year and a whopping 36% of the state’s children. Kids are automatically enrolled; no action is required. Upon reaching adulthood (18-30), participants can claim funds for specific wealth-and-opportunity-building purposes like higher education, a home purchase, or starting a business in the state. To receive the funds, they have to be Connecticut residents and need to complete a financial literacy course (hopefully not one funded by self-serving Wall Street firms). The initial $3,200 investment is anticipated to grow to $11,000 – $24,000, depending on when claims are filed.

Turning the idea of baby bonds into reality was a rocky road: the Democratic-led Connecticut General Assembly passed the bill in 2021, championed by former Democratic Treasurer Shawn Wooden. However, Governor Lamont and his team initially opposed the program’s funding, citing concerns over borrowing more than $50 million annually. Internal conflict heated up, as revealed in a January 2023 investigation by the Connecticut Mirror, exposing tensions between Wooden and the governor’s staff. Yet, following the publication, the situation took an unexpected turn. The program became a reality.

The sticking point of funding was solved by a plan to use a $393 million reserve fund established in 2019 during the restructuring of the state’s cash-strapped pension fund for municipal teachers. Originally designed to cover shortfalls in pension fund contributions, this reserve could be repurposed. To safeguard the pension system and meet ratings agencies’ requirements, a $12 million insurance policy was necessary, leaving approximately $381 million available for investment in the baby bonds program.

Author(s): Lynn Parramore

Publication Date: 27 Feb 2024

Publication Site: Institute for New Economic Thinking

Adele vs. Taylor Swift, Covid, and Entertainment Industry Pandemic Insurance

Mary Pat Campbell

Link: https://www.nakedcapitalism.com/2024/02/adele-vs-taylor-swift-covid-and-entertainment-industry-pandemic-insurance.html

Graphic:

Excerpt:

Making those timelines — 2020, 2021, 2022, 2023, 2024 — really brought home to me how long this pandemic has been going on; I lost track in the daily grind (though the daily grind is also my form of coping). And it’s a bit discouraging to see the most solidarity our society seems capable of fizzle out after 2020, followed by a struggle to return to business as usual, a struggle that failed by 2024, in that a once-essential part of touring — contact with the fans — has now gone missing.

We can, of course, moralize about what how these artists have gone about their business:

To be fair, though, when CDC Director Mandy Cohen is swanning about with no mask, modeling how to infect everybody she breathes on, what’s a poor celebrity to do? Restoring social norms that support non-pharmaceutical interventions will probably take a whole-of-society approach (which could happen when those Tiktokers start doing their research).

Here, however, are two small steps artists like Adele and Taylor Swift could do to improve the Covid pandemic situation.

First, big acts could really help out smaller acts by supporting organizations like this one: [Clean Air Club]

Second, sell N95s at your concerts and on your websites as branded merch. K-Pop powerhouse Twice already does this (though KN94s, not N95s):

And if, by some happy chance, some intern from either organization reads this post, please champion these ideas!

Oh, and champion clean air, too. Who could be against that? Miasma delenda est!

Author(s): Lambert Strether

Publication Date: 28 Feb 2024

Publication Site: naked capitalism

How Should the Government Negotiate Medicare Drug Prices? A Guide for the Perplexed

Mary Pat Campbell

Link:https://www.ineteconomics.org/perspectives/blog/how-should-the-government-negotiate-medicare-drug-prices-a-guide-for-the-perplexed

Graphic:

Excerpt:

Now, at last, thanks to the Inflation Reduction Act (IRA), the federal government will be allowed to negotiate a “maximum fair price” for drugs covered by Medicare Part D. This historical change, taking place in the face of intense industry opposition, incrementally reverses policies that have prohibited the government from engaging in price negotiations since Medicare Part D was first established in 2003. While only ten drugs will be subject to negotiation in the first year of the IRA and 90 over the first five years, negotiations are now ongoing.

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It has been suggested that the government should negotiate for value-based pricing that would benchmark the Medicare Part D price measures of the health benefit provided to those using these drugs. This would be analogous to the approach currently used by most European countries for drug pricing. We believe this approach is inadequate and fails to provide the public with a return on the massive US government investments in biomedical research related to these drugs that enabled these products to be developed and commercialized in the first place.

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In our new INET working paper, we extend these analyses to the ten drugs selected for Medicare price negotiation in the first year of the IRA. Our analysis reveals that the NIH spent $11.7 billion on basic or applied research related to the drugs selected for Medicare price negotiations, representing a median investment cost of $895.4 million per drug and, by making this research available to industry, saving industry a median of $1,485 million per drug. While data on industry investments in these ten drugs is not publicly available, this level of NIH investment is comparable to reported investment by industry in the drugs approved from 2010 to 2019.

Paper PDF: https://www.ineteconomics.org/uploads/papers/WP_219-Federal-spending-on-drugs-Ledley-et-al-final.pdf

Author(s): Fred Ledley

Publication Date: 4 Mar 2024

Publication Site: Institute for New Economic Thinking

The mystery of the ‘golden cohort’

Mary Pat Campbell

Link:https://www.bbc.com/news/uk-15024436

Graphic:

Excerpt:

The life experience of British people born between the years 1925 and 1934 has long had demographers and insurance companies scratching their heads.

For reasons which remain unclear, individuals within this slice of the UK population have been living longer and healthier lives than groups both older and younger.

Today the Office for National Statistics returns to the mystery of the so-called “golden cohort”, trying to understand better why the members of the generation born in the midst of the Great Depression have been enjoying higher rates of mortality improvement throughout their adult lives.

One tool used to track the golden cohort is a heat chart which, in this case, looks at annual mortality improvements for men and women. It takes a bit of explaining, but the diagrams reflect the social history of Britain over the last century or so.

Starting with men (Figure 1a), the most obvious feature of the heat chart are the vertical bands of blue and brown in the bottom left corner. Blue represents worsening mortality and brown improving, so the blue slice closest furthest to the left is the cohort decimated by World War I and the influenza pandemic.

Author(s):

Publication Date: 23 Sep 2011

Publication Site: BBC

Why do Swiss people die?

Mary Pat Campbell

Link: https://blog.datawrapper.de/why-do-swiss-people-die/

Graphic:

Excerpt:

Looking at the evolution of premature deaths, we can celebrate the progress made in medical research. Years lost to infectious diseases like tuberculosis have reduced dramatically, and deaths due to AIDS in particular are nowadays close to zero, a drastic decline since the height of the pandemic in the 1990s. Cancer and cardiovascular diseases have followed a similar path, though they still cause a high number of premature deaths. We can observe that years lost to suicide before age 70 have also declined significantly. In a country where assisted suicide is legal, there is maybe something empowering in the prospect of dying healthy of old age. Years lost to alcoholism and car accidents have also declined — it may be that prevention and overall security have reduced these types of more behavioral deaths.

Author(s): Luc Guillemot

Publication Date: 26 Oct 2023

Publication Site: datawrapper