The municipal bond market was long seen by small investors as a safe vehicle for retirement savings. However, with the bankruptcy of Detroit as just one example of shaky public financing, municipal bonds are looking riskier than ever before. So the Treasury Department has decided to take a more aggressive role in monitoring the ability of cities and states to raise money through municipal bonds.
This is no small potatoes; investment in the municipal bond market is some $3.7 trillion. For their part, these cities and states use the borrowed money to finance projects, such as bridges and roads, that benefit the public good. With investors of these bonds receiving a safe return, the system has worked well for many years.
Changing tide in local finances
However, the recent economic crisis has pointed up a lot of vulnerability in the once-stable system. As more homes were foreclosed (providing less local tax revenue) and more people flooded out of areas with a shrinking employment base (like Detroit), municipal bonds became more and more important to states and metropolitan areas and more and more dicey for the investors who had faith in those governments to repay the bonds.
As noted in the Wall Street Journal, “Efforts to boost oversight of the municipal bond market have taken on a new urgency in the wake of financial problems in places like Puerto Rico, which is beset by challenges, including 15 percent unemployment and roughly $70 billion of outstanding debt.”
Treasury Department and SEC step in for a closer view
In the wake of these issues, the Treasury Department has announced it will create a new “unit” or watchdog to monitor borrowers and their projects, including public works and pension systems. The new unit will be headed by a veteran public banker (formerly of JP Morgan Chase) Kent Hiteshew, who will join the Treasury Department next month.
Treasury officials have noted that this new group will enable the government body to consolidate and centralize its efforts in one office. Also taking a harder look at the municipal bond market will be the Securities and Exchange Commission (SEC), which is the primary regulator of these bonds. In part, the SEC is trying to ensure that the those financially stressed cities and states are not misleading investors.