Today the legislature sent to the Governor a bill that would put the full faith and credit of the Commonwealth behind the Turnpike Authority’s obligations under a disastrous “swaptions” agreement about which we‘ve written quite a good deal. To make a long story short, the Pike faces the possibility of a $400 million (give or take a few mill, but who’s counting?) termination payment to UBS (details on that are in our previous posts). Obviously, the Pike doesn’t have that kind of cash lying around (otherwise, presumably it would have paid overtime for a few toll-takers last weekend). The idea of the bill is that, by promising to step in if the Pike’s insurer craps out, the Commonwealth guarantees the deal going forward, thereby hopefully avoiding the enormous termination payment.
Guaranteeing the debt is a regrettable, but probably necessary, thing to do. What I do not understand, though, is why the House rejected a series of sensible proposals from the Senate to increase transparency and prevent this kind of thing from happening again. From a SHNS article (no link):
The Senate version of the turnpike credit bill creates a task force to report back within 60 days in great detail on the turnpike finances and the impact of state backing of turnpike credit on the state’s own credit rating, a provision that an aide to Sen. Mark Montigny, chair of the Senate Bonding Committee, said was not included in the House draft.
The House proposal also cuts broad reporting requirements aimed at getting the turnpike to disclose more information on financing arrangements dating back to 1997, or when it was assigned powers over metropolitan Boston highways and the Big Dig project, the Montigny aide said….
The House version also eliminates a Senate ban on “swaption” investments at all stage agencies, which [House transportation chair Joseph] Wagner said may have been too sweeping.
The state’s Finance Advisory Board would be authorized to review all derivative transactions proposed by all state entities, according to a House bill summary obtained by the News Service. Senate officials say this section was watered down by changing the word “shall” to “may,” effectively removing the mandate.
The Montigny aide, speaking on condition of anonymity, said the House bill also stripped a provision requiring prompt notification of lawmakers when a so-called termination event occurs, or when a party to an interest rate swap agreement seeks to terminate that agreement and demand a lump sum payment. The notification would also require information about efforts to prevent putting the state’s credit behind a derivatives settlement.
This is pretty straightforward stuff, you’d think. If the state’s going to back a bankrupt and incompetent state authority to the tune of about half a billion dollars, it would seem to behoove the state to understand what happened and how to avoid it in the future. Why did the House strip the Senate proposals? Why did the Senate, having put the proposals in there, go along with the House version?
Perhaps the Governor might consider sending the bill back to the legislature with an amendment restoring at least some of the Senate’s proposals.
the Governor should take David’s advice – and let the public know it.
I see no reason why the Commonwealth should guarantee the obligations of an independent authority. Isn’t it independent so that the state doesn’t have to do that? Let it default on the debt and enter a bankruptcy process which will eliminate most of the debt.
in the future
The whole point of being an independent authority is to have a separate and unrelated bond rating from the state.
I would tend to agree with Ron.
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p>The MTA is an independent authority. When it got involved in these derivative investments, it did so without the full faith and credit of the state government. If it defaults and goes into bankruptcy, I don’t see how that would impact the state’s ability to issue bonds. I could see it impacting other independent state agencies perhaps, but only insofar as causing a potential bond-buyer to look at them more closely, which is a good thing.
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p>I’m concerned about how guaranteeing the debt would impact the state’s ability to issue bonds. Once the state is on the hook for that much debt, we now have an even greater debt load. At some point, that will DEFINITELY impact our credit rating and ability to issue bonds. Also, it’s a signal to rating agencies that although there are other “independent” state agencies out there issuing debts without the full faith and credit of the state, in reality, the state will jump in and bail them out. Which, again, I could see impacting the state’s bond rating.
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p>I’m using logic, not any detailed understanding of bond issuing. If I’m wrong, someone please correct me!
There is no explicit guarantee. The concern is that if the Pike goes down, the relatively small and controlled debt market will shun the Commonwealth in general. Here one can see the degree to which the financial markets are controlled by people with common interests, and are not very “free” despite protestations to the contrary.
Bob, I agree with your basic position on this, but I am not sure I agree with your point in this comment about the “free” markets. If the markets understood that there was an implicit guarantee from the Commonwealth, then it stands to reason that a default by the Turnpike Authority should affect the Commonwealth’s credit. I’m not saying I like it, but I’m not sure it’s dastardly or unfair.
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p>TedF
All I meant was that if there were more sources of capital — if the market was “more free” and less tightly controlled by a few players — the fact that some were mistaken about an implicit guarantee (because, after all, there is no such guarantee; as a matter of law, the Pike is independent), wouldn’t be particularly significant.
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p>I don’t think the attempt by the banks to claim an “implicit” guarantee and force the Commonwealth to support the debt on pain of not being able to access capital markets in the future is especially dastardly or unfair. That is the way the game is played. My point was just that invention of new ex post facto obligations is a sign of a controlled market, a weak state, corruption, or a bit of all three.
A large amount of state and local debt is bought by mutual funds. The people who buy those funds aren’t likely to know about the turnpike problems, so I wouldn’t expect them to sell because of it.
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p>Just as an example, the Vanguard MA Tax exempt fund, which buys only debt issued by MA municipalities, has almost $800 million in assets. People buy that fund because it is exempt from MA and federal taxes. The people buying it don’t have other options if they want to avoid paying all income taxes on their earnings (that is, their only options are equivalent funds). So they will buy the bonds regardless of what the state does. The yields will have to be higher if the risk is seen as being higher, but people will buy the bonds regardless.
At the end of the day, bond-buyers just want to make money for themselves and their clients. If we are offering up bonds that allow them to do that, they won’t say no out of some sort of moral outrage.
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p>What they will do is look at any bond issued by the state or a state agency more closely. Good. They should. Think of how many people didn’t look closely enough at the MTA before it was too late. I’m fine with investors looking with a more critical eye at our bond issusances. I wish someone had been more cautious with MTA.
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p>I also could see bond-buyers saying, “You people in Mass stink at managing money and we’re going to demand more interest to compensate for the risk you people are.” Again, while this is unpleasant, don’t we deserve this? When we right our ship (to take your pirate analogy all the way!), our bond rating will improve and lower interest ensues. And everyone learned a very important lesson.
In any event, if the state assumes the debt we’ll never know.
If the state assumes the debt we will never know. And other independent state agencies will be encouraged to be reckless, because even though the state is not supposed to bail them out, they will have set the precedent that they will.
The State i.e. our reps dropped like 2.2 billion on this independent authority to cover big dig debt. They did the same to the MBTA.