Open Accessibility Menu

Investor Concerns Grow Over State and Local Government Finances

David P. Meyer, Esq.

Investors in the $2.9 trillion municipal bond market are becoming increasingly anxious – and angry – over delayed financial disclosures, according to an article by The Wall Street Journal (“Bondholders Left in the Dark,” Jan. 26, 2010). In 2010, individual investors owned at least 70 percent of the municipal securities market. Now, many of those investors are worried about the financial health of the U.S.’s state and local governments.

As reported in the article, a recent analysis conducted by DPC DATA Inc., a specialist in municipal disclosure, found that at least a third of the 17,000 bonds studied failed to file financial statements in three out of five years. And, the percentage of non-filers appears to be growing alongside the increase in government credit and financial problems. Peter Schmitt, chief executive of DPC, told the WSJ: “This works out to insufficient ongoing disclosure information for more than $2 trillion of the $3 trillion in outstanding bonds.”

Last year, Arthur Levitt, SEC Chairman from 1993 to 2001, toldBloomberg News that enforcement of the municipal securities market "was terribly neglected in recent years" and that municipal fraud and incompetence “has never been greater.” (“Can the SEC Get Its Street Cred Back?” Bloomberg News, April 1, 2010) Now, to help protect investors, the SEC is increasing its scrutiny over the largely unregulated market.

In 2010, the SEC set up a new municipal-bond enforcement unit, headed by Elaine Greenberg. Greenberg believes the lack of disclosure is a problem for investors, particularly when financial problems tend to mean municipalities disclose less information later – information that investors need now.

In the WSJ article, Greenberg was quoted as having said: “If a municipality is in dire financial straits, we want to know if that information was disclosed to bond holders in a timely fashion. It's not good enough to put the information out there late. Investors need information that is current, not stale, to make informed investment decisions."

To address the problem, the new SEC unit is investigating cases where municipalities allegedly failed to disclose their financial problems to bond holders. New Jersey authorities recently settled such a case, and Illinois is currently facing an inquiry about public statements authorities made about its pension funds, according to the WSJ article.

Additional inquiries into other municipalities are expected.