By Andrew Ackerman
WASHINGTON--U.S. policy makers, concerned about strained public
finances in places like Detroit and Puerto Rico, are moving to keep
closer tabs on the ability of states and cities to raise money in
the $3.7 trillion municipal-bond market.
The Treasury Department is forming a new unit to broadly monitor
the market, with a focus on troubled borrowers, according to a
Treasury official. The unit, which will be headed by a veteran
public-finance banker at J.P. Morgan Chase & Co., also will
track state and local pensions as well as the financing of bridges,
roads and other infrastructure projects. Public-pension funding
levels have been a problem area for many states and
municipalities.
By boosting the department's monitoring of municipal finance,
the Treasury hopes in part to better understand the ramifications
of municipal-market stresses, the official said. The unit wouldn't
have authority to write and enforce rules for the market like the
Securities and Exchange Commission.
Efforts to boost oversight of the municipal-bond market have
taken on new urgency in the wake of financial problems in places
like Puerto Rico, which is beset by challenges including 15%
unemployment and roughly $70 billion of outstanding debt.
Puerto Rico's troubles could reverberate well beyond its borders
because roughly three-quarters of municipal-bond mutual funds own
some debt issued by the commonwealth. It is among the biggest
issuers in the municipal-bond market due to its tax benefits and
often higher yields. The Federal Reserve's interest-rate-setting
committee, meeting in January, said the commonwealth's financing
situation "needed to be watched carefully," according to minutes of
the meeting.
The SEC, which is the municipal-bond market's primary regulator,
also has ramped up its scrutiny of the sector and is conducting a
review of past disclosures by financially stressed states and
municipalities to determine if they may have misled investors about
their financial condition, according to SEC officials.
The Treasury's effort to gain greater insight into the
municipal-bond market will be led by Kent Hiteshew, who will join
the department in mid-May. Mr. Hiteshew has overseen J.P. Morgan's
relationship with its housing-sector clients and municipal
borrowers in the Northeast region. A J.P. Morgan spokeswoman
declined to comment on Mr. Hiteshew's behalf.
"This office will centralize a lot of the work that is already
happening across the building," said Matthew Rutherford, the
Treasury's assistant secretary for financial markets. "It can look
at various issues that arise in the municipal marketplace and make
sure we understand what's driving them."
The municipal-bond market long has been seen by many mom-and-pop
investors as a reliable source of tax-exempt income and as a
vehicle for retirement savings. But that view has been rattled in
recent years by episodes including the largest-ever municipal
bankruptcy filing last July by Detroit and Puerto Rico's
problems.
Last month, Puerto Rico sold $3.5 billion in new bonds to help
pay down existing debt, a move that bought officials time to
eliminate persistent budget deficits and jump-start the economy.
The bonds have fallen in price in recent days amid reports that the
island hired consultants that specialize in restructuring, though
island officials haven't said they are working on a
debt-restructuring plan. Credit-rating firms downgraded Puerto Rico
to junk status this year.The commonwealth has said it plans to
honor its obligations.
While the U.S. government has had talks with island officials
about how Puerto Rico can improve its financial condition, Treasury
officials have said they aren't contemplating a federal bailout.
The Treasury official said the department doesn't have the
authority to grant federal financial assistance.
Federal officials have sought to boost their oversight of the
municipal-bond market in the wake of the financial crisis, when a
contraction in state and local income-tax receipts squeezed
municipalities andthreatened the ability of some governments to
fulfill their financial obligations.
The SEC, which sets disclosure rules for state and local
governments that issue bonds, is pushing for additional authority
from Congress to crack down on municipalities that don't keep the
public apprised of their financial health.
Mike Cherney contributed to this article.
Write to Andrew Ackerman at andrew.ackerman@wsj.com