When you look at funding growth in private companies, it’s like going to the racetrack. You can bet Win, Place, or Show. In the case of finance, it’s Cash, Equity, and Debt.

For governments, the choices are more limited. You can’t sell equity. Hence, governments never “invest”. They can only grow from cash, which is tax receipts, or from selling debt. Selling debt is a claim on the future tax receipts remitted by taxpayers. To simplify, a claim against your future income.

Most people are aware of, but do not understand, how a government uses leverage. No one knows how it works or how it trades in the market.

I have been participating at the bleeding edge of finance for most of my forty-year career. Because of what I have done, I am better able to realize and understand what true innovation is versus snake oil. You have had to get your hands dirty. The changes coming to finance in the next ten years will be groundbreaking.

Here is some background and an example to help you understand.

Suppose a state wants to build infrastructure. It decides to issue bonds and use leverage to pay for that infrastructure. Most states lack the financial resources to fund infrastructure projects directly. Plus, the opportunity costs of using cash versus debt always favor debt for a good reason.

Many of these capital projects take time to build, and they are long-lived. That’s why auctioning off some bonds is a good idea because it matches cash flows with the performance of the asset being financed. To simplify, it’s like taking out a mortgage to buy a house.

The credit rating of a government is meaningful. Why? Because the credit rating determines the amount of interest the government will have to pay. It will also determine the covenants that secure the debt being auctioned. A bankrupt state will pay a higher rate, with very restrictive covenants on the bond.

Nevada generally has a strong and stable credit rating. There are some chinks in the armor to worry about, though, since the government has grown in size and scope. Governor Lombardo has done all he can to check that. It’s important to note that the reason Nevada is such a desirable state to live in is that it has 0% income tax, and property taxes are capped. Nevada is seeing an influx of new residents yearly for that reason. That should never change. Everyone in government should do all they can to shrink government, get rid of regulations, and lower taxes and fees in every way they can. The way to do that is by being smart and efficient.

Here is the skinny:

The State’s General Obligation Bonds are rated Aa1/AA+/AA+ by Moody’s, S&P, and Fitch. The State also issues Motor Vehicle Fuel Tax Bonds (to pay for transportation projects), of which the senior lien bonds are rated Aa1/AAA/AA+ by Moody’s, S&P, and Fitch, respectively.

As Treasurer, the ratings are nice, but ratings are an accounting metric. This is important.

Ratings mostly look backward. The ratings agencies do try to look forward, but they cannot account for everything. You might remember 2008. Treasurers need to forecast, be proactive, and live in the present. It requires an economic lens, not an accounting lens. There is a huge difference. People who look through the accounting lens will make bad decisions and big mistakes.

Knowing how the bond market works and moves is essential for a state treasurer. Why?

Not only do state treasurers buy bonds for the investment portfolio of the state, but treasurers also issue bonds for the financing of state infrastructure projects. Many states have taken advantage of changing market conditions to buy back bonds at a discount and refinance these bonds for savings or use extra cash to redeem these bonds.

I chatted with the North Carolina State Treasurer the other day. He was able to buy back bonds at below par value, saving taxpayers millions. In the NC case, because the Fed moved quickly to increase interest rates, the issued bonds were trading lower in the market. In bond markets, prices move inversely to rates. The ones he bought were trading for seventy and eighty cents on the dollar.

Florida was able to do the same thing.

A treasurer focused on the market always knows where the debt portfolio is trading. Because of quirks in federal tax law, municipal bonds that trade at a deep discount to par value can be subject to federal taxes (de minimis rule) as the bonds accrete in value when they get closer to maturity. They are redeemed at par value when mature.

These bonds are illiquid. The reason investors buy municipal bonds is TO AVOID paying taxes, as they are generally federal tax-exempt. What North Carolina and Florida did was create a market to buy these bonds back from investors. It was a pro-move.

Why would someone who owned bonds sell into a tender offer? Because they value having the cash today versus the uncertainty of cash tomorrow. The opportunity cost and net present value of the cash are worth more to them today.

A financially unsophisticated person would look at the Nevada debt portfolio and say, “Isn’t this great. We locked in low yields and coupons on our debt.”

A financially sophisticated person would look at the Nevada tax-exempt debt portfolio and say, “I can buy some of these bonds back at 85 cents on the dollar by creating a market for investors to tender their bonds to me. I can either use excess cash or refinance the debt. Remember, the treasurer is only paying 85 cents on the dollar for the bonds. They are selling $85 of new bonds to buy back $100 face value of old bonds, which means they are reducing the debt load taxpayers are on the hook for.

If the treasurer does nothing and lets the bonds mature, they mature at face value of $100 or what’s called “par”. Being smart about debt and the ever-changing market conditions allows one to take advantage of debt savings and investing opportunities in high and low interest rate conditions.

One thing that people have said to me is that the Treasurer’s $12 billion Nevada portfolio has had decent returns given the constraints on it. They aren’t wrong. However, because the portfolio is made up of US government short-term interest rate products, the fact that the Federal Reserve raised rates so aggressively has helped more than anything else.

The aggressive rise in rates has had real market effects on the Nevada portfolio, though. That rise in rates has caused taxpayers to lose money on existing bonds trading in the market. Someone who looked at the portfolio through the lens of accounting might not see, nor understand why.

Let’s use a live example:

The State of Nevada issued Motor Fuel Tax Bonds in 2020 with a 2040 maturity. They auctioned off $5.735 million with a coupon of 2% and a yield of 2.07%. These bonds are callable at par in 2030. But the dollar price of the bonds is 86 today since the market yield for a 2040 maturity of a AA rated municipal bond is a 3.25% today. Hence, the bonds are trading at a discount to par, which means the Nevada taxpayer is losing money.

The pro move is to do a tender offer for all the bonds and then reauction the remaining debt at today’s prices. This is what I mean when I talk about being competent.

It is a move that someone who has been active in interest markets would spot. People who have never been in a market would not understand where to look to spot the opportunity. It might not occur to them.

Wait until next-gen innovations rapidly change the way finance unfolds. It is coming.

It’s why you want a financial expert in a finance office to safeguard the people’s money. You wouldn’t want someone without a law degree in the attorney general’s office.

When you look at funding growth in private companies, it’s like going to the racetrack. You can bet Win, Place, or Show. In the case of finance, it’s Cash, Equity, and Debt.

For governments, the choices are more limited. You can’t sell equity. Hence, governments never “invest”. They can only grow from cash, which is tax receipts, or from selling debt. Selling debt is a claim on the future tax receipts remitted by taxpayers. To simplify, a claim against your future income.

Most people are aware of, but do not understand, how a government uses leverage. No one knows how it works or how it trades in the market.

I have been participating at the bleeding edge of finance for most of my forty-year career. Because of what I have done, I am better able to realize and understand what true innovation is versus snake oil. You have had to get your hands dirty. The changes coming to finance in the next ten years will be groundbreaking.

Here is some background and an example to help you understand.

Suppose a state wants to build infrastructure. It decides to issue bonds and use leverage to pay for that infrastructure. Most states lack the financial resources to fund infrastructure projects directly. Plus, the opportunity costs of using cash versus debt always favor debt for a good reason.

Many of these capital projects take time to build, and they are long-lived. That’s why auctioning off some bonds is a good idea because it matches cash flows with the performance of the asset being financed. To simplify, it’s like taking out a mortgage to buy a house.

The credit rating of a government is meaningful. Why? Because the credit rating determines the amount of interest the government will have to pay. It will also determine the covenants that secure the debt being auctioned. A bankrupt state will pay a higher rate, with very restrictive covenants on the bond.

Nevada generally has a strong and stable credit rating. There are some chinks in the armor to worry about, though, since the government has grown in size and scope. Governor Lombardo has done all he can to check that. It’s important to note that the reason Nevada is such a desirable state to live in is that it has 0% income tax, and property taxes are capped. Nevada is seeing an influx of new residents yearly for that reason. That should never change. Everyone in government should do all they can to shrink government, get rid of regulations, and lower taxes and fees in every way they can. The way to do that is by being smart and efficient.

Here is the skinny:

The State’s General Obligation Bonds are rated Aa1/AA+/AA+ by Moody’s, S&P, and Fitch. The State also issues Motor Vehicle Fuel Tax Bonds (to pay for transportation projects), of which the senior lien bonds are rated Aa1/AAA/AA+ by Moody’s, S&P, and Fitch, respectively.

As Treasurer, the ratings are nice, but ratings are an accounting metric. This is important.

Ratings mostly look backward. The ratings agencies do try to look forward, but they cannot account for everything. You might remember 2008. Treasurers need to forecast, be proactive, and live in the present. It requires an economic lens, not an accounting lens. There is a huge difference. People who look through the accounting lens will make bad decisions and big mistakes.

Knowing how the bond market works and moves is essential for a state treasurer. Why?

Not only do state treasurers buy bonds for the investment portfolio of the state, but treasurers also issue bonds for the financing of state infrastructure projects. Many states have taken advantage of changing market conditions to buy back bonds at a discount and refinance these bonds for savings or use extra cash to redeem these bonds.

I chatted with the North Carolina State Treasurer the other day. He was able to buy back bonds at below par value, saving taxpayers millions. In the NC case, because the Fed moved quickly to increase interest rates, the issued bonds were trading lower in the market. In bond markets, prices move inversely to rates. The ones he bought were trading for seventy and eighty cents on the dollar.

Florida was able to do the same thing.

A treasurer focused on the market always knows where the debt portfolio is trading. Because of quirks in federal tax law, municipal bonds that trade at a deep discount to par value can be subject to federal taxes (de minimis rule) as the bonds accrete in value when they get closer to maturity. They are redeemed at par value when mature.

These bonds are illiquid. The reason investors buy municipal bonds is TO AVOID paying taxes, as they are generally federal tax-exempt. What North Carolina and Florida did was create a market to buy these bonds back from investors. It was a pro-move.

Why would someone who owned bonds sell into a tender offer? Because they value having the cash today versus the uncertainty of cash tomorrow. The opportunity cost and net present value of the cash are worth more to them today.

A financially unsophisticated person would look at the Nevada debt portfolio and say, “Isn’t this great. We locked in low yields and coupons on our debt.”

A financially sophisticated person would look at the Nevada tax-exempt debt portfolio and say, “I can buy some of these bonds back at 85 cents on the dollar by creating a market for investors to tender their bonds to me. I can either use excess cash or refinance the debt. Remember, the treasurer is only paying 85 cents on the dollar for the bonds. They are selling $85 of new bonds to buy back $100 face value of old bonds, which means they are reducing the debt load taxpayers are on the hook for.

If the treasurer does nothing and lets the bonds mature, they mature at face value of $100 or what’s called “par”. Being smart about debt and the ever-changing market conditions allows one to take advantage of debt savings and investing opportunities in high and low interest rate conditions.

One thing that people have said to me is that the Treasurer’s $12 billion Nevada portfolio has had decent returns given the constraints on it. They aren’t wrong. However, because the portfolio is made up of US government short-term interest rate products, the fact that the Federal Reserve raised rates so aggressively has helped more than anything else.

The aggressive rise in rates has had real market effects on the Nevada portfolio, though. That rise in rates has caused taxpayers to lose money on existing bonds trading in the market. Someone who looked at the portfolio through the lens of accounting might not see, nor understand why.

Let’s use a live example:

The State of Nevada issued Motor Fuel Tax Bonds in 2020 with a 2040 maturity. They auctioned off $5.735 million with a coupon of 2% and a yield of 2.07%. These bonds are callable at par in 2030. But the dollar price of the bonds is 86 today since the market yield for a 2040 maturity of a AA rated municipal bond is a 3.25% today. Hence, the bonds are trading at a discount to par, which means the Nevada taxpayer is losing money.

The pro move is to do a tender offer for all the bonds and then reauction the remaining debt at today’s prices. This is what I mean when I talk about being competent.

It is a move that someone who has been active in interest markets would spot. People who have never been in a market would not understand where to look to spot the opportunity. It might not occur to them.

Wait until next-gen innovations rapidly change the way finance unfolds. It is coming.

It’s why you want a financial expert in a finance office to safeguard the people’s money. You wouldn’t want someone without a law degree in the attorney general’s office.