INSUBCONTINENT EXCLUSIVE:
If you&re a certain age, it likely that you&ve never given a second thought to buying a municipal bond or the process of bond buying, even
if you&ve intuited, rightly, that it an intentionally opaque business.
Yet there could be a big opportunity for startups, and for people
looking for places to invest, and for cities with crumbling infrastructures, in disrupting the status quo — if only more Americans start
playing attention.
First, there a strong case for buying bonds
Late last year, the Trump administration capped at $10,000 the amount that taxpayers can deduct in property tax and local and state income
Most people with hefty tax bills are benefiting in other ways from that same new tax bill, but this aspect of it isn''t so great for them,
and municipal bonds can help
The reason: interest income paid on muni bonds is exempt from federal tax
(Bonds issued within one state can also be free of state tax.)
What about people without hefty tax bills For one thing, bonds are a very
They&re not sexy, it true ( they typically deliver interest in the single digits), but they also feature low default rates
Whether debts from states, cities, or counties, they&re typically government guaranteed and paid back in full at the end of their term
In fact, muni bond default rates have been as low as below .03 percent over the last decade
What also compelling — perhaps even more so — is that bonds can give residents an opportunity to help out the community where they live
voters in 2016 overwhelmingly approved a $600 million bond to fix old city streets and build affordable housing.
You might be wondering at
this point where the new opportunity lies and what role tech can play
Let start with the moolah, which there happens to be a lot of sloshing around the municipal bond market
Last year, Morningstar Direct reported $34 billion in net inflows to municipal bond funds and exchange-traded funds, and there a lot of
action happening outside these kinds of products, which package up a bunch of bonds to create a diversified portfolio for investors.
Like
any financial services disruptor, the idea here is to offer what the big financial institutions are offering but to do it at less
cost.
There also room to create many more bonds than are currently available
As the New York Times reported earlier this year, fewer municipal bonds have been hitting the market ever since the financial crisis of 2008
More, the Trump administration new tax law revision eliminated something called &advance refunding issues,& which the Times describes as a
type of municipal bond financing that accounts for around 15 percent of the market
Where there constrained supply, there demand.
Right now, there aren''t tons of startups paying attention to public finance, and perhaps just
one company laser focused on bringing the muni bond market into the 21st century: Neighborly, which is a six-year-old, Bay Area-based
company that very progressive, to say the least, for a bond broker
In 2017, its technology enable the city of Cambridge, Ma., to create $2 million of &mini bonds& that allowed residents to earn tax-exempt
interest for smaller check sizes than typically possible, and the residents were able to invest that money directly in a variety of
projects, without going through a middleman
(Apparently, it was successful; Cambridge staged a second mini bond sale earlier this year.)
Earlier this year, Neighborly convinced the
city of Berkeley, Ca., to stage an initial coin offering that it dubbed an &initial community offering.& The idea is to deliver
crytocurrency tokens in exchange for investments into cash-strapped projects in Berkeley — tokens that will be backed by municipal bonds
(Bond holders can receive their money back in digital coins or cash.) The project is still in development, but if it works, it could
certainly provide a roap map for other cities.
Whether Neighborly winds up being a pioneer in the space- & or else trampled by a newer
entrant — remains to be seen, but a recent on-stage sit-down with a longtime political strategist turned investor, Bradley Tusk, opened
our eyes to the possibilities
You can check out part of that conversation below
Note that Tusk is not an investor in Neighborly but has more recently begun advising the company
Our chat has been edited for length.
TC: You think the muni bond market is broken
Why
BT: We have a system now that, on the one hand works
Governments can issue debt
You can build projects and people will get paid back
But it a very opaque, very closed system
And in the way that tech has managed to disrupt other very closed industries and force change and make them more cost efficient and
transparent, there no reason that can''t happen in public finance as well.
[Earlier in my career],I was at Lehman Brothers
and they didn''t know where to put me so they stuck me in public finance
The people who worked there were honest, they weren''t the people who bankrupted the global economy
But they made a lot of money, and effectively, it was just all layered on top of the taxpayers
It built into [banks&] underwriting costs
And you just don''t need that any more.
TC: So right now, bonds are mostly made available through brokers who charge too much in your view
But is skipping straight to &initial community offerings& or employing blockchain technologies the right way to go You could see that
scaring people.
BT: I think blockchain gets confused with crypto and ultimately, it just a better system of piping, a more efficient way of
moving data across a ledger from Point A to Point B and done n a way where it distributed across lots of different places so that it more
But it plumbing; it infrastructure at the end of the day
So it will evolve to the point where it will just make a transaction that complicated and has lots of different parties and pieces just
It no different than how the Internet makes it faster to do things we used to do
Email is faster than writing a letter
Text is faster than email.
[To your point], what Neighborly is trying to achieve isn''t solely dependent on blockchain
I don''t think it existed in the form it does now when [Neighborly founder and CEO Jase
Wilson] first came up with this idea.The main notion is you have a public finance system that expensive and opaque and not particularly
You meanwhile have a lack of awareness by the people most impacted by the decisions [about where bond money should go], and those are real
inefficiencies in the marketplace that Neighborly and other companies are trying to do address
Blockchain should just help them do it more efficiently over time.
TC: Is Neighborly making already available bonds to users of its platform
or creating new bond offerings
BT: Both
It can participate in a process and make bonds available or it can work with a municipality that, say, wants to create community-owned
broadband.
TC: What about challenges in persuading governments to work with startups like Neighborly Aren''t there a lot of special
interests and existing relationships to overcome
BT:Yeah, there a huge problem right now, which is that you have all these firms that advise
government on issuing debt or participate in the process that, even though a lot of them are prohibited from giving money directly to
candidates, they are very, very entrenched
They have relationships with mid-level people at budget offices everywhere.
This is a cartel that has to be taken on, just like Uber has had
to take on the taxi industry and Airbnb has taken on hotels
In some ways, it an even harder cartel to fight because it so opaque
No one really understands how the budgeting process works internally, so it a big cartel and it a silent cartel, which in some ways is the
most powerful of all, so it a pretty big fight
I give Neighborly a lot of credit for taking it on.
TC: Is there a precedent here
BT: [Not really.] One company does it well, then 15 more
The first one has to do all the heavy lifting and take on all the fights and that probably what going to happen here, too
When market opens up, and people realize there money to be made, you&ll see more come in, but right now, there just one company that I&m
aware of that doing most of the work.
Public finance departments are good at really working over who gets to issue and underwrite the debt,
