Muni Credit News June 7, 2016

Joseph Krist

Municipal Credit Consultant

STATE FINANCIAL HEALTH RANKINGS

The Mercatus Center at George Mason University annually ranks each US state’s  financial health based on short- and long-term debt and other key fiscal obligations, such as unfunded pen­sions and healthcare benefits. This ranking of the 50 states and Puerto Rico is based on their fiscal solvency in five separate cate­gories: Cash solvency. Does a state have enough cash on hand to cover its short-term bills? Budget solvency. Can a state cover its fiscal year spending with current revenues, or does it have a budget shortfall? Long-run solvency. Can a state meet its long-term spending commitments? Will there be enough money to cushion it from economic shocks or other long-term fiscal risks? Service-level solvency. How much “fiscal slack” does a state have to increase spending if citizens demand more services? Trust fund solvency. How much debt does a state have? How large are its unfunded pension and healthcare liabilities?

Alaska, Nebraska, Wyoming, North Dakota, and South Dakota rank in the top five states. Kentucky, Illinois, New Jersey, Massachusetts, and Connecticut rank in the bottom five states, largely owing to the low amounts of cash they have on hand and their large debt obligations. There were big movers in each of the five categories that make up the overall ranking: Colorado, Delaware, New Mexico, and Iowa all moved down in the ranking of cash sol­vency, while Maine and Minnesota both improved.

While the methodology of the study is clear, its results show its limitations. The bottom five states would be likely to finish near the bottom of any such survey. At the same time, states like Kansas with limited direct debt issuance powers inflate their relative position. On the other hand, current oil/gas productions states like Alaska and North Dakota are clearly under current fiscal distress. Alaska is balancing its budget by running down reserves accumulated in prior years of higher oil prices. North Dakota and its municipalities, like Williston, are seeing significant revenue impacts. No one would call them financially strong on a current basis.

Our point is to help investors place surveys like this in context. Information without context is like trying to operate a new piece of electronics without reading the instructions.  It’s likely to go a lot better if you follow the guidance of the professionals. That is also true for municipal bond investing. It’s something to keep in mind when you try to interpret data and evaluate it in relation to your municipal bond portfolio.

FLORIDA CITY UNDER STATE REVIEW AGAIN

Just weeks after Miami-Dade County officials sent letters to the governor warning that the City of Opa-Laka could be shut down because of gaping budget shortfalls in the millions Governor Rick Scott issued an executive order declaring that it needs  state assistance to resolve the state of financial emergency that currently exists through the implementation of measures authorized  by Part  V, Chapter  218, Florida Statutes.

Under the Agreement, the City of Opa-locka shall obtain written approval of its proposed annual budgets, and any amendments to such budgets, from the Governor before final approval of the budget. A  financial  emergency board  shall be established  by the Governor to oversee the activities of the City of Opa-locka. The board members and chair of the financial emergency board shall be appointed by, and serve at the pleasure of, the Governor.

The financial emergency board shall adopt such rules as are necessary for conducting board business, and shall make  regular  reports to the Governor  of its findings, recommendations , and  actions. The City of Opa-locka is prohibited to issue bonds, notes, certificates of indebtedness, or any other form of debt without the prior written approval of the Governor. The City of Opa-locka shall make available for inspection and review all records, information, reports, and assets of the City at the request of the Governor.

For months, Miami-Dade County Mayor Carlos Gimenez had urged Scott to issue the order while the FBI was undertaking an investigation targeting city leaders, including the Mayor, the City Manager and a City Commissioner. Last week, one Commissioner took his own life by crashing his SUV into a tree two days before he was to turn himself in to Miami-Dade prosecutors in a state corruption case. The order follows by nine months the discovery of $8 million of previously undisclosed debts.

Publicly issued debt outstanding from the City is insured. It does not have an underlying rating. While the Governor’s order is in effect, the City does not control its fiscal affairs and cannot make any decisions of consequence without approval. The City of Opa-locka would have to obtain prior written approval from the Governor before it may seek application of the laws under the bankruptcy provisions of the United States Constitution and/or Federal Statutes.

ARE STATE CREDITS ABOUT TO WEAKEN AS A GROUP?

Some are concerned about “slowing” state revenues in the first quarter of 2016. A recent report from the Rockefeller Institute of Government is the latest source of concern. So what does it say?

It observes that personal income tax revenue growth slowed to 6.5 percent on a year-over year basis, down from 14.4 percent growth in the second quarter of 2015. Thirty-four states reported increases in personal income tax collections, while nine states reported declines. Second-quarter growth had been atypically high, likely reflecting the strong stock market of 2014 and taxpayer response to federal tax rate changes. Growth was also weak in all other major tax sources: corporate income taxes grew by 1.0 percent, sales taxes 3.2 percent, and motor fuels 5.3 percent.

The Institute also notes that states expect fiscal years 2016 and 2017 to be much weaker than fiscal year 2015. The median forecast of income tax growth in the thirty-six states for which it was able to gather recent forecasts is 4.6 percent for 2016 and 4.4 percent for 2017, compared to 7.8 percent actual growth reported for 2015. The median forecast of sales tax growth in the thirty-eight states for which we have data is 3.5 percent for 2016 and 3.9 percent for 2017, down from actual 2015 growth of 4.5 percent.

We think that it is important to note that what is being observed is slower rates of growth, not actual declines. We would also note that some of the prior rates of growth against which these rates are compared must be viewed in the context of the impact of the Great Recession on state revenues. Those impacts were unique in the post-war experience of our market and created a low base against which to measure growth. Before one panics, keep in mind that the data is available to budgeters early enough in this budget cycle for them to take into account when projecting budgets for the upcoming fiscal year.

Our view is that this data is important but we believe that political and ideological issues should be of more concern to bond investors than the absolute short term revenue trend data. We are not ready to panic yet.

PR PRIMARY RESULTS ARE ANTI PROMESA VOTE

Puerto Rico chose the son of former governor, Pedro Rosselló, who served from 1993 to 2001, and who opposes a U.S. House plan for fixing the island’s debt crisis, over their representative in Congress who supports it for the New Democratic spot in this year’s gubernatorial election. Ricardo Rosselló Nevares won 51.08 percent of the vote, while Resident Commissioner Pedro Pierluisi, Puerto Rico’s congressional representative, won 48.92 percent in the Sunday election.

Rosselló will contest the general election in November, with he and David Bernier, the pro-commonwealth Popular Democratic Party (PPD) candidate, considered the frontrunners. Bernier also opposes the bill – and has threatened to sue to block it – as do the other candidates on the ballot: María de Lourdes Santiago of the Puerto Rican Independence Party (PIP), Rafael Bernabe of the Puerto Rico Working People’s Party (PRTP) and independent candidates Alexandra Lúgaro and Manuel Cidre.

The vote shows the difficulty that is faced in determining how feasible any recovery program imposed by Congress will be. Between the high level of opposition on the island and efforts expected from the U.S. Senate against strong oversight, we think that approval and implementation of an effective restructuring and recovery program is far from a done deal.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

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