I start this week with some observations on the follies taking place in our nation’s capital, then provide some data around Puerto Rico and, finally, a look at a recently released report around municipal defaults. One might argue a common thread just might run thru this commentary. Be on the lookout for a special release later this week as the Geo Score is updated for States, Counties and over 330 Cities.
DC Follies at Our Expense – Here We Go Again
I am, perhaps, as numb to the shenanigans going on in our nation’s capital as you are. A year ago, we ended up with the Sequester (which, by the way, is still in place and the 2014 Sequester order has been signed by the President). A year ago, we talked about the debt ceiling, the budget, paying our creditors and tax reform – yes, it’s time to dust off your vocabulary. Here we go again. It seems, just as the calendar turns towards autumn, our nations elected officials ramp-up their dysfunction. I certainly do not profess to know the answer (like you, I have ideas) but I do know that shutting down the government is not the answer – after all, they will eventually start-up again and, other than one party “winning” they will have simply wasted time and money. So, as we dust off our Fall vocabulary, perhaps, We the People, should ask our elected officials to dust off their vocabulary and include the word compromise.
While on the subject, two more points to be made. First, yesterday I heard one of our esteemed elected officials, matter-of-factly stating that the idea of not raising the debt ceiling was plain wrong given the government must pay for obligations already incurred. Not for nothing but, if you incur obligations that you can’t pay for, it seems you have a problem. If you are a private citizen, you change your ways, work with creditors and get your house in order. If you are a municipality, you seek to do the same or end up like Detroit. I’m not suggesting the US Government file for bankruptcy but I am suggesting a good hard look across the board just as the Simpson-Bowles Commission did. As the world’s greatest rock band put it, “You can’t always get what you want. But if you try sometime, you just might find, you get what you need.”
Second, as many of our readers focus on our States and local governments and their reliance on Federal spending, you might be surprised to learn that 47 States receive at least 25% of their revenue from the Federal Government. 36 States receive 35% of their revenue from the Feds. Something to factor into the analysis.
DIVER Analytics, Map Module; State CAFRs, NASBO, Recovery Act Transparency Board
One may want to take a closer look at the source of the funding (by agency, contract, etc.) and gain an understanding of what may be if the debt ceiling is not raised or the government decides to further slow its spending growth (remember, Sequester did not slow spending, it slowed spending growth). If this data is important to your analysis of municipalities, let us know. We track Federal Spending to the zip code level as well as by the source and type of spending.
Puerto Rico – Word on the Street and Some Data
Unless you have been on holiday with no access to any media outlet, you are all too familiar with what the markets are telling us about Puerto Rico. Indeed, much has been written and, after spending a few days with some very smart credit analysts in California, I am not sure if the glass is half full or half empty, they’ve bottomed or what. Indeed, many of these very smart people tell me, absent any intervention or steps to get things directionally right, we are a few years from something “really bad.” They all did go on to point out that the government of the Commonwealth, is indeed, taking responsible steps to get their house back in order, fully cognizant that the house needs some serious work.
Below we provide some data points worth considering. I have selected New Mexico and Mississippi for comparison as they currently have the lowest Geo Scores. Puerto Rico is not scored as certain of the data used to calculate the Geo Score is not available for Puerto Rico.
DIVER Analytics, Filter Module.
It is hard, OK impossible, to deny that this fundamental data does not look good (other than the change in Violent Crime). Word on the street is that the government of the Commonwealth is taking steps to right the ship. Moreover, to help address a revenue shortfall, the government was able to transfer over $241 million from a swap collateral contingency fund to the General Fund helping offset otherwise lower than expected revenues. The actions and data of the coming months will be telling as this story unfolds.
Muni Defaults in a Post BK World
This past week, Kroll Bond Ratings released their “Municipal Defaults in a Post-Bankruptcy World.” I offer a few quotes and observations but space prohibits me from doing more. The report notes that:
…we do expect a higher default rate with substantially lower recoveries over the medium term.
It is worth noting that year to date data already supports this notion. 2012 saw 69 issuer bankruptcy and 150 default filings while 2013, through August, has seen 43 issuer bankruptcy and 121 default filings. Source: MSRB Filings, DIVER Database. Moreover, Kroll is not alone in their observation regarding lower recoveries, Moody’s opined similarly in a report they released on September 12.
KBRA believes that debt of municipal issuers, and in particular in the general government sectors, will likely experience somewhat higher default rates in the near-to-medium term… The composition of defaults has shifted, with defaults on G.O. debt increasing as a percentage of total municipal defaults since 2008…
Kroll’s observation is made in the context of economic conditions and the state of the fiscal well-being of municipalities. One may also want to contemplate the landscape post-Detroit with its potential for new municipal bankruptcy precedent.
Discussing the fact that more municipalities have defaulted or sought Chapter 9 protection than historically, the report notes “severe fiscal stress” and a reduction “in general fund revenues and in some cases increasing social service costs” with pension and retiree healthcare liabilities increasing.1 This weekly commentary routinely cites these and similar factors. Couple the same with earlier points around Federal spending and Kroll’s observations seem all the more relevant.
The practice of municipal credit analysis has historically been rigid and backward looking. KBRA’s new default study highlights the paradigm shift in municipal credit. Municipal credit analysis must now incorporate more due diligence and a forward looking view…
As our regular readers know, focusing on economic and demographic data and trends – drivers of tax rolls, receipts and spending – is a foundational aspect of our platform. Unlike a look in the rearview mirror, a CAFR that is, on average, 180 days old at release or a budget that contains the municipalities’ assumptions, economic and demographic data is, by and large, from independent sources and available within 24 hours of release from the source on the DIVER platform.
The entire Kroll report can be found at their website (https://www.krollbondratings.com/).
Have a great week.
Gregg L. Bienstock
CEO & Co-Founder, Lumesis, Inc.
Data Released Last Week:
- Drought Intensity, County, Sep, 2013
- Weekly Initial and Continued Jobless Claims, State, 9/14/2013
- Employment by Industry, State, County, 2013 Q1
- Avg. Weekly Wages, County, 2013 Q1
- Coincident Index Change, Aug 2013, State
- Tax Collections by Category, State, 2013 Q2
- UPDATED: Default Filings - Issuers, State, County, 2013
- UPDATED: Bankruptcy Filings - Issuers, State, County, 2013
1 For comprehensive pension data for all State sponsored plans and for plans sponsored by cities with populations greater than 100,000, please contact us at [email protected]. Lumesis tracks data for over 900 individual pension plans.