The birds’-eye view of muniland
My Thomson Reuters colleague at Municipal Market Data, Daniel Berger, published an excellent report on the debt of the 40 poorest U.S. cities. His work is exclusively for MMD subscribers, but I excerpted the high-level part where he summarizes the general view the credit rating agencies have about municipalities. Here is what Dan had to say:
Moody’s
According to a recent report from Moody’s, the outlook for various… local governments remains negative. It cited a weak national economy and possible global risks to stock markets that could hurt state revenue. Another problem is the austerity measures of the federal government, which diminish any chance of more stimulus aid. This week Moody’s released the results of a default study of municipal bond issuers using default data from 1970 through 2011. They believe that revenue bonds will account for most of the troubled issuers and they foresee a “very small but growing number” of local government issuers defaulting on their debt.
Fitch
Fitch has no single outlook for the local governments. However, localities face two big concerns. First, Fitch expects an inflation-adjusted 13% decline in property values. Taken together with the fact that assessments are catching up with previous declines, Fitch expects further declines in property tax revenues for local governments. These declines may pressure some local bonds.
Labor costs are local governments’ other big challenge. About two‐thirds of local government spending is for labor. The easy cuts to other sorts of spending have already been made. Governments might be considering gaining labor concessions. Decisions made related to labor costs will have the most impact this coming year on local governments’ financial situation. Whereas cuts to public safety previously were off the table, localities are now starting to consider that possibility. Meeting pension obligation gaps appears to be a bigger problem for local governments than it is for states.
Standard & Poor’s
According to an S&P report, most governments have started 2012 with far fewer resources than in the recent past. The report also discusses the role that liquidity continues to play in governments’ abilities to manage declining revenues. S&P does not expect “many defaults” and “even fewer are likely to occur among rated debt issuers.” However, this rating agency foresees the possibility of a greater divergence between strong and weaker credits emerging in 2012.
For the past two years S&P has consistently claimed to use its Global Rating Scale for municipal bonds. This week it announced changes in this methodology which will lead to the slight upgrade of nearly 3,800 (or about 1/3) of its outstanding municipal ratings. However, S&P refuses to call this a “recalibration.”
States receive crumbs from mortgage settlement
The $25 billion mortgage-fraud settlement that was announced yesterday came after 18 months of coordinated action by the Department of Justice, the Department of Housing and Urban Development and 49 state attorneys-general. The settlement is carved up so that homeowners and governments at the state and federal levels each receive some compensation. Given the scale of national losses, it’s a tiny penalty for banks that engaged in egregious servicing and foreclosure practices, and it will do little to repair the widespread economic damage.
More important for states, the amount they are set to receive far from covers the shortfalls they will suffer from lower property tax collections, which are pegged to property values.
A little background: Municipalities and school districts collect substantial revenues from property taxes, and they benefited from inflated housing values during the boom. With higher property tax collections, they ramped up municipal services. Starting in the first quarter of 2010, property taxes began to flatten, but property appraisals did not, as they lag behind property values by several years. We are just now starting to experience what could be a big decline in property tax collections.
National residential real estate values have dropped from $22.7 trillion in 2006 to $16 trillion in 2011, according to the Federal Reserve. The Tax Foundation has calculated that the median nationwide property tax is 0.97 percent of home values. If residential real estate values were fully appraised at lower levels, losses to local and state governments would equal $60 billion a year.
The ability of communities to raise property tax rates to make up for this shortfall will vary tremendously. New Jersey, for example, already has the highest rates in the country and is seeking ways to reduce this tax burden.
What do muniland insiders think?
When the mainstream press pays attention to muniland, often it’s the most colorful and misinformed voices — think Meredith Whitney – that dominate coverage. So it was great to get some interesting data today on how municipal insiders view the market from the muni team at RBC Capital Markets. They did a survey of 116 municipal market professionals at the recent Bond Buyer’s California Public Finance Conference. Respondents included officials from federal, local and state governments; bankers; and other municipal finance professionals in attendance.
The key findings, shown in the chart above, are that industry participants worry most about the low level of bond issuance, headline risk and federal budget issues. Headline risk and federal budget problems are out of the control of everyone in the municipal space. But low issuance is a puzzler. Certainly these professionals have had their trade reduced as fewer bond issues come to market and as municipalities face harsher credit constraints than they are used to.
Another terrifying data point reported by RBC is the length of time respondents thought that it would take for state and local government revenues to return to pre-crisis levels.
The majority of survey responders think it will take four or more years before municipal revenues return to 2007 levels. We are looking at very hard times for muniland given that demands on state and local governments are likely to increase as more people seek Medicaid coverage and other support programs. Given this outlook it’s easy to predict that municipal bond issuance will remain very flat. State and local governments don’t have the fiscal space to easily take on more debt.
It’s hard times ahead but industry participants don’t seem overwhelmed by conditions. Chris Mauro, who heads the RBC municipal research team, said:
The interesting take-away from the recent California Public Finance Conference was that the percentage of respondents who feel that municipal defaults will be less in 2011 than 2010 has been going up while at the same time, the percent of respondents who believe that it will take four years or more for state revenues to return to pre-recession levels has also been increasing.
This reflects the growing confidence on the part of industry participants in the ability of state and local governments to manage through the current difficult fiscal environment but while at the same time, acknowledging that US economic weakness will limit the organic growth in state tax revenues.
All high government approval ratings are local
This great graphic from Visually maps the public’s great discontent with the federal government using data from the Pew Research Center. It’s hard to imagine the numbers being any worse than this: 11 percent of the public is satisfied with the officials in Washington, DC.
Given Pew’s research, it’s somewhat counterintuitive that a recent poll from Gallup shows Americans pretty content with their state and local governments. From Politico:
Trust and confidence in local government has hovered around 70 percent for the past decade, and the recent gridlock at the federal level has done little to sully local impressions of government. In fact, 68 percent of respondents to a new Gallup poll on Monday said they had a “fair” or “great” deal of trust and confidence in their local governments.
State governments also received good reviews compared to their federal counterparts. A solid majority, 57 percent, viewed their state governments with a “fair” or “great” amount of trust.
It’s unclear why people trust local and state governments more. Personally I think all levels of government are susceptible to outside influences and corrupting internal players. People actually see the benefits of their local governments through roads, schools and garbage collection and maybe this boosts their trust.
The great muniland refi
Bloomberg picks up the theme I wrote about on Friday of the very favorable conditions municipalities are enjoying as they finance their debt. Bloomberg reports:
The foolishness of Ann and Amanda
Television is my least favorite medium because pundits usually strike outlandish poses that are wholly disconnected from the facts. Case in point is the short video above from MSNBC with Chris Hayes of The Nation, author Amanda Foreman, pundit Ann Coulter and political commentator and comedian Bill Maher. What are these people talking about?
Amanda Foreman: “Government doesn’t create jobs. Ideas create jobs. Innovation creates jobs.”
Fact check: State and local governments employ approximately 19.6 million people.
Chris Hayes: “My mother works for the government. Is that not a job?”
Fact check: Chris Hayes mother definitely has a “real” job. About 20% of the U.S. economy comes governmental expenditures, and much of that is paid as salaries and wages to government employees. State and local governments are about 12% and the federal government is about 8%.
Ann Coulter: “She [Chris Hayes' mother] is a drain on society.”
Rebuild America
The United States Conference of Mayors released a survey Tuesday focused on metropolitan transportation investments. Generally the take-away is that the mayors want less money spent on highways and more spent on cities’ transport needs.
From the survey:
• Ninety-eight percent of mayors point to investment in affordable, reliable transportation as an important part of their cities’ economic recovery and growth.
• Three in five mayors said they would not support an increase in the federal gas tax if federal transportation funding were allocated among programs in the same proportions that it is today.
• Ninety percent of the mayors urged reforms in federal transportation programs to allow cities and their metropolitan areas to receive a greater share of federal funds directly.
• More than three in five mayors have established a dedicated local funding source for transportation improvements, which would enable them to meet federal transportation project matching requirements.
• Absent a greater share of funding directly to cities and metropolitan areas, only 8% of the mayors indicated support to increase the federal gas tax.
The United States has benefited from decades of inexpensive oil. We built suburbs and a highway system that allows us to have energy intensive lifestyles.
People have left the residential areas of cities for decades.
But there is much to commend cities. Cities are the heart of commerce. Generally the best health care is found there. They are particularly environmentally friendly. And increasingly I hear of seniors retiring into cities.
Muniland’s black swans
Are we looking in the wrong places?
John Carney of CNBC argues for the possibility of a black swan event for muniland.
He’s right about unknown risks but I think he is looking in the wrong place.
He doesn’t mention municipal derivatives in his analysis. I mean interest rate swaps not municipal credit default swaps.
Derivatives are likely to be where muniland’s biggest risks lie.
From John’s blog NetNet:
The SEC should not be the only government entity dealing with these settlements and guilty pleas.
Their corporations are fined a modest amount of money, then it’s done.
What these executives and corporations are doing is illegal … against the law… and those illegal actions should be prosecuted by the Justice Department.
Most importantly, felony criminals need to serve time in prison.
When the Justice Department abdicates its authority in these matters to the SEC, there is no incentive to curtail similar future crimes. Those modest SEC fine is simply considered a cost of doing business.
Sharing services, and struggles
Some of the challenges facing muniland often are legacy problems, where a certain way of doing things has existed for a long time.
I can speak directly to that. Rhinebeck, NY, the place where I live, has both a village and town government.
The village has about 3,000 people and the town has about 8,000.
Imagine a tiny place with two highway crews and other duplicate town services.
Thankfully we have a merged school district.
People here have said for years that the two “municipalities” should be merged. (Actually the people saying this are those who have moved here within the last 10-15 years. Those who have lived here for generations think every thing works fine as it is.)
Joan Gralla of Reuters wrote about a study by Fairleigh Dickinson University’s PublicMind which showed an overwhelming majority of voters in New Jersey backed shared services for municipalities.
As I tweeted earlier, thanks for sharing. Small towns and counties need to be educated on the rules and outcomes in muniworld. The town I was raised in floated an issue of munis for several parking garages and, until they got “educated” had no problem or a feeling for the downside of defaulting on the issue. Luckily a local broker was on the advisory board and managed to inform them as to how they would have a hard time ever getting an issue to float again.
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