The Week in Public Finance: School Shutdowns, Trading Munis and Small Business Lending

A roundup of money (and other) news governments can use.
by | March 4, 2016

For previous editions of "The Week in Public Finance," click here.

Education Opens Closes Doors

One of states' top spending items is education. When lawmakers can’t agree on a budget -- or they decide to make severe cuts -- higher education often gets hurt. Sometimes, even K-12 spending takes a hit. In Illinois and Pennsylvania, ongoing stalemates over the current fiscal year’s budget may lead to school closures. In Louisiana, potential major cuts have students protesting.

Let’s start in Illinois, where three state universities have taken severe hits. Last Friday, Chicago State University sent layoff notices to all 900 of its employees. The school is making plans to end its semester early unless the state makes good on funding promises. That alarming news came after Western Illinois University announced it would cut $20 million from its budget over the next two years, while laying off 100 employees. Southern Illinois University is contemplating $40 million in cuts and has already started closing programs, such as men’s tennis and women’s golf. Most recently, Eastern Illinois University, which saw its credit rating downgraded to junk status last month, laid off nearly 200 employees, although the school president offered assurances that the university was not closing.

At least Illinois lawmakers have actually agreed on K-12 funding for the current year. Not so in Pennsylvania, where school districts haven't received all their funding from the state and some are borrowing to meet their costs. That still may not be enough to stay open.

The state Department of Education recently sent a checklist of things for school administrators to consider before ending the school year early. "Please note,” the memo pleaded, “that the closure of a school district for lack of funds is an unprecedented event.”

In Louisiana, lawmakers are currently meeting in special session to figure out how to close a nearly $1 billion budget gap in the current fiscal year, which ends on June 30. Last month, eight state universities were placed on watch for a credit rating downgrade because of the looming funding cuts.

Louisiana's public universities already have limited financial flexibility due to a bigger-than-average decline in state support over the past half-decade, compared with other states. As was the case last August, the specter of funding cuts has prompted student protests across college campuses. Gov. John Bel Edwards has warned that the state might cut up to $70 million more from higher education and reduce funding for the state’s popular scholarship program for low-income students.

Just the Facts, Ma’am

This year’s Fact Book on municipal market data is out, and the numbers show that more investors are buying and holding their bonds than in recent years. The market, which holds about $3.6 trillion in bonds, has always been more of a buy-and-hold kind of place than the corporate market, but trading volume has declined every year since reaching a high of $6.7 trillion in 2007.

In 2015, only $2.2 trillion in bonds were traded. According to the Municipal Securities Rulemaking Board, which publishes the fact book, most of last year’s decrease can be attributed to a nearly 40 percent trading volume decline for variable rate bonds. This makes sense, as those securities have largely fallen out of favor since the 2008 financial crisis and many governments are trying to get those bonds off their books.

The most-traded security of the year was Puerto Rico’s latest 20-year bond. It comes with a whopping 8 percent interest rate but, given the insecurity of returns, investors have been passing it around like a hot potato. The $3.5 billion bond offering was initially sold in 2014. Since then, the commonwealth has defaulted on some of its debt payments and has been seeking ways to file for bankruptcy so it can restructure its $70 billion in total debt.

Small Business, Few Options

Small businesses create about one-third of the nation’s jobs, but their access to credit continues to be a significant problem. In a survey released Thursday, half of the businesses that applied for credit last year said they didn’t get all the financing they asked for. Nearly one in five didn’t receive any financing, according to the 2015 Small Businesses Credit Survey, produced by a group of Federal Reserve banks. The reserve banks surveyed nearly 3,500 firms, 95 percent of which were businesses with fewer than 50 employees.

Among lenders, small banks received the highest satisfaction rating in the survey, at 75 percent. Large banks scored just 51 percent, mainly due to the difficult paperwork process and long waits to hear back on a credit decision. Online lenders, which are generally unregulated and are increasing their loans to the small business market, scored the worst. Just 15 percent of those surveyed were satisfied, and the chief problems were high interest rates and unfavorable repayment terms.

The tough loan market has had a chilling effect. Only 47 percent of the businesses surveyed said they even applied for credit. Of those that didn’t apply, 16 percent said it was because they thought they would be turned down anyway. This stifled lending environment has some regulators and governments looking at how to free up credit so small businesses can grow, but progress has been slow.