The Week in Public Finance: Best and Worst States, More Chicago and the Oil Slump
A roundup of money (and other) news governments can use.
For past editions of the Week in Public Finance column, click here.
How solvent is your state?
For all the budget turnaround attention given to California lately, it still ranks toward the bottom of the 50 states (at 44th) when it comes to overall fiscal solvency in a new state rankings report released this week by George Mason University. Illinois and New Jersey rank last and second-to-last, respectively. Natural resource states dominate the top of the list. Alaska is ranked first while the Dakotas, Wyoming, Oklahoma and Montana are all in the top ten.
The July 7 report ranks the states on fiscal conditions in five areas:
1. Cash solvency. Does a state have enough cash on hand to cover its short-term bills?
2. Budget solvency. Can a state cover its fiscal year spending with current revenues? Or does it have a budget shortfall?
3. 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?
4. Service-level solvency. How much fiscal “slack” does a state have to increase spending should citizens demand more services?
5. Trust fund solvency. How much debt does a state have? How large are its unfunded pension and health care liabilities?
The bottom five states (which include Massachusetts and Connecticut) are there because they have low amounts of cash on hand and high debt obligations, the report said. The top five states tend to have significant amounts of cash on hand and relatively low short-term debt obligations. But few states are doing well when it comes to deficits or debt obligations in the forms of unfunded pensions and health-care benefits. They “continue to drive each state into fiscal peril,” the report said. “Each holds tens, if not hundreds, of billions of dollars in unfunded liabilities -- constituting a significant risk to taxpayers in both the short and the long term.”
Moving on down in Chicago
There’s been a lot of chatter about the diversity of Chicago’s ratings from the three major ratings agencies lately. But this week, their ratings of Chicago got a little more in-line with one another when Standard & Poor’s downgraded the city’s general obligation debt one notch to BBB+. The move puts S&P and Fitch Ratings in agreement and somewhat shrinks the split between Chicago’s ratings from the three major agencies. Moody’s Investors Service is now the outlier with its rating of Ba1, the only ratings grade in junk territory. There are three ratings levels between those two grades.
The downgrade from S&P takes Chicago out of the upper-medium grade of ratings and into the lower-medium grade class. Chicago is facing budget gaps projected to grow to $588 million in 2017 that are mainly thanks to increasing contributions to its police and fire fighter pension plans. In its downgrade, S&P analyst John Kenward cited "the city's structural imbalance, which... will necessitate corrective budget measures over several years. In our opinion,” he went on, “the city has not yet identified a credible plan to address the imbalance."
The ins and outs
The slump in oil prices and the strengthening dollar took a swipe out of some states’ international trade business during the first quarter of 2015, according to an analysis by Fitch Ratings released this week. Overall, exports declined 5.1 percent compared to the first quarter of 2014, although the combination of events affected the export sectors differently across states. The states hit hardest were Texas (which accounted for 44 percent of the total national decline), Louisiana (accounted for 21 percent) and California (responsible for 9.1 percent). The fall in oil prices affected petroleum oil exports in Texas and Louisiana, while California’s exports were affected by the decline in computer and electric product prices, commodity prices, and port disputes in the West Coast, Fitch said. Exports to China declined the most for Louisiana and California, while Mexico accounted for most of Texas’ fall in exports.
Arkansas, Pennsylvania and Kentucky saw a slight rise in exports this quarter and helped offset some of the decline. Arkansas’ and Kentucky’s main export products are civilian aircrafts, engines, and parts; Pennsylvania’s main export products are Bituminous Coal, Fitch said.