The Week in Public Finance: A Math Lesson, Hartford's Timeout and the After School Special

A roundup of money (and other) news governments can use.
by | October 10, 2014
Standard & Poor's revised its outlook for Hartford, Conn.'s credit from stable to negative.
Standard & Poor's revised its outlook for Hartford, Conn.'s credit from stable to negative. FlickrCC/J. Stephen Conn.

A schooling on finances

Fitch Ratings is warning that while California school district finances are getting better, increased costs down the road will offset a significant portion of projected funding growth. School districts are benefitting from a third year of funding increases and are slated to see funds grow as part of better state revenues and make-up payments for underfunding K-12 during the state's recession years. But, said Fitch Director Scott Monroe, budgetary pressures won't let up. “Districts must contend with a multi-year program of pension contribution increases, the scheduled expiration of temporary sales and personal income taxes in fiscal years 2017 and 2019, and pent-up wage, service level, and capital pressures,” he said in an analysis released Oct. 7.

In particular, pension reform changes would end up raising district contribution rates by 131 percent over seven years and absorb a significant portion of districts' resources for decades, Fitch said.

Not so sure about the Insurance Capital of the World

Hartford, Conn., has struggled in recent years to balance its budget and lawmakers have thrown everything but the kitchen sink at the problem. (Namely, raising taxes, laying off employees, cutting expenses and resorting to one-time fixes.) In 2013, a budget analysis reported that the city faced a $9.4 million shortfall in that year's $540 million budget, and a $70 million deficit in 2014 — a gap equal to about 12 percent of annual spending. The projections showed Hartford’s deficit rising to as much as $82 million by the 2017 fiscal year.

Now, the city’s perennial financial woes have moved Standard & Poor's to revise its outlook on the city’s credit to negative from stable, an indication that Hartford could face a ratings downgrade if things don’t improve. “The outlook revision is due to the city's diminished flexibility following a sizable general fund drawdown projected for fiscal 2014, and significant budget gaps in its long-term projection," Standard & Poor's credit analyst Hilary Sutton said in a press release this week.” Hartford has an AA- rating from S&P.

A sunnier outlook on not being one of the cool kids

In just about every afterschool sitcom, there comes a point where the dorky-but-loveable guy is left out of something the rest of the kids are doing. And his sympathetic mom takes him aside and explains that children can be cruel and they’ll all be sorry some day when he’s highly successful and they’re trying to recapture the glory days of high school. Or something like that. Well, this week, the Municipal Market Advisors firm seems to have taken on that same comforting tone with its take on how muni bonds were excluded from the new “High Quality Liquid Assets” (HQLA) category of investments banks are now required to maintain as a certain portion of portfolios.

Issued by the U.S. Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, the new HQLA rule exists to make sure banks have enough assets on hand that can quickly be converted to cash in the event of a financial crisis. In MMA’s view, the great majority of banks buy municipal bonds for income and not for a quick cash out. Ergo, concludes MMA’s weekly outlook, being excluded shouldn’t change much in terms of munis’ popularity with banks in the long run.

And even as there is progress on including some municipal bonds in the HQLA category, MMA reminds readers that “HQLA eligibility is just that; banks may well choose not to include any municipals as HQLA even if they are eligible to do so. And in that vein, banks could still favor selling their municipals in a crisis to raise cash.” In other words, whether or not munis are included, their perceived value as an investment shouldn’t drastically change. “Regardless of what actually happens, we still see the likely net industry takeaway as modest,” MMA writes.