Those nasty, long-term liabilities

Sure, day-to-day finances are improving for state and local governments. But this week's Municipal Market Analytics outlook points out that a recent Government Accountability Office study on long-term liabilities bolsters the firm’s view that Medicaid and retiree health care represent major challenges for state and local governments. MMA (which changed its name this year from Municipal Market Advisors), said in its write-up that investors should note the secondary treatment unsecured bondholders received in last year’s bankruptcy cases in Stockton, Calif., and Detroit. In MMA’s opinion, investors should “retreat from issuers with both a large retiree health care liability AND a material risk of being dragged into chapter 9 [bankruptcy].” (In related news, a Luxembourgian bondholder company sued bankrupt San Bernardino, Calif., this week for favoring pensioners over bondholders as the city navigates its bankruptcy.)

Despite recent strides in the economy, state and local government revenues are not keeping pace with expenditure growth and the GAO expects the gap to widen without major policy changes. As a percentage of GDP, MMA notes, revenues are not expected to reach 2007 levels until 2058. Meanwhile, health care costs are expected to nearly double, to 7.4 percent of GDP by 2060. According to the GAO, state and local governments will need to reduce expenses  or increase revenues by 18 percent for the next half-century to close the fiscal gap. “We think the fiscal challenges will reasonably constrain infrastructure spending by these governments -- and therefore, municipal debt issuance,” MMA said, adding that the greatest pressure would trickle down to the local level.

Poking the Monster

New York, Connecticut and Philadelphia have come together to try to push Monster Beverage Corporation to diversify its board of directors. The three governments’ pension funds have holdings with the company and, together with Calvert Investments, filed a shareholder proposal on Jan. 8 calling on the company to report on plans to increase gender and racial diversity on its board. The filers hold approximately $57 million in combined shares of Monster Beverage.

In 2009, Monster said diversity would be a factor in considering board nominees after pressure from investors forced the company to clarify its policy. “It defies belief that the company’s directors have not identified one diverse candidate to serve on the board since then,” said Connecticut Treasurer Denise Nappier in a press release. The filing asks that the board describe what steps it has taken or will take to include women and racial minorities in its nominee pool, and to expand director searches to include nominees from non-traditional sources. According to the New York Comptrollers’ office, corporate boards tend to have long director tenures, which leaves fewer opportunities for new candidates to enter the boardroom.

A warning in Kansas

Kansas’ shaky financial status in 2015 is getting noticed by Standard & Poor's, which issued an analysis this week warning that the state’s failure to achieve a structurally balanced budget could hurt its credit quality. Two developments are important: a lower court ruling that could require substantially higher education funding if upheld on appeal, and the state's budget shortfall. Kansas, which cut its income tax rate in 2013, could be required to spend more than $500 million extra per year, beyond the $129 million of increased education funding the Kansas Supreme Court required the state to spend in fiscal year 2015, according to S&P. Although the new ruling has no immediate impact because of the appeal, it does add uncertainty to future years’ budget, S&P said.

Additionally, the state is facing a projected $280 million deficit (about 4 percent of the general fund budget) in 2015. Gov. Sam Brownback has proposed one-time fixes to plug the hole, but if approved by the legislature, S&P said the state would be left with essentially no money in its general fund at the end of the year. That leaves no cushion if the deficit grows even more this year. S&P lowered Kansas’ credit rating last summer to AA from AA+ and assigned a negative outlook. (Moody's issued a similar downgrade last May.) “Although Kansas will likely make adjustments to bring its general fund balance back to a marginally positive level at fiscal year-end 2015, we remain concerned about the one-time nature of most of the budget fixes, and the large fund balance drawdown,” S&P said.