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Junk status on the rise among local governments
The number of local governments rated at junk status has nearly doubled over the past four years, according to a recent Moody’s Investors Service report. Although less than 1.1 percent of rated local governments -- cities, counties, school districts and special districts -- are rated at what’s called speculative grade, as of March of this year, 92 local issuers had at least one speculative-grade rating on either general obligation, special tax, lease, revenue or tax increment debt, the June 5 report said. Excluding California tax allocation districts (which were devastated by a 2012 law that significantly altered the payment mechanics of those types of credits), the number of speculative-grade local governments has nearly doubled since 2011, to 51 from 33, Moody’s said.
Of those 51 credits, 13 are local school districts -- up from six rated at junk in 2011. Cities and towns account for about half of the junk bonds, jumping from nine to a total of 24 in four years. Notable examples include Woonsocket, R.I.; Central Falls, R.I. (which emerged from bankruptcy in 2012); Salem, N.J.; and East Greenbush, N.Y. All four have had speculative-grade debt since 2011, which shows how difficult it is to get back to investment grade (bad news for Chicago, which Moody’s downgraded to junk last month and was not included in this tally). “Once a credit is rated below investment grade for more than two consecutive years ... it is much more likely to remain there for some time,” the report said.
But munis are scrappy. While many local governments with speculative-grade ratings remain weak for long periods, Moody’s said a significant number ultimately return to investment grade. Vadnais Heights, Minn., for example, sold off a costly sports arena to meet obligations on its debt. The sale, along with keeping strong general fund reserve levels, contributed to an upgrade to Baa2 in October 2014. This upgrade and others, the report said, shows "the resiliency of local governments and underscore that the sector remains one with very few defaults.”
So are states healthy or what?
A new analysis from the Federal Funds Information for States (FFIS) explains how two recent reports on state budgeting could come to contradictory conclusions. Last month, the Associated Press (AP) ran a story declaring “Nearly Half of States Expect to Confront Big Budget Gaps.” A few days later, the National Association of State Budget Officers (NASBO) countered with its own analysis, “Positive April Surprises to Help Many States Meet Revenue Targets.” So, FFIS asked, which is it?
The discrepancy is mostly an issue of timing. The AP report likely didn’t incorporate tax returns from April, which is generally the make-it-or-break-it month for states; most tax filers settle up with their governments at that time. “As AP looked at it, states were largely lagging their estimates, but NASBO’s more recent anecdotal data suggest that April revenues will be cause for celebration in many state capitols,” FFIS’ analysis said. The Rockefeller Institute of Government also released a report this week with more details on the April windfall for states.
There’s also the matter of what’s being measured. Again, there’s a difference between the two stories. The AP focused on potential budget gaps, meaning the difference between expected expenses and expected income. The NASBO blog focused solely on income (revenues). Still, a state can meet its revenue targets but still face a budget gap if expenses go too high.
Summer laze setting in
After getting off to a busy start, activity in the municipal market appears to be taking a summer vacation. Two reports this week noted a recent downward trend in bond issuance from governments. RBC’s Chris Mauro found this month’s bond issuance is on pace to be below average. June typically averages $40 billion in total bonds issued, by far the heaviest month of the year. But according to Mauro, last week’s volume was only slightly above $8 billion and this week’s total looks to be below it. Meanwhile, CUSIP Global Services tracks the number of CUSIPs (which are basically individual ID numbers assigned to each bond offering) issued each month. It found a 3 percent decline in May in the number of CUSIP requests made by issuers, meaning that the slowdown will hold at least in the near future.
The main cause of the drop is that governments have slowed down their bond refinancing. “Unless new money issuance starts to increase appreciably, the weekly new issue run rate should continue to decline,” said Mauro, “and what once looked like a record breaking volume year now looks like it's trending closer to the $375 billion, 12-year average.”