Welcome to Governing's weekly roundup of money (and other) news that governments can use. This edition touches on the California drought, college sports and more.
Dry times ahead
While much of the country shivers under the chill of a polar vortex, California residents are shedding their layers for a unseasonable warm winter. But this isn’t good news. Along with the heat has come a severe drought. It’s prompted Gov. Jerry Brown to declare a state of emergency; he’s urging residents to reduce their water usage by 20 percent.
So what does this have to do with public money? In a recent note, Moody’s Investors Service says this turn of events could be a mark against the credit of local water agencies as less usage will mean declining revenues. “If the drought is prolonged and water agencies do not raise rates sufficiently to compensate for the lost revenues, their reserve balances could be quickly depleted,” the note says. “The diminished reserves and revenue impacts will weaken their ability to make payments on water revenue-backed debt.”
Moody’s notes that the Golden State’s water agencies are only now just recovering from the last drought (2007-09) and the recession, during which time, debt service coverage levels fell by 30 percent. Thanks to new state policies, a water rate increase to offset the 20 percent reduction in use this year will also be difficult to implement for some agencies. But the doom and gloom doesn’t apply to all – Moody’s says some systems are “reasonably well-prepared to weather the drought because of built-in cost inflators in rate structures” while “others have responsive management that will quickly adjust rates.”
Hold your horses
Municipal Market Advisors is throwing a little caution at the good news last week that the municipal market saw its first positive net inflow of cash since May 2013. While this is a positive development, “MMA is not convinced this is a long‐term ship just yet,” analyst Matt Posner writes. “One item to consider is that much of the investments into funds were into exchange‐traded funds (ETFs) that are more ‘fast money’ than a consistent presence.”
How shiny is your college stadium?
If you watched the college football national championship game earlier this month, you may have noticed that Pasadena. Calif.’s Rose Bowl looked prettier than ever. That’s because the stadium, home to UCLA football, underwent a $180 million upgrade, part of a national trend of increased investment in college sports infrastructure. According to a new note by Wells Fargo Analyst Randy Gerardes, roughly 80 percent of higher education institutions have made or will make significant investments in basketball and football facilities and 70 percent are investing in baseball and training facilities. This trend has happened in the face of an overall decrease in capital spending in higher ed between 2007 and 2012. “In our view, universities are likely to continue to invest heavily in athletics,” Gerardes says. “[But] investors should consider whether those investments produce value or potentially introduce risks.”
For example: the return on investment can extend beyond an institution’s athletics program. According to Moody’s data, the University of Alabama (which won three national championships between 2009 and 2012 and narrowly missed appearing in the 2013 title game), reported increases first-year out-of-state enrollment to 52 percent from 35 percent from 2009 to 2012. The university also saw its net tuition revenue grow by 52 period during the same time period.
Of course the drawback is that when you spend a bunch of money on something, you reduce your financial flexibility. Fitch Ratings downgraded Baylor University ahead of its bond sale for its new stadium in October 2012, citing “a material increase in outstanding debt and associated carrying costs which will pressure the university’s recently reduced operating surpluses and financial cushion.” And the Rose Bowl also caused local officials headaches during its renovation: the project went over budget and Pasadena was saddled with about $30 million in extra debt. The increased cost was a major factor in the city’s bond rating downgrade to AA+ by Fitch last year.
But Pasadena’s gamble appears to be paying off – UCLA home games sold more seats than projected, the stadium hosted several sold-out concerts last year and revenue in January along was at least $6 million.