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More Disclosure Pressure on Munis
Investors in the municipal market have long demanded better access to governments’ financial information, particularly since the 2008 financial crisis. But tired of waiting, an industry group stepped up its calls for federal regulators to intervene this week in a letter to the Securities and Exchange Commission (SEC).
“The failure to publicly disclose bank loans to all market participants can lead to unexpected rating changes that negatively impact bond pricing,” said Lisa Washburn, chair of the National Federation of Municipal Analysts (NFMA). The group is calling for governments to disclose all interim but relevant information, such as an approved fiscal year budget and tax receipts, as well as clearly report any long-term debt obligations.
The letter also suggests that the SEC adopt the authority to ensure that municipalities file their financial disclosures in a timely manner. Currently, there is no enforced deadline, and governments typically file annual reports anywhere from six months to a year after the close of a fiscal year.
The Takeaway: The problem from an investor point of view is that the more troubled an issuer is, the more likely it will delay releasing relevant financial information. Take Puerto Rico, which is essentially out of cash and only recently issued its annual financial report for the 2014 fiscal year.
The SEC is well aware of investors' frustrations -- this week's letter largely urges the commission to implement its own recommendations from a 2012 report on the municipal market. But the SEC has been hesitant to push for changes as governments argue that they are too different from each other for a one-size-fits-all requirement to work. Governments want to be left alone to implement disclosure changes at their own pace.
But the NFMA isn’t the only organization beating down the SEC’s door on this topic. Credit ratings agencies and even the Municipal Securities Rulemaking Board have also been vocal, particularly in regards to disclosing loans from banks. Time may be running out for governments to ramp up their financial disclosures themselves.
A Country of Municipal Haves and Have-Nots
A new report this week from Standard & Poor's on Pennsylvania localities illustrates the growing economic disparity between urban and rural areas across the nation.
Pennsylvania has seen its population grow 0.8 percent over the past five years, but two-thirds of the state's 67 counties actually lost population. In many of those counties, the growth in the tax base has not kept pace with legacy costs like pensions and retiree health-care costs.
On top of that, slow economic growth and state budget issues could further hurt these municipalities, according to S&P. Governments that have the flexibility to raise a local income or property tax are “are more equipped to face rising costs despite slow economic growth,” the report said. Additionally, the less reliant on state aid, the better for local governments as that makes them less vulnerable to future fluctuations in state aid.
The Takeaway: These themes are repeated in states across the country, particularly as populations flock to major metropolitan areas. In Pennsylvania, a large portion of the state is rural and many of those regions have struggled. Areas reliant on coal mining, steel or other manufacturing jobs that have been in decline for decades have had a very weak economic recovery, S&P said.
While a majority of the country lives in a large metro area now, the vast geographic majority of our country is rural. This rural-urban divide has, in a financial sense, created a country of municipal haves and have-nots. Rural areas increasingly do not have the tax base to support themselves. It’s one of the reasons the National Association of Counties reports that nine in 10 U.S. counties has not fully recovered from the recession.
Pump It Up
The U.S. Energy Information Administration is predicting that gasoline consumption will set a record in 2017. That, according to Moody’s Investors Service, is a very good thing for highway bonds that are paid back in part by motor fuel tax revenue. While states’ gasoline tax receipts slid during the recession and increased tepidly during 2010-2012, those numbers have since improved, largely because of lower gas prices.
Even as fuel economy has gotten better -- meaning consumers make fewer trips to the pump -- the past two years have seen growth in state tax gas receipts -- 0.6 percent in 2014 and nearly 1 percent last year. That means people are driving more and the feds now estimate Americans will pump about 9.3 million barrels, or nearly 391 million gallons, of gas a day in 2016. That represents a 1.7 percent increase from last year’s daily average.
The Takeaway: Bottom line, this is good news for state highway officials. Higher gasoline tax receipts will strengthen debt service coverage on state highway revenue bonds. Perhaps even more key, said Moody’s, is that stronger gas tax revenues could expand states’ borrowing capacity to finance highway maintenance projects at a time when reinvestment has stalled.
“States have deferred highway maintenance for a decade, leading to a higher average age of highway assets and pent-up capital investment needs,” Moody’s said. “Considering the trend of growing pledged revenues, willingness by some states to increase gasoline taxes, and aging of capital assets, states may soon be poised to resume investing in their highways.”