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Despite Fears, Many Muni Credits Are Stable to Better

JUN 25, 2012 7:21pm ET
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Even though some municipal credits are on shaky ground, local and state finances are generally improving, according to the latest data compiled by McDonnell Investment Management LLC.

SLIDESHOW: Municipal Credit Quality Stabilizes

Richard Ciccarone, chief municipal strategist at the firm, has compiled the most recent available data on state, county and city governments, as well as the school district, revenue bond, health care and higher education sectors.

The most recent numbers used in the report are from fiscal 2011, and while not all parties have reported that data, Ciccarone has collected a substantial portion of it.

“In general, municipal credit quality is showing stabilization and some improvements as reflected by their cash levels and deleveraging,” Ciccarone said. However, “some of the weakest credits remain very vulnerable.”

The data shows state finances improving. Median general fund tax revenue rose 14.5% in fiscal 2011 from fiscal 2010.

The median days cash on hand in states’ general funds and governmental activities funds improved by 33% and 1%, respectively. However, both are still at levels below those found in the years from 2006 to 2009. The former is at 37.4 days and the latter is at 63.6 days.

The general fund is the largest discretionary fund of a government, and is usually used for appropriation, Ciccarone said.

The government activities fund includes the general fund and other funds that may have restrictions. It does not include fiduciaries. Some of the government activities fund money may be used for inter-fund loans or transfers.

State debt per capita statistics are mixed. From fiscal 2010 to fiscal 2011 there was a 2.3% decline in total direct debt per capita but a 0.9% increase in net direct debt per capita, using incomplete 2011 data.

Net direct debt includes general obligation debt plus annual appropriation debt minus self-supporting debt, Ciccarone said.

Total direct debt includes net direct debt plus most other tax-supported debt. It does not include revenue bond debt.

The median pension funded ratio for states improved slightly from 72.0% in fiscal 2010 to 72.6% in fiscal 2011. The 2011 figure remains 9.9 percentage points under the level in fiscal 2007, prior to the financial crisis.

In a report issued Thursday, Standard & Poor’s found in preliminary data the average state pension funded ratio to be essentially unchanged from fiscal 2010 to fiscal 2011. Based on a sample of 29 states, S&P found the ratio to be 72.6% in 2010 as compared to 72.7% in 2011.

Cities, counties and school districts also generally saw improvements in their cash positions from 2010 to 2011. Based on samples, the percent of cities with less than 30 days cash on hand fell from 18% to 12%, the percent of counties went from 12% to 8%, and the percent of school districts went from 28% to 23%.

Based on samples, the percent of cities with governmental activities fund cash on hand below 60 days improved from 11% to 8%, the percent of counties in the same circumstance improved from 12% to 5%, and the percent of school districts improved from 33% to 28%.

Median pension funded ratios for cities remained fairly stable from fiscal 2009 through fiscal 2011. However, compared to fiscal 2007, the fiscal 2011 ratio is down 7.18 percentage points.

Debt service as a percentage of total expenditures for school districts increased from 8.4% in fiscal 2010 to 9.0% in fiscal 2011.

The trend to less borrowing by municipalities in the last couple of years can be seen in the revenue bond sector.

From fiscal 2010 to fiscal 2011 long-term debt outstanding declined 4.2% for the airport sector, 2.8% for toll roads, 2.1% for hospitals, 1.8% for private higher education, 1.7% for public higher education and for 2.8% for the water and sewer sector.

“Municipal enterprises have been deleveraging in the last few years .... This reflects the mood of the country,” Ciccarone said.

In the revenue bond sector the amount of revenues available for expenditures increased. From fiscal 2010 to fiscal 2011 the airports sector improved 9.0%, toll roads improved 0.9%, hospitals improved 14.7% and the water and sewer authority improved 20.9%.

In the water and sewer service sector, debt-service coverage improved from 1.45 times in fiscal 2010 to 1.56 times in fiscal 2011. Debt service coverage is net revenue available for debt service divided by current debt service. However, that is still lower than the 1.71 level found in fiscal 2007.

The sector’s excess margin shows a similar pattern. It improved from 5.7% in fiscal 2010 to 8.2% in fiscal 2011.

Again, the fiscal 2011 figure is lower than the 11.4% pre-financial crisis figure in fiscal 2007.

Excess margin is non-operating plus operating income minus both non-operating and operating expenses, according to Ciccarone. It does not include bond principal payments.

The hospital sector also improved from fiscal 2010 to fiscal 2011. The median hospital debt-service coverage went from 3.2% to 3.6%, just slightly lower than the 3.7% in fiscal 2007.

Excess margin improved from 3.4% in fiscal 2010 to 3.9% in fiscal 2011. The latter figure is still substantially lower than the 4.8% in 2007. Median days cash on hand improved 12.4% from 143.1 days in fiscal 2010 to 160.9 days in fiscal 2011. The latter figure is a substantial improvement on the 138.8 days found in fiscal 2007.

Finally, the private higher education sector has also improved. The median ratio of unrestricted resources to debt improved from 0.55 in fiscal 2010 to 0.62 in fiscal 2011.

However, it is still considerably lower than the 2007 ratio of 1.18.

In this sector, inflation-adjusted debt per full-time equivalent student declined 1.2% from fiscal 2006 to fiscal 2011.

During this same period private higher education schools managed to increase the median inflation-adjusted tuition per full-time equivalent student 4.1% from $17,206 to $17,911.

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Comments (2)
Great piece, excellent review of some of the important analytical statistics!
Posted by Sekou S | Tuesday, June 26 2012 at 9:47AM ET
As always, Rich Ciccarone marshals the salient facts and cuts through the fog.
Posted by csandmel | Tuesday, June 26 2012 at 9:57AM ET
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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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