Central Plains States Displaying Stability

CHICAGO — The economies of Iowa, Nebraska, and the Dakotas have emerged as some of the healthiest in the U.S., enjoying a rare stability anchored by strong commodity prices while largely escaping the strains posed in other states by the housing market’s collapse and high unemployment.

While facing some stress, overall most municipalities located in the Central Plains states have managed to avoid the steep revenue declines plaguing other local governments and should be able to cover budget shortfalls without much trouble, according to a new report from Moody’s Investors Service.

“It’s a story of stability, of slow and steady growth,” said s analyst Elizabeth Foos, one of the authors of “Central Plains Buck National Economic Trends; State and Local Government Credit Profiles Remain Sound.”

“We’ve been spending a lot of time with stressed credits throughout the country and we’re seeing overall in these particular states more stability,” she said. “They’re experiencing some stress, but it isn’t as severe as other parts of the country, as they seem to be rebounding more quickly than other parts of the country.”

Having missed out on the housing boom enjoyed by much of the rest of the nation, the region is now escaping the fallout from the housing bust.

The housing market’s relative stability is reflected in the ability of issuers like the South Dakota Housing Development Authority to continue to sell its bonds at relatively attractive rates as other Midwestern housing agencies face more challenges entering the market.

From a market perspective, the stability of the credits makes them an attractive buy for investors, but the supply of tax-supported paper from the region is scarce. None of the four states featured in the Moody’s report issue general obligation bonds.

“They have so little indebtedness, especially the state governments, if you like these areas it’s a challenge to find bonds that one can buy from these states,” said Richard Ciccarone, head of research at McDonnell Investment Management.

The biggest issuers in the Central Plains states are often public power and housing agencies, universities, and health care systems.

In addition to not issuing GO debt, North Dakota does not issue any state-supported revenue debt either.

“You’re stretching to find bonds in North Dakota even if you’re interested,” Ciccarone said.

“The numbers are good, and the states are in good shape,” he said. “But you’d have a hard time finding tax-supported debt because of the smaller amounts available.”

Nebraska and Iowa face budget deficits, but remain less hard-hit than many other states and are strengthened by strong reserves.

Iowa entered fiscal 2010 with a $100 million ending balance and $373 million of reserves, while Nebraska’s reserves reached a record high of $593 million by the end of its fiscal 2009 on June 30.

North Dakota, meanwhile, boasts a $1.2 billion budget surplus that has been built largely from oil-related revenues.

In a reflection of the state’s strong housing market, South Dakota’s largest issuer, the triple-A rated Housing Development Authority, has managed to price bonds at relatively attractive interest rates over the last year despite the market fallout that has largely frozen other Midwestern housing agencies, like those in Ohio and Wisconsin.

“Our housing prices never did decrease that much — they never saw much of an increase either,” said executive director Mark Lauseng. “We didn’t see as much predatory lending, and the underwriting was a little more conservative in the state.”

The agency yesterday closed a sale of $75 million of fixed-rate housing bonds that captured an interest rate of 4.75%, according to Lauseng.

He said that states that suffered fewer “big swings” in the housing market are now “going along steady.” Overall, the authority’s issuance volume is up by about 20% from the same time last year, largely due to the federal government’s first-time homeowner’s tax-credit program.

The agency has continued to attract the interest of retail investors, but institutional appetite has diminished over the last year. The federal program to begin buying housing agency debt next year is expected to spark more institutional interest, Lauseng said.

On the local side, governments in the Central Plains are showing signs of being on the road to economic recovery, Moody’s said.

Key revenue sources, such as sales and property taxes, are softening, but not at the higher rates seen across the country.

“Previously, we were seeing upper single-digit growth in sales tax trends [in the Central Plains]. Now we’re seeing 1% to 3% growth in sales tax,” said Moody’s analyst Nora Wittstruck. “Unlike the rest of the country, where there are severe declines in sales tax revenues, they’re still experiencing some growth.”

While clouds could appear on the horizon — Ciccarone noted that Iowa and Nebraska are heavily invested in the vulnerable ethanol sector — overall, the Central Plains states are expected to continue to benefit from low unemployment and strong agricultural enterprises, analysts said.

“There’s only so much land, and you can’t replace our farming completely with products overseas because of high transportation costs,” Ciccarone said. “This is good for the long term. These states are desirable places.”

Standard & Poor’s rates North Dakota AA-plus and Moody’s rates it Aa2. Fitch Ratings has no underlying rating on the state. Iowa carries an implied GO rating of AA-plus from Fitch and a Aa1 rating from Moody’s. Standard & Poor’s rates the credit AAA.

Nebraska is rated AA-plus by Standard & Poor’s, while Moody’s and Fitch have no underlying rating on the state.

Fitch rates the South Dakota’s lease-backed debt AA-minus, and Standard & Poor’s rates it AA. Moody’s has no underlying rating on the state.

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