CHICAGO — Strong investor relationships and diligent disclosure provide issuers with their best shot at keeping borrowing costs down amid headlines about fiscal stress that persist even as state tax revenues have rebounded, a conference panelist said here Tuesday.
“The better disclosure one can provide for investors … likely translates into a better cost of financing,” said Amberine Nagree, a vice present at JPMorgan.
She said investors are making good use of the Municipal Securities Rulemaking Board’s EMMA repository to look for up-to-date fiscal results, and also praised the efforts of states like New York and Illinois that have set up investor websites.
Illinois launched its website two weeks ago at www.capitalmarkets.illinois.gov.
“Best practices have always been to keep your investors informed,” said Illinois capital markets director John Sinsheimer, another panelist at The Bond Buyer’s Midwest Public Finance Conference.
The state has paid more to borrow over the last year due to ongoing headlines over its budget deficit, rating downgrades, and mounting pension obligations.
Investors and their analysts are also paying more attention to how an issuer will use its bond proceeds, with a special focus on making sure that the life of the asset being funded truly matches final maturities.
Investors are more stressed over pension funding headlines and are frustrated by the conflicting metrics — such as assumed investment earnings and discount rates — used by various fund managers or states.
“You have a muddied picture,” Nagree said. “They are more concerned with having a uniform metric” in order to weigh one government issuer’s debt and pension position more squarely against another.
Amid the headlines warning of massive municipal defaults, investors have steadily pulled their money from muni money market funds since November. Spreads to the Municipal Market Data scale on double-A rated credits have eased while spreads on single-A credits remain wider, showing investor preference for quality.
While 41 states are reporting that their revenue collections have picked up, they remain on average about 9% below peak levels of a few years ago, according to panel moderator Justin Hoogendoorn, a managing director in the strategic analytics group at BMO Capital Markets.
While state revenues have picked up, the fiscal challenges persist. Those obstacles are especially acute for local governments, many of which have had to absorb a drop in state aid in recent years and are now also beginning to feel the effects of weakening property tax collections.
While state balance sheets often are more heavily dependent on economically sensitive income taxes and sales taxes that pick up in an improving economy, many local governments rely more on property taxes, and in some cases state aid, posing longer-term challenges. A total of 21 states cut local government aid in 2010 and most did the same in fiscal 2011, Nagree noted.
States are not out of the woods, especially those dealing with an ongoing misalignment between recurring revenue growth and ongoing spending, said Rick Mattoon, senior economist at the Federal Reserve Bank of Chicago.
Wisconsin and Illinois provide examples of states with large structural problems while Iowa and Indiana managed well through the recession. Michigan stands out because of its prolonged economic decline. The state never fully recovered from the previous recession, Mattoon said.
Illinois faced a $15 billion deficit going into the next fiscal year until passage of an income tax increase earlier this year. That will raise an additional $6 billion to $7 billion annually, but the state is still on track to close out the year owing $8 billion in bills.
Gov. Pat Quinn wants to restructure that debt with a bond issue, but lawmakers so far have refused.
Sinsheimer stressed that on the operating side, the income tax hike will generate a surplus of more than $1 billion through 2015.
He acknowledged that the state faces structural issues and needs to enact further reforms to its pension system.
Illinois holds the distinction among states of having the lowest funded ratio of 45.4% with $75.7 billion of unfunded liabilities.
“There are ongoing discussions,” Sinsheimer said, adding that “it’s critical we” enact additional reforms. The state last year cut benefits for new employees.
Wisconsin faces a $3.6 billion deficit that new Republican Gov. Scott Walker has proposed eliminating through steep spending cuts, which Democrats, school districts, and some local governments warned would strain budgets and hurt students, services and jobs. The plan would nearly eliminate the state’s structural deficit.
“From a credit perspective, it’s great news,” said panel member David Erdman, Wisconsin’s deputy capital finance director. Moody’s Investors Service said as much in a commentary after Walker unveiled the plan.
Walker’s move to make state employees pay more towards their pensions and for health care premiums, however, has made it more difficult to draw prospective candidates to state employment, and the capital finance office is shortstaffed, Erdman said.
Wisconsin took the national spotlight earlier this year as Senate Democrats fled the state in order to stall the bills that increased those contributions. The controversy stemmed from Walker’s move to curtail most collective bargaining rights for public unions in the so-called budget repair bill.
A proposed debt restructuring pushing off maturities that came due May 1 was part of the stalled package. After Democrats returned and the measure passed, Wisconsin issued $225 million of short-term notes to cover the May debt-service payment.
During the week of May 9 the state will issue as much as $286 million of long-term bonds to retire the notes and refund some other debt.
The state expects in June or July to sell operating notes and will issue a request for qualifications to establish a fresh pool of underwriters later this month or in June.
States that go through the boom-and-bust cycle are going to have to show “more fiscal discipline” to stabilize their balance sheets, perhaps funneling more surplus revenue during boom cycles into rainy-day funds rather than spending it, Mattoon suggested.
From a local perspective, Milwaukee Comptroller Wally Morics said the city will see a significant drop in state aid this year. Walker’s budget limits local governments’ ability to raise property taxes to make up the shortfall.
Those two revenue streams account for more than 80% of the city’s general fund and neither keeps pace with inflationary growth, Morics warned.
The ongoing economic impact of the recession has tempered the appetite for debt among some local governments, and state officials and recently published reports suggest that trend might continue for some time.
Former Ohio Treasurer Kevin Boyce, now a managing director at Rice Financial Products, said he sees his state’s issuance picking as the new administration there gets its bearings.
Illinois shows no sign of slowing down. Sinsheimer said the state plans to issue between $2 billion and $3 billion in 2011 to support the $31 billion capital budget.
“Capital for us is a way of employing people,” he said.
The timing, however, depends on the resolution of a court case before the Illinois Supreme Court.
A lower court overturned the state’s capital budget earlier this year, agreeing with a liquor distributor that it violated the Illinois constitution’s single-subject rule. The state’s high court will hear oral arguments this month.
Illinois will issue a request for qualifications to establish a fresh pool of underwriters in August, Sinsheimer said.
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