News Column

The Week in Public Finance: Rhyme Time, Slow Money and Water Works

August 22, 2014

By Liz Farmer, Governing



Aug. 22--Eds and Meds to the rescue

A new Moody's report singled out Philadelphia, Boston and Baltimore as cities whose former industrial economies have largely been salvaged thanks to big growth in universities and hospitals. As the manufacturing and trade sectors shrank along the eastern seaboard in the last 50 years, the Aug. 18 report said, so-called eds and meds gradually expanded and became the new economic anchor of some older cities, "effectively propping up local economies that would have otherwise declined far more sharply. We expect the world-renowned academic and healthcare organizations... will continue to bolster these cities for the remainder of this decade at least," Moody's said.

Moody's singled out those three citiest in part because hospitals and universities represent a combined 21.5 percent of total employment, well above the national average of 15 percent. The sectors also contributed to 2 percent of each city's annual employment growth during the recession, which Moody's said explains why Baltimore, Boston and Philadelphia "fared far better in job stability than the US as a whole during the severe 2008-2009 crisis." The credit ratings agency expects the eds and meds sectors to continue to outpace national employment growth over the decade.

Slowing their roll

For the second quarter in a row, it looks like state income tax revenues will dip. Preliminary figures for April through June show further declines in personal income tax collections and possibly in overall state taxes, according to the Rockefeller Institute of Government of the State University of New York. The slowdown comes after four years of uninterrupted growth.

The Rockefeller report noted that these returns were part of a larger picture that started when state tax revenues "softened significantly" in the second half of 2013. The preliminary 2014 figures for the second quarter come from 36 early reporting states and show a decline in personal income tax collections of 6.5 percent, up from the first quarter decline of 1.2 percent. Meanwhile, sales tax collections continued growth of 4.5 percent so overall tax collections in those states declined by 0.8 percent, compared with the corresponding quarter in 2013.

But take heart. The report said the "declines in tax collections are not an indication of a slowdown in the economy, but are mostly due to the mirror-image effect of the initial fiscal cliff." That is, when many taxpayers shifted their income from tax year 2013 to tax year 2012 to avoid paying anticipated higher tax rates, that drove collections upward.

Two takes on Detroit water

Two assessments have come out recently on Detroit's proposed settlement with Water and Sewer bondholders, in which the city will refinance $5.2 billion in bonds by buying them back (some for less than what is owed) and then reissuing them at a lower interest rate. The Municipal Market Advisors take a hardline approach and noted earlier this month that the move is a way to avoid technically defaulting by, in essence, "having bondholders agree to be defaulted upon." The analysis predicted that some credit rating agencies "may be convinced" by this approach but MMA's opinion was that if it looks like a duck and walks like a duck, well, you get the idea: "For the purposes of our default and impairment database, MMA defines a payment default as non-payment of 100 percent of scheduled principal or interest to bondholders, regardless of whether or not bondholders are complicit in that default," the analysis by Matt Fabian said.

Now (as Fabian predicted) at least one credit ratings agency sees it another way. This week, Fitch Ratings came out with its review of the proposal, and said that in the context of Detroit's bankruptcy, the offer was "not an attempt to avoid a payment default or default on other terms" of the bonds. Instead, Fitch said that the deal was as a way for Detroit to pay off early bonds that it would otherwise be obligated to pay off over time with interest. (This is referred to as "calling" a bond.) Fitch also noted that by doing so, calling the bonds nets Detroit savings and helps "facilitate a potential conversion of [the Detroit Water and Sewer Department] to a regional utility or, more remotely, a privatized utility. It was not motivated by any financial distress within the DWSD itself."

Liz Farmer |

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lfarmer@governing.com -- @LizFarmerTweets

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(c)2014 Governing

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Source: Governing


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