November 24, 2014
This week we summarize the findings of a cover article in Barron’s, which ranks the states. We highlight the linkage between Illinois Tollway Authority and Illinois State as one to watch; and share one of our Thanksgiving rituals.
Barron’s Ranks the States
The cover article in Barron’s this week, “On Solid Ground”, discusses the economic and fiscal health of the 50 states. The overall tone of the article is constructive, highlighting historically low default rates, efforts at pension reform, and light debt issuance. The article points out that pension reform efforts are not universal, and that for many states, OPEB’s remain a challenge.
Notable at the bottom of the Barron’s ranking are Illinois (#50); New Jersey (#49); Connecticut (#48); and Pennsylvania (#47). The ranking is based on a model from Eaton Vance, which incorporates economic health, debt levels, pension burdens, and OPEB’s.
Barron’s cites Illinois’s chief negative factor as: “structural imbalance could increase”. Last week’s rejection by a Sangamon County Circuit judge of previously enacted pension reform is one of the challenges face by Illinois’ new Governor. Another is the upcoming expiration of a temporary income tax hike in January.
The funded ratio for the State of Illinois’s pension funds and those of its largest city, Chicago, are among the worst in the nation.
Illinois State and City of Chicago Pension Funded Ratios
Source: CAFR, DIVER Data Solutions
Illinois Tollway Authority Linkage to Illinois State Should Raise Questions
One of this weeks largest (and only) new issue sales comes from the Illinois State Tollway Authority. IL Toll is a “component unit of the State of Illinois” and a participant in the Illinois State Employee Retirement System.
While there is no direct linkage of the credit quality of IL Toll to the State’s finances, as the rating gap widens between IL Toll (AA-) and Illinois State (A-), investors should consider how politicians might try to use a valuable asset like IL Toll to relieve State fiscal stress. The bond documents include many protections for lenders, but financial engineers can be very creative in finding (and exploiting) the weakness of legal covenants.
Pennsylvania shows one possible example: the State passed “Act 44” in 2007 to use to tap revenues from the Pennsylvania Turnpike. Act 44 required PA Tpk to make annual payments to PennDOT for funding of “state transportation needs.” Passage of Act 44 ultimately lead to credit downgrades and spread widening.
Depending on one’s view of how bad the fiscal health of Illinois State will get, the treatment of Detroit Water and Sewer bondholders could also raise questions regarding how financially isolated an enterprise credit like IL Toll is from its “parent”.
Barron’s Points Out “Sluggish Economies” in Connecticut and New Jersey
In the case of Connecticut and New Jersey, the Barron’s article notes the contribution of sluggish local economies to the poor score. This Barron’s “point in time” observation of weak economies in New Jersey and Connecticut is consistent with trends we have been observing in the DIVER Geo Scores.
DIVER Geo Score (3-month average)
Source: DIVER Analytics-Data Access Module, DIVER Data Solutions
In last week’s Commentary, we discussed the weak Connecticut economy and pointed out its tight linkage to New York City. In early October, we observed that New Jersey presents investors with a large risk of downside surprise due to a number of factors including its economy. Barron’s points out that the current credit spread for New Jersey is 48 basis points, much less than the credit spread for Illinois (150 basis points).
Thanksgiving Rituals (from an infrastructure perspective)
All of us have special Thanksgiving rituals. In addition to Alice’s Restaurant, one of our favorites (Mike C.) is the annual blog posting by Michael Boyd of BoydGroup International regarding the abundance (and silliness) of media stories regarding the perceived crush of Thanksgiving traffic at US airports.
Boyd, who is one of the best airport traffic consultants in the business, seems to pride himself on being an outspoken contrarian. His most recent posting
states his opinion very clearly:
There is no “holiday crush” of additional flights in the sky over Thanksgiving.
To the contrary, airlines actually cut back on departures during the Thanksgiving period. If the media will take a look at the flights and capacity, there will be fewer at-the-airport news stories at 6PM.
Boyd supports this assertion with data from his database:
Source: BoydGroup International
Boyd’s conclusion:
Not to put a wet blanket on what’s become a staple story every year at the local TV station, warning consumers to get to the airport early and prepare for something close to a reenactment of Exodus, sans Moses, but the facts just don’t support it.
Unfortunately misreading demand for our transportation infrastructure is not limited to vapid local news personnel. The FAA has consistently and systematically overestimated future demand for our air travel network.
Total Scheduled U.S. Passenger Traffic
(Actual and Forecast)
Source: FAA, DIVER Data Solutions
Because of the role of these forecasts in determining future infrastructure needs, this represents a major public policy issue. If our leaders are going to make informed decisions on our infrastructure needs, accurate data (and predictions) are essential.
The Lumesis team will be local this week.
Have a great week and a happy Thanksgiving,
Mike Craft
Managing Director, Credit, Lumesis, Inc.
CLICK HERE to Subscribe to the Weekly Commentary
Barron’s Ranks the States; Illinois Toll Link to Illinois State; Thanksgiving Rituals
November 24, 2014
This week we summarize the findings of a cover article in Barron’s, which ranks the states. We highlight the linkage between Illinois Tollway Authority and Illinois State as one to watch; and share one of our Thanksgiving rituals.
Barron’s Ranks the States
The cover article in Barron’s this week, “On Solid Ground”, discusses the economic and fiscal health of the 50 states. The overall tone of the article is constructive, highlighting historically low default rates, efforts at pension reform, and light debt issuance. The article points out that pension reform efforts are not universal, and that for many states, OPEB’s remain a challenge.
Notable at the bottom of the Barron’s ranking are Illinois (#50); New Jersey (#49); Connecticut (#48); and Pennsylvania (#47). The ranking is based on a model from Eaton Vance, which incorporates economic health, debt levels, pension burdens, and OPEB’s.
Barron’s cites Illinois’s chief negative factor as: “structural imbalance could increase”. Last week’s rejection by a Sangamon County Circuit judge of previously enacted pension reform is one of the challenges face by Illinois’ new Governor. Another is the upcoming expiration of a temporary income tax hike in January.
The funded ratio for the State of Illinois’s pension funds and those of its largest city, Chicago, are among the worst in the nation.
Illinois State and City of Chicago Pension Funded Ratios
Source: CAFR, DIVER Data Solutions
Illinois Tollway Authority Linkage to Illinois State Should Raise Questions
One of this weeks largest (and only) new issue sales comes from the Illinois State Tollway Authority. IL Toll is a “component unit of the State of Illinois” and a participant in the Illinois State Employee Retirement System.
While there is no direct linkage of the credit quality of IL Toll to the State’s finances, as the rating gap widens between IL Toll (AA-) and Illinois State (A-), investors should consider how politicians might try to use a valuable asset like IL Toll to relieve State fiscal stress. The bond documents include many protections for lenders, but financial engineers can be very creative in finding (and exploiting) the weakness of legal covenants.
Pennsylvania shows one possible example: the State passed “Act 44” in 2007 to use to tap revenues from the Pennsylvania Turnpike. Act 44 required PA Tpk to make annual payments to PennDOT for funding of “state transportation needs.” Passage of Act 44 ultimately lead to credit downgrades and spread widening.
Depending on one’s view of how bad the fiscal health of Illinois State will get, the treatment of Detroit Water and Sewer bondholders could also raise questions regarding how financially isolated an enterprise credit like IL Toll is from its “parent”.
Barron’s Points Out “Sluggish Economies” in Connecticut and New Jersey
In the case of Connecticut and New Jersey, the Barron’s article notes the contribution of sluggish local economies to the poor score. This Barron’s “point in time” observation of weak economies in New Jersey and Connecticut is consistent with trends we have been observing in the DIVER Geo Scores.
DIVER Geo Score (3-month average)
Source: DIVER Analytics-Data Access Module, DIVER Data Solutions
In last week’s Commentary, we discussed the weak Connecticut economy and pointed out its tight linkage to New York City. In early October, we observed that New Jersey presents investors with a large risk of downside surprise due to a number of factors including its economy. Barron’s points out that the current credit spread for New Jersey is 48 basis points, much less than the credit spread for Illinois (150 basis points).
Thanksgiving Rituals (from an infrastructure perspective)
All of us have special Thanksgiving rituals. In addition to Alice’s Restaurant, one of our favorites (Mike C.) is the annual blog posting by Michael Boyd of BoydGroup International regarding the abundance (and silliness) of media stories regarding the perceived crush of Thanksgiving traffic at US airports.
Boyd, who is one of the best airport traffic consultants in the business, seems to pride himself on being an outspoken contrarian. His most recent posting
states his opinion very clearly:
There is no “holiday crush” of additional flights in the sky over Thanksgiving.
To the contrary, airlines actually cut back on departures during the Thanksgiving period. If the media will take a look at the flights and capacity, there will be fewer at-the-airport news stories at 6PM.
Boyd supports this assertion with data from his database:
Source: BoydGroup International
Boyd’s conclusion:
Not to put a wet blanket on what’s become a staple story every year at the local TV station, warning consumers to get to the airport early and prepare for something close to a reenactment of Exodus, sans Moses, but the facts just don’t support it.
Unfortunately misreading demand for our transportation infrastructure is not limited to vapid local news personnel. The FAA has consistently and systematically overestimated future demand for our air travel network.
Total Scheduled U.S. Passenger Traffic
(Actual and Forecast)
Source: FAA, DIVER Data Solutions
Because of the role of these forecasts in determining future infrastructure needs, this represents a major public policy issue. If our leaders are going to make informed decisions on our infrastructure needs, accurate data (and predictions) are essential.
The Lumesis team will be local this week.
Have a great week and a happy Thanksgiving,
Mike Craft
Managing Director, Credit, Lumesis, Inc.
CLICK HERE to Subscribe to the Weekly Commentary