November 10, 2014
This week we examine a credit-scoring algorithm for cities and counties in California, plot drought conditions in beef producing States, and highlight (again) a lack of transparency by Governor Cuomo and the New York State Thruway Authority.
California Credit Scoring Tool is Promising, But Needs Work
We are enthusiastic supporters of both greater local government transparency and efforts to create algorithms to assist municipal investors in performing credit analysis.
In our September 29 Commentary, we highlighted efforts by the California Controller and the New York State Comptroller to provide increased transparency into local government finances. In addition to financial information, the New York tool uses an algorithm to produce a Fiscal Stress Score.
Last week the California Policy Center released a report, which produces a “default probability” score for the cities and counties in California. The CPC’s default probability is based on General Fund Balance, General Fund Surplus, Annual Revenue Change and Interest and Pension Expenses.
When we examined the New York credit scores, it was helpful to compare the credit score to the DIVER Geo Score, which measures relative economic health. In the chart below we create a similar plot for California counties comparing their “default probability” score and the Geo Score.
DIVER Geo Score vs. CPC Default Probability
(California Counties)
Source: California Policy Center, DIVER Data Solutions
The correlation between economic health and CPC’s credit score was very weak. We didn’t expect a perfect correlation. Nassau County, NY has sensitized us to the ability of bad management to create a mediocre credit from a strong economy. Despite our awareness that the fit wouldn’t be perfect, the CPC default probability vs. DIVER Geo Score comparison produced some surprising outliers.
Orange, Santa Clara, San Francisco and Marin counties all showed relatively high default probabilities for counties high Geo Score (strong economies). All four showed default probabilities above the 0.1% level that CPC denotes as “substantially elevated risk.” Unlike Nassau, these counties are all relatively strong credits and highly regarded by the DIVER Geo Score and credit rating agencies.
We applaud and encourage CPC’s work but it seems clear that their model needs improvement.
Beef Prices Reflect Impact of Drought
The ongoing drought in California continues to generate headlines and spark public policy debate regarding water allocation and pricing. The passage last week of the California water bond may provide a little relief to a State thirsty for water and a municipal market thirsty for supply.
The maps below illustrate the severity of this year’s drought compared to last year’s.
Drought Intensity by County
October 2013 October 2014
Source: DIVER Analytics-Map Module
Nationwide, there are 119 counties with worse drought conditions this year than last. These counties are concentrated in California (54), Texas (32) and Oklahoma (15).
The Wall Street Journal published an article (“Cow Prices Jump Over the Moon”) last week, which highlighted the impact of the drought on beef prices. The article describes two ways in which the drought conditions flow through to beef prices. The first is the tendency of farmers to “cull” their herds as drought conditions cause feed prices to rise and grazing lands to become less productive. The second, lagged, impact occurs even after drought conditions begin to improve. To rebuild their herds, farmers allocate more cows to breeding than to beef production, which reduces beef production.
While California, Texas and Oklahoma have counties with still high drought levels, overall, drought conditions are less severe in cattle producing areas compared to last year. The chart below displays a history of Drought Intensity for the 5 largest cattle producing states: Texas, Nebraska, Kansas, California and Oklahoma.
With the “Cattle States” still showing elevated drought levels, there is little hope that beef prices will come down any time soon.
“Cattle State” Drought Intensity
Source: DIVER Analytics-Data Access Module, DIVER Data Solutions
New York Post Joins Our Call for Greater NYSTA Transparency
In last week’s Commentary, we discussed the lack of transparency by Governor Cuomo and the New York State Thruway Authority regarding a financial plan to fund the rebuilding of the Tappan Zee Bridge. Last week, the New York Post published an editorial (“For Whom the Bridge Tolls”) echoing our concerns on the issue:
As for how much the tolls on the bridge itself will rise, the governor continues to insist “you can’t really figure out the toll until you know the final bill.”
That’s right: Gov. Cuomo says is pulling another Nancy Pelosi here: We’re going to have to build the bridge first, he says, to find out how much it’s going to cost us.
Why won’t he tell us something more definite? Because, the state told the feds, doing so “could harm the Thruway’s credit rating and drive up interest rates on Thruway bonds.”
Only in New York could an administration claim that taxpayers can’t afford basic fiscal transparency.
From a business standpoint, the ability of the Tappan Zee to support higher tolls is unquestionable. The evasiveness of the Cuomo administration highlights the risk of willingness to increase the tolls. So far there has been no public response by the credit rating agencies to NYSTA’s assertion that the plan cannot be revealed because it would damage the credit ratings and lead to higher borrowing costs.
This week, the Lumesis team will be in Boston, NYC and New Jersey.
Have a great week,
Mike Craft
Managing Director, Credit, Lumesis, Inc.
CLICK HERE to Subscribe to the Weekly Commentary
Credit Scoring Algorithm in California, Drought Impact on Beef Prices, and More on NYSTA Evasiveness
November 10, 2014
This week we examine a credit-scoring algorithm for cities and counties in California, plot drought conditions in beef producing States, and highlight (again) a lack of transparency by Governor Cuomo and the New York State Thruway Authority.
California Credit Scoring Tool is Promising, But Needs Work
We are enthusiastic supporters of both greater local government transparency and efforts to create algorithms to assist municipal investors in performing credit analysis.
In our September 29 Commentary, we highlighted efforts by the California Controller and the New York State Comptroller to provide increased transparency into local government finances. In addition to financial information, the New York tool uses an algorithm to produce a Fiscal Stress Score.
Last week the California Policy Center released a report, which produces a “default probability” score for the cities and counties in California. The CPC’s default probability is based on General Fund Balance, General Fund Surplus, Annual Revenue Change and Interest and Pension Expenses.
When we examined the New York credit scores, it was helpful to compare the credit score to the DIVER Geo Score, which measures relative economic health. In the chart below we create a similar plot for California counties comparing their “default probability” score and the Geo Score.
DIVER Geo Score vs. CPC Default Probability
(California Counties)
Source: California Policy Center, DIVER Data Solutions
The correlation between economic health and CPC’s credit score was very weak. We didn’t expect a perfect correlation. Nassau County, NY has sensitized us to the ability of bad management to create a mediocre credit from a strong economy. Despite our awareness that the fit wouldn’t be perfect, the CPC default probability vs. DIVER Geo Score comparison produced some surprising outliers.
Orange, Santa Clara, San Francisco and Marin counties all showed relatively high default probabilities for counties high Geo Score (strong economies). All four showed default probabilities above the 0.1% level that CPC denotes as “substantially elevated risk.” Unlike Nassau, these counties are all relatively strong credits and highly regarded by the DIVER Geo Score and credit rating agencies.
We applaud and encourage CPC’s work but it seems clear that their model needs improvement.
Beef Prices Reflect Impact of Drought
The ongoing drought in California continues to generate headlines and spark public policy debate regarding water allocation and pricing. The passage last week of the California water bond may provide a little relief to a State thirsty for water and a municipal market thirsty for supply.
The maps below illustrate the severity of this year’s drought compared to last year’s.
Drought Intensity by County
October 2013 October 2014
Source: DIVER Analytics-Map Module
Nationwide, there are 119 counties with worse drought conditions this year than last. These counties are concentrated in California (54), Texas (32) and Oklahoma (15).
The Wall Street Journal published an article (“Cow Prices Jump Over the Moon”) last week, which highlighted the impact of the drought on beef prices. The article describes two ways in which the drought conditions flow through to beef prices. The first is the tendency of farmers to “cull” their herds as drought conditions cause feed prices to rise and grazing lands to become less productive. The second, lagged, impact occurs even after drought conditions begin to improve. To rebuild their herds, farmers allocate more cows to breeding than to beef production, which reduces beef production.
While California, Texas and Oklahoma have counties with still high drought levels, overall, drought conditions are less severe in cattle producing areas compared to last year. The chart below displays a history of Drought Intensity for the 5 largest cattle producing states: Texas, Nebraska, Kansas, California and Oklahoma.
With the “Cattle States” still showing elevated drought levels, there is little hope that beef prices will come down any time soon.
“Cattle State” Drought Intensity
Source: DIVER Analytics-Data Access Module, DIVER Data Solutions
New York Post Joins Our Call for Greater NYSTA Transparency
In last week’s Commentary, we discussed the lack of transparency by Governor Cuomo and the New York State Thruway Authority regarding a financial plan to fund the rebuilding of the Tappan Zee Bridge. Last week, the New York Post published an editorial (“For Whom the Bridge Tolls”) echoing our concerns on the issue:
As for how much the tolls on the bridge itself will rise, the governor continues to insist “you can’t really figure out the toll until you know the final bill.”
That’s right: Gov. Cuomo says is pulling another Nancy Pelosi here: We’re going to have to build the bridge first, he says, to find out how much it’s going to cost us.
Why won’t he tell us something more definite? Because, the state told the feds, doing so “could harm the Thruway’s credit rating and drive up interest rates on Thruway bonds.”
Only in New York could an administration claim that taxpayers can’t afford basic fiscal transparency.
From a business standpoint, the ability of the Tappan Zee to support higher tolls is unquestionable. The evasiveness of the Cuomo administration highlights the risk of willingness to increase the tolls. So far there has been no public response by the credit rating agencies to NYSTA’s assertion that the plan cannot be revealed because it would damage the credit ratings and lead to higher borrowing costs.
This week, the Lumesis team will be in Boston, NYC and New Jersey.
Have a great week,
Mike Craft
Managing Director, Credit, Lumesis, Inc.
CLICK HERE to Subscribe to the Weekly Commentary