February 24th, 2014
This week’s commentary will run a bit long (if you print) given two graphics. Also, in case you missed it, I am attaching a link to an article from last week that was picked up by the NSCP, Advisor Perspectives and as a commentary in the Bond Buyer https://lumesis.com/pdf/Final-Time-of-Trade-Disclosure.pdf .
The next few years will be interesting – not just because the President is doing what most second term presidents do (worry less about politics and more about their legacy – see President Obama’s 2015 budget) but because much has changed. We have a new Chair of the Federal Reserve (who it seems has a good sense of humor), our foreign policy stance has evolved relying more on regional allies to help address troubled hot spots around the world (and there are a few) and general obligation bonds, once considered the safest and securest bonds, are being dragged through Detroit’s bankruptcy process and who knows the outcome or if another municipality will be next. This last part is not new to most of you.
I want to start with the fact that, as you all know given your interest in the muni space, Detroit filed its “plan of adjustment” (a rather quaint term as opposed to the more common, “plan of reorganization” or the more blunt “bankruptcy plan”) last week. While a plan, it is well known that this is just another part of the negotiation process. That said, some interesting comments and quotes that set the stage for, what one hopes to be, ongoing negotiations:
“… to overcome its crushing debt, the city proposes paying some unsecured creditors about 20 percent of what they are owed. City retirees who argue their pension benefits are protected in the State Constitution, would lose cost-of-living allowances and face cuts … NYT, Detroit Submits Proposals for Debts, 2/22/2014
In that same article, a consultant for FGIC (yes, FGIC) states things a bit more bluntly:
While we understand that favoring pensioners and discriminating against bondholders and other creditors may be more politically popular, we believe this is contrary to bankruptcy law and will result in costly litigation that will hamper the city’s emergence from bankruptcy.”
To be sure, the municipal unions had their say as well. The bottom line is that litigation will only benefit the lawyers and leave less of the pie for those fighting over who should take the biggest haircut. With the Olympics drawing to a close, one can be assured the “games” will continue.
A little while back, I did a baseline comparison of Detroit and Cleveland. More recently, a colleague provided me a blog posting that took a look at the “most troubled cities” from a sample of 295 large cities. The blog, perhaps meant for the bloggers clients, focused on six factors, the majority of which were financial metrics (cash on hand, fund balance to expenses, direct debt per capita and several others). The results were posted as the most troubled cities amongst the sample group. I am not saying I disagree with this analysis – in fact, I have the utmost respect for the writer, his organization, their platform and its integrity.
I do, however, want to make a couple of points. First, I want to point out the reality that CAFRs are filed, on average, about six months after the end of the fiscal year and, in many cases, there are no interim financials to rely on. Of the 22 “most troubled” cities cited in the blog, only four have filed their CAFR for fiscal year 2013 (on average 175 days after the close of the fiscal year). For the rest of the group (those that have yet to file their 2013 CAFR), their FY 2012 CAFRs were filed, on average, 190 days after the close of the fiscal year (perhaps they will file soon!).
This, of course, goes to my point that one must look beyond the financials. To do so, Lumesis looks at economic and demographic drivers of the economy. To this end, Lumesis tracks over 250 data sets allowing folks to look at factors and parameters that are most meaningful to them. The data can be analyzed a number of ways but the Filter module is a great way to self-select data, set your own parameters or comparables and “score” those locations most important to you.
Lumesis has also created the DIVER Geo Score – a proprietary score that looks at the economic well-being of every State, county and about 350 cities. The Geo Score is based on current data (that’s why we do it monthly) and derived from data points from the employment, housing and income categories. Because Lumesis uses data that comes out monthly, the Geo Score is updated and made available the beginning of each month. Below, I provide you a look at the Geo Score of the cities (other than Patterson and Hialeah – the data used for the Geo Score was not available for these two cities) cited in the blog and how they have fared over the past year.
DIVER Data Services and Geo Score
Yes, there is a lot going on here. However, a few points worth noting. The Geo Score is a relative score of about 350 cities. The bottom 22 would be the bottom 6% — in Geo Score parlance, slightly above the .5 on the Geo Score axis (Flint, Detroit, Cleveland and Toledo). Even if we were to look at those cities with a score below 2 (bottom 20%), it is worth contemplating the trajectory of the Geo Score as the economic factors will surely be a driving factor in the financial filings of the city.
To round out this discussion, I am providing you the bottom 25 cities based on the January 2014 Geo Score. As a reminder, we are not looking at the factors cited in the blog but are looking at the current drivers of the economy. Yes, there is some overlap – Flint, Detroit, Cleveland, Lansing and Toledo – and
yes, it is worth looking at the financials but it is equally important to understand the current economic climate, however you score it.
Worst Locations
| Rank |
City |
Score |
| 358 |
Flint, MI |
0.0 |
| 357 |
Palm Coast, FL |
0.0 |
| 356 |
Detroit, MI |
0.0 |
| 355 |
Victorville, CA |
0.1 |
| 354 |
Yuba City, CA |
0.1 |
| 353 |
Merced, CA |
0.1 |
| 352 |
Stockton, CA |
0.2 |
| 351 |
Youngstown, OH |
0.2 |
| 350 |
Yuma, AZ |
0.2 |
| 349 |
Rockford, IL |
0.3 |
| 348 |
Cleveland, OH |
0.3 |
| 347 |
Gary, IN |
0.3 |
| 346 |
Camden, NJ |
0.4 |
| 345 |
Hemet, CA |
0.4 |
| 344 |
Macon, GA |
0.4 |
| 343 |
Columbia, SC |
0.5 |
| 342 |
Brownsville, TX |
0.5 |
| 341 |
San Bernardino, CA |
0.5 |
| 340 |
Dayton, OH |
0.6 |
| 339 |
Toledo, OH |
0.6 |
| 338 |
Hartford, CT |
0.6 |
| 337 |
Lansing, MI |
0.7 |
| 336 |
Fresno, CA |
0.7 |
| 335 |
Muncie, IN |
0.7 |
| 334 |
Reading, PA |
0.8 |
DIVER Data Services and Geo Score
Speaking of how you score it, as you consider your best and worst and how to assess the same, be sure to look at when the last time a rating was issued for the municipality. While the financials may be a bit stale, ratings can, at times, be older.
Have a great week,
Michael Craft, CFA, Managing Director, Credit
Lumesis, Inc.
CLICK HERE to Subscribe to the Weekly Commentary
Detroit’s Plan and the Score for Cities
February 24th, 2014
This week’s commentary will run a bit long (if you print) given two graphics. Also, in case you missed it, I am attaching a link to an article from last week that was picked up by the NSCP, Advisor Perspectives and as a commentary in the Bond Buyer https://lumesis.com/pdf/Final-Time-of-Trade-Disclosure.pdf .
The next few years will be interesting – not just because the President is doing what most second term presidents do (worry less about politics and more about their legacy – see President Obama’s 2015 budget) but because much has changed. We have a new Chair of the Federal Reserve (who it seems has a good sense of humor), our foreign policy stance has evolved relying more on regional allies to help address troubled hot spots around the world (and there are a few) and general obligation bonds, once considered the safest and securest bonds, are being dragged through Detroit’s bankruptcy process and who knows the outcome or if another municipality will be next. This last part is not new to most of you.
I want to start with the fact that, as you all know given your interest in the muni space, Detroit filed its “plan of adjustment” (a rather quaint term as opposed to the more common, “plan of reorganization” or the more blunt “bankruptcy plan”) last week. While a plan, it is well known that this is just another part of the negotiation process. That said, some interesting comments and quotes that set the stage for, what one hopes to be, ongoing negotiations:
“… to overcome its crushing debt, the city proposes paying some unsecured creditors about 20 percent of what they are owed. City retirees who argue their pension benefits are protected in the State Constitution, would lose cost-of-living allowances and face cuts … NYT, Detroit Submits Proposals for Debts, 2/22/2014
In that same article, a consultant for FGIC (yes, FGIC) states things a bit more bluntly:
While we understand that favoring pensioners and discriminating against bondholders and other creditors may be more politically popular, we believe this is contrary to bankruptcy law and will result in costly litigation that will hamper the city’s emergence from bankruptcy.”
To be sure, the municipal unions had their say as well. The bottom line is that litigation will only benefit the lawyers and leave less of the pie for those fighting over who should take the biggest haircut. With the Olympics drawing to a close, one can be assured the “games” will continue.
A little while back, I did a baseline comparison of Detroit and Cleveland. More recently, a colleague provided me a blog posting that took a look at the “most troubled cities” from a sample of 295 large cities. The blog, perhaps meant for the bloggers clients, focused on six factors, the majority of which were financial metrics (cash on hand, fund balance to expenses, direct debt per capita and several others). The results were posted as the most troubled cities amongst the sample group. I am not saying I disagree with this analysis – in fact, I have the utmost respect for the writer, his organization, their platform and its integrity.
I do, however, want to make a couple of points. First, I want to point out the reality that CAFRs are filed, on average, about six months after the end of the fiscal year and, in many cases, there are no interim financials to rely on. Of the 22 “most troubled” cities cited in the blog, only four have filed their CAFR for fiscal year 2013 (on average 175 days after the close of the fiscal year). For the rest of the group (those that have yet to file their 2013 CAFR), their FY 2012 CAFRs were filed, on average, 190 days after the close of the fiscal year (perhaps they will file soon!).
This, of course, goes to my point that one must look beyond the financials. To do so, Lumesis looks at economic and demographic drivers of the economy. To this end, Lumesis tracks over 250 data sets allowing folks to look at factors and parameters that are most meaningful to them. The data can be analyzed a number of ways but the Filter module is a great way to self-select data, set your own parameters or comparables and “score” those locations most important to you.
Lumesis has also created the DIVER Geo Score – a proprietary score that looks at the economic well-being of every State, county and about 350 cities. The Geo Score is based on current data (that’s why we do it monthly) and derived from data points from the employment, housing and income categories. Because Lumesis uses data that comes out monthly, the Geo Score is updated and made available the beginning of each month. Below, I provide you a look at the Geo Score of the cities (other than Patterson and Hialeah – the data used for the Geo Score was not available for these two cities) cited in the blog and how they have fared over the past year.
DIVER Data Services and Geo Score
Yes, there is a lot going on here. However, a few points worth noting. The Geo Score is a relative score of about 350 cities. The bottom 22 would be the bottom 6% — in Geo Score parlance, slightly above the .5 on the Geo Score axis (Flint, Detroit, Cleveland and Toledo). Even if we were to look at those cities with a score below 2 (bottom 20%), it is worth contemplating the trajectory of the Geo Score as the economic factors will surely be a driving factor in the financial filings of the city.
To round out this discussion, I am providing you the bottom 25 cities based on the January 2014 Geo Score. As a reminder, we are not looking at the factors cited in the blog but are looking at the current drivers of the economy. Yes, there is some overlap – Flint, Detroit, Cleveland, Lansing and Toledo – and
yes, it is worth looking at the financials but it is equally important to understand the current economic climate, however you score it.
Worst Locations
DIVER Data Services and Geo Score
Speaking of how you score it, as you consider your best and worst and how to assess the same, be sure to look at when the last time a rating was issued for the municipality. While the financials may be a bit stale, ratings can, at times, be older.
Have a great week,
Michael Craft, CFA, Managing Director, Credit
Lumesis, Inc.
CLICK HERE to Subscribe to the Weekly Commentary