New DIVER Geo Scores, Why is Kansas Like New Jersey?, Map of the Week

Categories: Commentary |

March 2nd, 2015

This week we start with a review of our proprietary DIVER Geo Scores, highlight the strongest and weakest states, as well as provide you a link to get the scores themselves.   We note the trend of relative economic weakness in Washington State.  We tally the pension developments over the last week and marvel at the similarities between New Jersey in 1997 and Kansas in 2015.

February Geo Scores

Today, we released the most recent DIVER Geo Scores for States, counties and cities. The DIVER Geo Score represents a relative score of the economic health of a U.S. State, county or city. Based on a scale of 0-10, with 10 being the best, this data is updated monthly and is calculated from multiple economic and demographic factors related to three primary data categories—employment, income and housing.

The DIVER Geo Scores are available here.


While the condition of the labor market may be taking a back seat to (dis)inflation in the eyes of the Federal Reserve, employment remains an important factor in the health of State and local economies.  We use several labor market indicators in calculation of the Geo Score. A closer look at the unemployment rates for the Top 10 and Bottom 10 Geo Score states highlights the importance of a strong labor market.

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Out of the Top 10 States by Geo Score, 9 have unemployment rates lower than the national average.  The 10th (District of Columbia) has strong income and housing market metrics that offset the higher unemployment rate.

Out of the Bottom 10, only Florida and North Carolina have unemployment rates below national levels.

In last week’s Commentary we highlighted the risks to State and local economies from a strong dollar.  Washington State relies on exports for 21% of its GDP (primarily Civilian Aircraft, Engines, and Parts).

In our review of the most recent Geo Scores, the 12-month decline in the Geo Scores for Washington State was notable (hat tip to Lumesis Senior Data Analyst Jane Ma).  The economy of the State and 6 of its 7 largest cities has lagged the other regions.  The one exception, Seattle, has been unchanged as one of the strongest city economies in the nation.

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While we believe it is too early to attribute this weakness to dollar strength, the trend does raise an additional note of caution for Washington’s economy, especially in the context of Boeing’s plan to shift some jobs to South Carolina.

Can we still say Pension Bonds convert “soft” into “hard” liabilities?

We have strongly advocated that the troubles of public pensions will be one of the key story lines for the municipal bond market during 2015.  Events of the past few weeks support our view:

  • Moody’s cited pensions in announcing downgrade of Chicago’s rating.
  • A Stockton, CA bankruptcy judge cast doubt on the validity of claims made by CalPERS during bankruptcy proceedings. He also replaced “800-pound gorilla” with “bully with a glass jaw” as preferred epithet for CalPERS.
  • A New Jersey judge ruled against Gov. Chris Christie regarding his underfunding of FY15 pension contributions.
  • A New Jersey pension study commission presented its’ findings and Gov. Christie proposed an ambitious (unrealistic?) pension reform “roadmap”.
  • Kansas’s legislators approved a plan to issue $1 billion pension bonds.

The confluence of news on New Jersey’s situation and Kansas’s plan to issue pension bonds is especially interesting.  New Jersey itself issued $2.75 billion of pension bonds in 1997, to allow Gov. Christie Todd Whitman to cut taxes.  The parallels to the current situation in Kansas are remarkable, even down to Kansas Gov. Brownback being mentioned as possible Republican Presidential or Vice Presidential candidate.  We hope that Kansas achieves a better result than New Jersey.

A visual review of New Jersey’s path to its current predicament reinforces our skepticism of the public policy merits of pension bond issuance.  Pension bond proceeds, tech bubble gains (while they lasted), and tweaks to asset valuation smoothing rules kept New Jersey’s funded ratio above 100% until it began a steady decline in 2002.

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The use of pension bonds in New Jersey provided political cover for successive administrations to underfund annual contributions to its pensions while, in some cases, increasing benefits.

From a functional standpoint, issuance of pension bonds is a massive asset allocation play: shorting bonds and going long equities, alternatives, etc.  In New Jersey’s case, that asset allocation play worked well until the end of the tech bubble and is likely still underwater.

A historical criticism of pension bonds is that they convert a soft balance sheet liability (amounts owed to pensioners) into a hard balance sheet liability (amounts owed to bondholders).  The relative treatment of pensioners and bondholders in recent municipal distress situations raises the question of which is the soft and which is the hard liability.

Map of the Week:  Drought Intensity

While rains have brought California some relief from its drought conditions, the most recent data shows that the level of drought conditions in the state is still extreme.

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Source:  National Drought Mitigation Center, DIVER Analytics-Map Module


Have a great week,

Michael Craft, CFA


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