December 1, 2014
This week we start with a review of our proprietary Geo Score and highlight some ups and downs as well as provide you a link to get the scores themselves. We discuss potential State and local implications of OPEC’s announcement last week, and look at the State of New Jersey’s recent pension disclosure. We also discuss the increasing focus on liquidity and the G-47 compliance issues it raises.
November Geo Scores Released; North Dakota Remains on Top (for now)
This morning, 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.
State DIVER Geo Score Strongest and Weakest
Source: DIVER Analytics-Data Access Module, DIVER Data Solutions
County DIVER Geo Score Strongest and Weakest
Source: DIVER Analytics-Data Access Module, DIVER Data Solution
North Dakota continues to top the State and county Rankings. As we discuss below, North Dakota’s economic strength will be pressured by recent events in the oil markets.
OPEC Decision Has Implications for State and Local Economies
The news last week that OPEC will not adjust its oil production quotas and the resulting drop in the price of oil, has the potential to dramatically impact State and local economies. Because of their large share of fracking activity, North Dakota Texas, Colorado and Pennsylvania will likely suffer if OPEC maintains its discipline and oil prices stay low enough to make many fracking sites uneconomical.
While low oil prices, will help the national economy, the loss of fracking related employment may cause localized difficulties in those States currently benefitting from the fracking boom.
In the last several years, the counties of North Dakota, west Texas and portions of Colorado have consistently had the highest Geo Scores in the nation.
County Level DIVER Geo Score
Source: DIVER Analytics-Map Module
New Jersey Discloses Anticipated Impact of New GASB Pension Standards
Last week the State of New Jersey disclosed an estimate of the funding status of its State pension plans under the new GASB 67 accounting standards (scheduled to take effect for fiscal years ending 6/30/15). GASB’s new rule alters the calculation of pension liabilities to be more conservative and more standardized. It has been widely anticipated that the new rules will paint a worse (or as some call it, a more realistic) picture of the pension funding status of many municipalities.
New Jersey is one of the worst states in the nation for pension funding, so at first glance it’s decision to disclose might be puzzling. The decision to disclose does make sense if one remembers New Jersey’s previous run-in with the SEC regarding disclosure of pension-funded status to investors. The SEC issued a cease and desist order as part of a 2010 settlement with the State.
The chart below compares the “Funded Ratio” (7/1/13) under the old rules and the “Plan Fiduciary Net Position as a % of TPL” (6/30/14) under the new rules for the State’s largest pension funds.
New Jersey State Pension Funds “Funding Ratios”
Source: State of New Jersey, DIVER Data Solutions
While the new standards will not change the substance of State and local pension funding, as can be seen from the New Jersey example, they will certainly change the optics. And changing the optics can frequently lead to changing perceptions. Many news articles will likely be written about the impact of the new rules on pension funding levels around the country. Digesting the new reporting and responding to the changing perceptions will be a significant issue for the municipal bond market over the next several years.
Constrained Liquidity/Potential for Higher Interest Rates Raise G-47 Issues
Last week, Fitch published a report, which highlighted the narrowing dealer liquidity base available to support growing assets in corporate and municipal investment funds. According to Fitch’s calculations, the ratio of mutual fund/ETF assets to dealer holdings has increased from 8.0x to 18.4x since 2009.
Given the increasing focus on narrowing bond market liquidity and the prospect of the Fed raising rates in 2015, it is not surprising that the front page of today’s Wall Street Journal featured an article discussing bond fund managers beginning to carry larger cash positions: “Bond Funds Load Up on Cash,”. If/when rates rise; we will see declining bond prices. Bloomberg recently reported that the SEC has added redemption stress tests to its questions for money managers especially in relatively illiquid markets like loans and high yield.
In muni land, one is reminded that during FINRA’s sweep last year, they asked how firms were educating their advisors and retail customers about interest rate risk. With an ever-increasing focus on protecting retail and non-SMMP muni investors, now might be a good time to ensure your firm is highlighting relevant risks at or before the time of trade as required by G-47.
We discussed this and other G-47 compliance issues in a white paper: https://lumesis.com/pdf/Time-of-Trade-G47-Paper.pdf
The Lumesis team will be mostly local this week, with just a couple of trips to NYC and Delaware.
Have a great week,
Managing Director, Credit, Lumesis, Inc.
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