[that] have placed state and local governments in a position of fiscal instability and undermined the ability of their economies to compete in the global marketplace (some of which we have routinely spoken to in this commentary):
- State and local revenues have only partially recovered since the recession that began in 2008.
- Reductions in federal spending have made state and local finances more chaotic and more difficult to manage.
- Retirement and health care expenditures continue to rise at a rate faster than state and local revenues, and many state and local governments have not addressed serious pension funding shortfalls.
- Few states have mounted new capital infrastructure investment programs that keep pace with deterioration and will keep their infrastructure modern and competitive.
- The near-total absence of serious consultation between federal and state fiscal policymakers has often obscured the long-term impact of expenditure cuts and revenue reductions.”
In addition, and not without notice, is the Task Force’s point around the need for “Easily Understandable Financial Reports” and the need for “rules for the creation of concise, timely, and readable financial reports.” (Emphasis mine).
How timely are States when filing their Comprehensive Annual Financial Report (“CAFR”)? Let me introduce you to the DIVER CAFR Index. The CAFR Index looks at the number of days, after the close of the fiscal year, the State filed its CAFR. The Index for 2012 and 2013 (YTD) is presented below. As a point of reference, the NASBO standard is 180 days (6 months) post end of fiscal year as the standard. As such, those that have reported for 2013 have met NASBO’s standard (the reds are 184 days). For 2012, Yellow, green and blue fall below 180 days, the lighter orange provides a “grace period of 30 days, darker orange extends the “grace period” 60 days and red, well, more than 240 days, no “grace period” for you![1]
State CAFR; DIVER Map Module
So, when the flight isn’t on time, your vendor fails to deliver or the children are late, you take steps where you can. You could punish the tardy filer but that seems not to be the path many (most) have chosen (I am still a believer that the market has the power to “demand” timely financial filings by not purchasing securities of those that are habitually late – what happens when a corporation misses a filing deadline?!). You can and, in many cases, do look to alternate sources to satisfy your needs. In this case, it’s tough to find alternate sources of financial data for a municipality but pretty easy to understand what drives revenues and expenditures for a municipality: economic and demographic data.
As it relates to demographic data, don’t take my word. John Mauldin’s, January 15, Outside the Box newsletter, The Demographic Cliff and Spending Wave, provides an excerpt from the first chapter of Harry Dent’s new book, The Demographic Cliff: How to Survive and Prosper During the Great Deflation of 2014-2019. Full disclosure, I have not yet read the book (plan to in the coming weeks). The excerpt focuses around demographic trends and when people spend during their lifecycle. “People do predictable things as they age.”
The peak in overall spending … is at age forty-six… there is a plateau between age thirty-nine .. and age fifty-three. Then spending drops like a rock.. This is a big deal that governments, businesses and investors are not anticipating as the massive Baby Boom generation ages…
[C]onsumers are 70% of the GDP, and business investment only expands if consumer spending is growing and the government taxes businesses and consumers for its revenues…
This last bit from Dent, discussing population growth, addresses the notion that because the population is growing we will, in essence, backfill, the needed consumer spending.
[W]hen adjusted for immigration, the Echo Boom generation [born 1976 to 2007] never reaches the growth numbers of the Baby Boom generation. Hence, it is the first generation to be smaller than the one before it… The Baby Boom generation is like a ten-foot-tall wave coming on the beach, whereas the Echo Boom is a five-foot-tall wave.
Are governments (States, local as well as around the world) considering the realities of demographics? Do their budget assumptions reflect the same? Does the economic data that is reported weekly, monthly and quarterly reflect those assumptions? Absent timely financial data to support their assumptions and projections, tough to tell unless you are accessing and reviewing the data.
Droughts and Disasters
Some recent headlines are highlighting the drought conditions and water shortage in California and the potential impact to everything from farmers to cattle ranchers (a $44 billion industry) and others. Using the National Drought Mitigation Center’s data, Lumesis has been tracking, on a monthly basis, drought conditions since the middle of the country suffered from a severe drought one year ago. None of California’s counties, as of the December data release, are considered to be at the “Exceptional Drought” level but 13 are at the “Severe Drought” stage.
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| Drought Intensity, December 2013 |
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National Drought Mitigation Center; DIVER Map Module; DIVER Filter Module
On the subject of disasters, the NFMA is hosting their Janaury Advanced Seminar on the “Credit Impacts of Natural Disasters” on January 30-31in New Orleans. There is still time to register.
Have a great week and I hope to see you in NOLA on January 30-31.
[1] DIVER also produces a CAFR Score that looks at the relative ranking of the time that an Issuer takes to file their latest CAFR. The CAFR Score is on a scale of 0 to 10 with 10 representing the best (most timely) filers. The Score is available for States and select counties and cites and will be expanded in the coming months. As a note, I do not present the State scores at this time due to the reality that States (and other issuers) can have multiple Issuers and, therefore, different filing status for each issuer. To use the DIVER CAFR Score it is important to know who the Issuer is (go back to the Task Force report and their point around transparency).
Have a great week,
Michael Craft, CFA, Managing Director, Credit
Lumesis, Inc.
CLICK HERE to Subscribe to the Weekly Commentary
On Time Performance and Another Drought
January 21, 2014
On Time. We use it to measure the performance of airlines, transit systems, overnight couriers, retailers sending us our merchandise and others. “Was he on time for the meeting” or “why weren’t you home on time?” The SEC, MSRB and other regulators and self-regulatory bodies have rules around timeliness. When there is a failure in this regard (timeliness), there can be penalties – fines, sanctions, loss of business, being grounded or simply put in the doghouse (we’ve all suffered this fate once or twice) – and there is the need to look for alternatives to help compensate for the lack of timeliness or complete information.
Last week, the State Budget Crisis Task Force, led by former Lt. Governor Richard Ravitch and former Federal Reserve Board Chair Paul Volker issued their Final Report. The Report, very much worth reading (http://www.statebudgetcrisis.org/wpcms/), focuses on “trends and circumstances
In addition, and not without notice, is the Task Force’s point around the need for “Easily Understandable Financial Reports” and the need for “rules for the creation of concise, timely, and readable financial reports.” (Emphasis mine).
How timely are States when filing their Comprehensive Annual Financial Report (“CAFR”)? Let me introduce you to the DIVER CAFR Index. The CAFR Index looks at the number of days, after the close of the fiscal year, the State filed its CAFR. The Index for 2012 and 2013 (YTD) is presented below. As a point of reference, the NASBO standard is 180 days (6 months) post end of fiscal year as the standard. As such, those that have reported for 2013 have met NASBO’s standard (the reds are 184 days). For 2012, Yellow, green and blue fall below 180 days, the lighter orange provides a “grace period of 30 days, darker orange extends the “grace period” 60 days and red, well, more than 240 days, no “grace period” for you![1]
State CAFR; DIVER Map Module
So, when the flight isn’t on time, your vendor fails to deliver or the children are late, you take steps where you can. You could punish the tardy filer but that seems not to be the path many (most) have chosen (I am still a believer that the market has the power to “demand” timely financial filings by not purchasing securities of those that are habitually late – what happens when a corporation misses a filing deadline?!). You can and, in many cases, do look to alternate sources to satisfy your needs. In this case, it’s tough to find alternate sources of financial data for a municipality but pretty easy to understand what drives revenues and expenditures for a municipality: economic and demographic data.
As it relates to demographic data, don’t take my word. John Mauldin’s, January 15, Outside the Box newsletter, The Demographic Cliff and Spending Wave, provides an excerpt from the first chapter of Harry Dent’s new book, The Demographic Cliff: How to Survive and Prosper During the Great Deflation of 2014-2019. Full disclosure, I have not yet read the book (plan to in the coming weeks). The excerpt focuses around demographic trends and when people spend during their lifecycle. “People do predictable things as they age.”
The peak in overall spending … is at age forty-six… there is a plateau between age thirty-nine .. and age fifty-three. Then spending drops like a rock.. This is a big deal that governments, businesses and investors are not anticipating as the massive Baby Boom generation ages…
[C]onsumers are 70% of the GDP, and business investment only expands if consumer spending is growing and the government taxes businesses and consumers for its revenues…This last bit from Dent, discussing population growth, addresses the notion that because the population is growing we will, in essence, backfill, the needed consumer spending.
[W]hen adjusted for immigration, the Echo Boom generation [born 1976 to 2007] never reaches the growth numbers of the Baby Boom generation. Hence, it is the first generation to be smaller than the one before it… The Baby Boom generation is like a ten-foot-tall wave coming on the beach, whereas the Echo Boom is a five-foot-tall wave.Are governments (States, local as well as around the world) considering the realities of demographics? Do their budget assumptions reflect the same? Does the economic data that is reported weekly, monthly and quarterly reflect those assumptions? Absent timely financial data to support their assumptions and projections, tough to tell unless you are accessing and reviewing the data.
Droughts and Disasters
Some recent headlines are highlighting the drought conditions and water shortage in California and the potential impact to everything from farmers to cattle ranchers (a $44 billion industry) and others. Using the National Drought Mitigation Center’s data, Lumesis has been tracking, on a monthly basis, drought conditions since the middle of the country suffered from a severe drought one year ago. None of California’s counties, as of the December data release, are considered to be at the “Exceptional Drought” level but 13 are at the “Severe Drought” stage.
National Drought Mitigation Center; DIVER Map Module; DIVER Filter Module
On the subject of disasters, the NFMA is hosting their Janaury Advanced Seminar on the “Credit Impacts of Natural Disasters” on January 30-31in New Orleans. There is still time to register.
Have a great week and I hope to see you in NOLA on January 30-31.
[1] DIVER also produces a CAFR Score that looks at the relative ranking of the time that an Issuer takes to file their latest CAFR. The CAFR Score is on a scale of 0 to 10 with 10 representing the best (most timely) filers. The Score is available for States and select counties and cites and will be expanded in the coming months. As a note, I do not present the State scores at this time due to the reality that States (and other issuers) can have multiple Issuers and, therefore, different filing status for each issuer. To use the DIVER CAFR Score it is important to know who the Issuer is (go back to the Task Force report and their point around transparency).
Have a great week,
Michael Craft, CFA, Managing Director, Credit
Lumesis, Inc.
CLICK HERE to Subscribe to the Weekly Commentary