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The Evaporation of Wealth: Implications for Municipal Credit

Explore the impact of wealth evaporation on state and local governments during the recession, federal stimulus aid, sector outlooks, and future economic recovery prospects.

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The Evaporation of Wealth: Implications for Municipal Credit

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  1. The Evaporation of Wealth Bob Kurtter Managing Director US States and Regional Ratings NFMA Annual Meeting Seattle May 5, 2009

  2. Household Net Worth Declines About 18% Source: Federal Reserve Board

  3. What are the implications for Municipal Credit? • The recession has now spread across the entire nation. • There are some signs that the bottom may be near. • Federal stimulus aid helps to offset most severe cuts and tax increases, but many will remain. • The recovery will be slow and jobs growth will lag business recovery • There will be state and local government downgrades, but overall municipal credit quality will remain strong.

  4. All Rated US Municipal Sectors Are Under Stress with Negative Sector Outlooks • Sector outlooks characterize the prevailing operating environment facing issuers in the coming 12-18 months. • Sector Outlooks are routinely assigned in U.S. Public Finance. • Currently we have negative outlooks on all major U.S. Public Finance sectors including: • States, Housing, Healthcare, Airports, Higher Ed • Industry Outlooks are also a regular feature of Corporate Finance and International Public Finance. • Individual credit ratings will continue to be reviewed on a case by case basis.

  5. The States

  6. States Rely on Big 3 Taxes: Income, Sales and Corporate

  7. State Tax Revenue Slowing(through December 2008) Dec. ‘08 Source: Rockefeller Institute and Bureau of Labor Statistics

  8. PIT Revenue is VolatileSales Tax Shows Weakness Dec. ‘08 Source: State Revenue Report, Rockefeller Institute, March 2009

  9. High-End Filers Determine PIT Revenues • In 2006, the top 1% of filers, paid 40% of total revenues • Up from 32% in 1996 • The top 5%, paid 60%. • The top 10%, paid 71% Source: IRS data and the Tax Foundation

  10. Corporate Taxes Highly Volatileand Headed Down Dec. ‘08 Source: State Revenue Report, Rockefeller Institute, March 2009

  11. Outlook for States is Negative • Employment is declining • Tax growth is weakening – • PIT – high end income will drop • Sales – significant slowing • Corporate – highly volatile, declining • Consumer spending is weak • credit crunch and reduced home equity extraction have restrained the consumer • Consumer confidence is very low

  12. Federal Fiscal Stimulus

  13. Federal Government To The Rescue States to get operating and capital assistance Offsets need for most serious spending cuts and tax increases Will stimulus funds turn the economy around? What will happen when the funds run out? Is this the beginning of a pattern of federal support?

  14. Local Governments

  15. Local Governments Rely on Property and Sales Taxes Local Government Tax Revenue Local Government Own Source Revenue Source: US Census Bureau

  16. Local Property Tax Collections Stable • RPT based on assessed valuation is the major revenue for local governments • Property taxes tend to be stable through business cycle • AV significantly lags changes in market value • Local governments RPT collections are beginning to slow • Housing related transactional revenues are at risk: real estate transfer taxes, mortgage recording taxes • We are closely monitoring credits secured by these revenues and TIF districts that may be more sensitive to housing market price fluctuations • Fiscal strains at the state level are resulting in cuts to funding for local government programs and schools

  17. Outlook for Local Government Sector isNegative • Recently published report • First time designation of negative outlook for the sector • Reflects the all-encompassing nature of this recession

  18. The Housing Market

  19. House Price Appreciation % change year ago Sources: NAR, FHFA Source: Moody’s Economy.com

  20. Housing Affordability Source: NAR % of median-priced home thatmedian income-earning family can afford Source: Moody’s Economy.com

  21. The Economy

  22. Employment Turns Sharply Negative Source: Bureau of Labor Statistics

  23. Declines in Retail Sales Cause Weakness in Sales Tax Collections Source: Bureau of Labor Statistics & Bureau of the Census

  24. Financial Services Sector Highly Volatile Source: Bureau of Labor Statistics

  25. Oil and Gasoline Price Declines Provide Some Relief Source: Oil Price Information Service and Federal Reserve Bank of St. Louis

  26. Auto Sales Have CrashedYOY %Change by Quarter Source: Bureau of Economic Analysis

  27. Consumer Confidence Is Lacking

  28. The “Evaporation is Wealth” takes a toll on state and local governments. • Economic decline continues to impact state and local governments • This recession is not over and it is now nearly the longest recession since the Depression. • Federal Stimulus • Will it hasten recovery? • What happens when the aid runs out? • Some glimmer of hope • 2 month rise in consumer spending • Some increase in home sales • State and local government cutbacks and tax increases will be the norm for the next few years • Fiscal stress in the tax-backed sector will remain high • Municipal defaults will still be rare.

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