MuniLand: Timing Is Everything

The Pew Charitable Trust just published a report titled “Recovering from Volatile Times: The ongoing financial struggle of America’s big cities.”  Using data from fiscal year 2012 comprehensive annual financial reports, the report made headlines because it showed that most large cities revenues had yet to match their pre-recession peaks (see chart below).  Remember, however, that a typical fiscal year differs from a calendar year.  So the data reviewed by Pew covers the period from July 2011 to June 2012.  Thus, the data cited in the report lags current conditions by two years. Not only is the data stale, but many cities (large and small) rely solely on revenue streams that tend to lag behind the business cycle, such as property tax revenue and state aid.  Property tax revenue takes time to recover from declines because property assessments are typically conducted using twelve to eighteen month old transaction data. July 2011 housing prices were at their nadir, as reported by the S&P Case-Shiller 20-City Home Price Index. Moreover, most cities and municipalities limit property tax assessment increases with some kind of homestead tax credit. These types of credits buffer property owners from large assessment increases while simultaneously limiting property tax revenue growth.  State aid is also a lagging revenue source.  In times of revenue shortfalls, states will reduce aid to cities, and they typically don’t increase local aid until their own fiscal situation improves.  Our in-house credit research shows that in FY ’12 state aid was flat to slightly negative. However, we have seen marked improvements in financial conditions for FY ’13 and expect more improvement in FY ’14. We think the work Pew does is excellent.  However, this report and the headlines it generated pertain to what happened at the bottom of the recession.  If the chart below were created today, it would show a much better story.

Sources: SNWAM Research, Pew Charitable Trust, S&P Case-Shiller Index