MUNILAND with HIP & SNW: Is the “Best City in America” a Credit Risk or Impact Opportunity?

In FY 2013, the city enacted pension reforms that will slow pension liability growth, and is one of the few city credits SNW covers that have started an OPEB (Other Post Employment Benefits) Trust to cover future health benefits. Economic conditions are weak in the City, with property values stagnant and unemployment persistently high. However, the real story is of the local income tax capturing growth in high income taxpayers. Baltimore City’s leaders have done a good job of conservatively managing its balance sheet and finances.

Though the City of Baltimore has limited credit risk, does this come at the expense of improving the quality of life, health, and wealth of its citizens? Its HIP Score indicates that the city is failing to provide a positive impact. By focusing on impact related outcomes, the city could improve the health and wealth of its residents. Unfortunately, the credit does present itself as a credit option, but currently fails to be an impact candidate. The HIP & SNW process evaluates every position in impact-rated bond portfolios on both credit and impact to find the most credit and impact worthy names.

The Watts and Detroit riots in the 1960s stemmed from inequality, poverty and racial conflict. Recently, in Ferguson, Missouri, in 2014, and now Baltimore in 2015, protests of police brutality, as well as longstanding inequality, has led to looting, public school closings and public curfews. 

Baltimore is the nation’s 26th largest city, between Nashville and Oklahoma City, and is part of the 7th largest metro area nationally. A comparison of the City of Baltimore (HIP Score 44.7%) and surrounding counties on the HIP impact pillars of Health (City of Baltimore has higher rates of diabetes, obesity, violent crime and murder; lower college and high school graduation rates; and lagging health care coverage) and Wealth (Baltimore City has lower income, higher poverty and unemployment, and lower shares of occupied housing) reveals stark contrasts. The City of Baltimore dramatically lags behind nearly all the surrounding counties. One exception is Prince George’s County (HIP Score 53.5%), which wraps around the east of D.C. While the County of Baltimore (HIP Score 54.1%) has higher ratings than the City, it also lags behind the strong performance of Maryland’s counties of Anne Arundel (HIP Score 58.3%), Howard (HIP Score 61.7%), Montgomery (HIP Score 57.9%), Carroll (HIP Score 57.4%) and Harford (HIP Score 58.6%). Yet there is also hope and opportunity as the HIP score laggards have excelled in certain ways. While the national average for women-owned businesses is 29%, the City of Baltimore average is 37% and Prince George’s County is 38%. 

Investing in the City of Baltimore’s bond could help finance improvements. Baltimore’s balance sheet is strong and the revenue base is well diversified. Only 39% of Baltimore’s revenue comes from property taxes. The remaining revenue is from a local income tax, various other local taxes like energy and telecom, and state support. Baltimore City has also done a great job of maintaining a rainy day fund at 8.5 times annual debt service, which is very high.