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Onondaga
I’m not a muni analyst. I just look at numbers and make observations. I
took a look at Onondaga County, NY. The home of Syracuse.
The county has a Aa1/AAA rating from Moody’s/Fitch. I have no idea what a AAA means today. The “top shelf”
should be something that is more certain than the economic winds of
up-state NY in my mind. That said, my look at Onondaga says they are a
good credit. The outstanding bonds are money good. If you own them,
sleep tight. They will pay interest and principal on time. If that’s the
definition of a AAA, they meet it. O does a very good job of presenting its numbers.
There were a few things that I thought were worth noting. I use some of
the information in the broader context of the muni market:
According to the census there are 455,000 residents . 14% of the
population is over 65; 23% are under 18. 74,700 have disabilities. The
healthy adult workforce is about 270,000. I’d be surprise if 70% had
full time jobs.
Syracuse University has a total of 31,000 students. The faculty is
1,500. The budget for SU is $1 billion. A decent chunk of that stays in
O.
-The Onondaga 2010 budget:
A net deficit of only $2mm. Not bad on a $1b expense base. But look at the sources of revenue. The State kicks in $119mm (12%) and the Feds $88mm (9%).
The state of NY has its own problems. Not just this year. It will be
every year for the next ten. Along the way Onondaga is going to get
squeezed. The Federal side is no different. Those numbers are going
down. They will go down for nearly every county in the country.
To make a point, the following is a listing of outstanding muni bonds:
My impression is that this is a fairly complex financial position for a
community of 455k people. O pays $45,000 a year to agents just to
distribute the interest. Think of the legal fees for all those bond
indentures. The underwriting spreads for Wall Street are a daily source
of revenue for the folks with white spats. Secondary market trading of
this paper is a flow traders dream; you can drive a truck through the
bid offer spreads. No wonder everyone loves it. With this much debt
everyone makes money. Right?
It’s important to note that there is gross and net bond debt
outstanding. O has defeased some older high coupon bonds. In my view
they have done a very good job of taking advantage of both lower
interest rates and their strong credit rating. They “arbed” Ben Bernanke
with his QE and ZIRP. Along the way bondholders (aka Savers) get less
for their money. So O wins, savers lose and Ben is the broker for this.
The current principal outstanding is 441mm, but $244mm has been pre-refunded. So net debt is only $197mm.
When you look at O you have to focus on the net number. But I am
troubled by this phenomenon. What you see with O you will see with
almost all munis. They have much more debt outstanding than the net debt
they are rated on. Yes it is true that the PreRe stuff is now secured
with solid assets (government guaranteed bonds. They are called SLUGS (State and local Gteed. Securities)). But heaven forbid there was a call on the SLUGS during a government shut down. Something like that could never happen, could it?
This feels a bit like ponzi land to me. There is much more muni debt
outstanding than there is debt reported on the balance sheets of munis.
The problem becomes if/when this paper starts rumbling around. (like it did with Agency bonds).
As of 1/31 the Treasury SLUG account had $187b of paper out. Is this
187b of extra funding for Treasury a big deal? No, not really. What’s
another $200b amongst friends? It is only 13% of the 11’ deficit. Well, actually, that is a fairly big deal.
So why does O deserve a AAA? Easy answer: They have a solid tax base. That income stream is (technically) committed to the bondholders. Some values/tax numbers:
Note that the tax revenue declined YoY by 16%. They lowered the mil
rates. They could have kept the mil rates the same and lowered the
assessed values. The result would have been the same. I don’t believe
the value of real estate in Syracuse has appreciated over the last four
years. I suspect it has gone down quite a bit. The value of the RE is
not the issue. It is the property tax that is generated that counts. The
2011 revenue is lower than it was in 2003. Given that the assessed
values seem too high, further drops in property tax revenue is likely.
The revenue from this property is $154mm in 2011. That comes to 78% of
Net Debt. A favorable ratio. More importantly is the revenue to current
year debt service ratio. Principal ($15mm) and Interest ($9mm) for 2011
is $24mm. O covers their debt nut 6Xs. That justifies my view they are ‘money good’. It is the basis for that lofty AAA.
Based on the property values being assessed a formula is used to establish the maximum amount of debt that O can have:
NY State law sets the formula for the maximum debt level a community can
have. (7% of the average of the “Full Value” of the property base) From
this comes the conclusion that O can have up to $1.4b of debt.
Given that they are well below that level ($200mm/12%) they are
considered a AAA. Just the idea that O has nearly unlimited capacity to
borrow money bothers me. (another 1.2b or 6X increase)
This a flawed concept. I can accept that the lower this ratio is the
better the credit of the borrower. But what is the value of that real
estate? What counts (to me) is the taxes that come from the property.
Setting a debt limit based on inflated property values is not a concern
with O. But other communities are kidding their bondholders on what this
key ratio is.
The business of defeasance I previously touched on has created
significant benefits for O over the past decade. I think the window for
defeasance has closed. As the cost of new debt rises the opportunity to
ReFi goes away. Consider this BABs bond O issued last year. A 5 1/8%
coupon bond is now yielding 5.80% (trading at 93). This is a proxy for
what it would cost O to issue new debt. The ReFi window is closed for O,
(and most other munis across the country). This increase in borrowing
costs is not a reflection of O; the entire muni yield curve has gone up.
The ten year is has moved a very significant 75BPs
The following is a discussion of the historical savings from defeasance activity:
Taking advantage of the lowest interest-rate environment in forty years(thanks to Ben B) , the County refunded $18.5 million of 10-year old bonds in 2003, saving $1.8 million
through 2014. In 2005, the County participated in a second pooled
tobacco bond sale, which enabled the County to defease $19.9 million,
beneficially affecting the years 2007 - 2025 for total debt service relief of $27.3 million. In late 2009, the County issued $33.3 million of refunding bonds, enabling savings of $3.3 million in 2010 – 2023.
It is
the County’s goal to annually review its outstanding debt for refunding
opportunities. In 2010, The County maximized its interest savings by
issuing a mix of tax-exempt, Build America and Recovery Zone bonds.(Sorry O, this benefit has left the barn, and it's not coming back.)
Syracuse University is a power force in the local economy. I have no
doubt that this fine school will be contributing to economic activity
(and taxes) for a long time to come. But, once again, I see chinks in
this armor. The tuition at SU this year is $50,791, up 6.2% YoY. This is a big nut.
In years past tuition cost was supported by Pell grants, donations,
investment returns from endowments. The money also came from tapping
401Ks or a ReFi of the family home. A ton of it came from student loans.
Most of that has gone away. I wonder if SU will be the driver of growth that it has been in the past.
O has a large capital budget. They need to make repairs to old “stuff’
and build new “stuff”. It’s a long list. A significant portion of this
has to be financed with new debt.
The capital plan:
Source of funds for capital spending:
Note that only 12% of the budget comes from reserves. The balance is
either borrowed or is grant money from the State or Feds. This is the
model that has been in place for years. I don’t think that model is
going to work so well for the next decade.
Conclusion
I don’t see a credit problem with O in the foreseeable future. I
would put the odds of a default or a restructuring around “0”. But I see
signs of weakness. Both in the micro-economics of O and the broader
macro dynamics of the muni market.
For what it is worth I have trouble accepting the Aa1/AAA rating, NY
State GO bonds are rated Aa2/AA. What happens in Albany will flow down
to O. Wanna bet on at NYS downgrade in the next year?
If you don’t own O’s bonds yet and are looking for a chance to buy in, I
would hold off. Yes, the bonds have gotten cheap of late. I think they will be cheaper still in the next few years.
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Holy shit.. I live in "Oganaga" county, not too far from the 'Cuse.. AND I just became an UE statistic. This article unsettles me. A lot...
Good Job Bruce...
As far as the AAA rating, have you ever heard of the Gaussian Copula Function?
Wired Mag had an interesting article a couple years ago about it.
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
still paying my SU student loan :(
the fact that you can afford to pay it at all, means it may well have been worth it...
only you can be the judge, but... if your point is that your debt sucks, well, i'll have a drink with you on that one!
I'll be paying my Sallie Mae SU loans for a loooooooong time, but I did the math before going.
Too many today rack up 60-100k in student loans to get a job that pays 35k. Now there is a poor soul who never sat down and did the math.
they prolly shoulda gone to colle... nm
:^)
i'm seriously re-considering the paths for my offspring w/ respect to the college decision. it's a slave-march from the day you walk, and the new fed loans aren't forgivable.
tell me that's not intentional enslavement...
good thing we're 'free' here in america, eh?
Thanks for the education, Bruce.
ditto on that, FH,
perhaps i'm being 'taken down a road', not knowing enough to question your (BK) presentation, it sure looks balanced and well-thought (if not self-skeptical) to my ever-skeptical eye.
cheers to you mr krasting.
For any AAA munis to be left standing there has to be a PONZI SCHEME happening.
Remember the rating agencies defense is that the rating is an opinion therefore they are not liable for faulty ratings. This was their defense in the sub prime mortgage ratings fraud. That they are still in business defies logic.
Excellent article, spot-on analysis. When government revenues collapse (due to economic collapse, dollar collapse, or similar) what will the value of O County bonds be?
We are headed for a REAL problem: one that "flee-bagging" off to Illinois (or anywhere else) for a while will not let you escape.
Who is going to pay >$50k/year tuition for a 2nd-3rd Tier university in the "new normal"? SU's business model is toast because parents and students cannot afford to take on such debt for a college degree that leads to a $30k/year job upon graduation (if you're lucky!).
So, if you factor into your analysis that Syracuse will have to cut its tuition 50% (in real terms, if not nominal) and do you still conclude that these munis are "money good"?
Who is going to pay >$50k/year tuition for a 2nd-3rd Tier university in the "new normal"?
SU classrooms are not filled with Americans.
Correct, they are filled with Jersey Princesses.
(Imagine Snooki driving around the hills of 'Cuse in a 2012 Land Rover paid by Daddy)
They cover debt 6Xs. So they can get squeezed quite a bit before there is a problem.
For O's RE taxes to fall to 30-40mm would impy 'something' that is not on my radar screen. (mine is old and possibly faulty)
My point was that even in this 'Best of Breed' there are big bumps in the road ahead.
What's you're guess on long term economic growth in O given what looks like a bottleneck in the Debt=Growth equation? Multiply that by 3100 counties.
The Miller Brewery in Fulton, NY and Church & Dwight (of the famous Solvay process) are all in there too. I'm sure the export of apple juice and fall foliage colors is a considerable asset, as are the salt caverns underground. How much is a salt cavern worth?
college is consumer discretionary. if we know anything its that the income disparity gap merely shifts spending, in zero sum fashion. fewer middle class, more rich kids, higher tuition? the same student spending net net, just more high end. ands its possible students who may have gone to Harvard ten years ago, will go to Syracuse next year. The real question is what their research budget like? what are the corporate ties. If they strictly an educational institution, then downgrade them accordingly. That said I agree this is the core industry, and everything else is secondary.
syracuse is funded by basketball royalties
Good points regarding the vulnerability to State and Fed funding though.
Advance refunded bonds, where either US Treasury issued SLGS or open market Treasury bonds (bill¬es) are put into an escrow in sufficient quantity to meat all payment obligations of the old bonds, including the redemption of all outstanding principal on the first call date are defeased, ie. dead and are off the books as a liability.
The only way they default is if the US Treasury defaults on its bonds, period. Not a Ponzi, nothing like it. More like a mortgage refunding where you don't have an "any time" call on your mortgage.
You're right. $200b. Nothing to see.
"You're right."
Yes, I am.
Thank you, this is good, and makes many of the points that need to be made :)
The ponzinomics continues to become clearer and clearer. So, just for fun, show everyone what a CCC rated muni might look like.
this is the ultimate ponzi , multiplied by 3100 counties in the USA ......
So, they are creating debt in the name of taxpayers, turning it into an asset, and borrowing against it in the muni market.
Nothing new, except everyone is beginning to see the ponzi.