The Tennessee Valley Authority (TVA)’s bond rating has been downgraded from AAA to AA+, though, “the fundamental financial strength of the TVA is unchanged.” The TVA is a wholly-owned entity of the federal government, and the downgrade reflects, “the negative outlook of the United States as the TVA’s sponsoring sovereign.” Moody’s confirmed the TVA’s AAA rating on the basis that TVA is self-funded and a self-sufficient public power system that finances its operations based on its own user-generated revenues. In the event of fiscal stress, the TVA operates under an implicit federal guarantee.
The TVA doesn’t think the downgrade will have any material impact on its finances as the authority’s stand-alone credit rating remains unchanged (at least in the short-term, according to S&P) and it doesn’t rely on federal subsidies.
S&P downgraded several other power authorities in the United States: Texas, Oregon, Arizona, New York and Florida, Arizona and Colorado.
As far as states go, in July, Moody’s put five states on a downgrade watch list: Tennessee, South Carolina, Virginia, Maryland and New Mexico. And they gave six reasons: 1) employment volatility; 2) high federal employment relative to total state employment, 3) federal procurement contracts as a percent of state GDP, 4) Size of Medicaid expenditures relative to state spending, 5) variable interest rate debt as a percent of state resources and 6) the size of the operating fund balance as a percent of operating revenues.
Places with a lot of exposure to risk, or a “high dependence on federal economic activity,” include Virginia and Massachusetts. This doesn’t mean that these states and their local governments will see their interest rates rise, or be downgraded, or that they are in any danger of default. It simply means their books will be scrutinized with this risk exposure in mind.
A deal has been struck between Governor Mark Dayton (D) and Republican legislative leaders in Minnesota to end the government shutdown . Instead of “raising taxes on the rich” (the preferred strategy of the Governor) Republicans prefer deferrals. The GOP proposal includes $700 million borrowed against the state’s portion of the Tobacco Settlement and $700 million in deferred school payments. Both must be repaid in the next two years. Fitch downgraded Minnesota from its AAA rating due to the state’s ongoing structural deficits, and the Tobacco Settlement bonds proposal. While Republicans say the compromise enables them to stop tax increases and a $500 million bond proposal, structural reforms are still lacking.
Spending has grown in Minnesota over the past several decades in particular in education and Medicaid as with most states. Pensions are undervalued and will require higher contributions. Depending on your view Minnesota either has a revenue problem (in that it can’t support the growing costs associated with these programs), or it has a spending problem (in that these costs continue to grow and demand more revenues.) It is not unlike the fundamental philosophical divide at the center of the debt-ceiling debate: do we support growing costs with more debt or do we cut costs by rethinking and restructuring what government is providing?
Effectively, Minnesota’s budget has been balanced by not engaging this debate but by attempting to reconcile two different views on the size of government. Spending growth can be supported by evasive techniques at least for awhile and people may be lulled into thinking you can have it all – lots of services and low taxes. But one-shots and short-term revenue sources eventually dry up leaving politicians with the uneviable choice of cutting programs or finding more revenues. Minnesota’s government has only purchased a little more time.
The market for municipal bonds is showing signs of skittishness, The Wall Street Journal reports. The New Jersey Economic Development Authority cut a bond issue by 40 percent on the news of increasing yields on tax-exempt debt as well as decreased demand. Governor Christie’s state of the state address used the word “bankrupt” to describe the state’s health care costs, a choice of words some are linking to the reduced bond sale. While it may be easy to pin the blame on the b-word, the state is in bad shape where its off-balance sheet debts are concerned, bested only by Illinois.
The yield for 30-year AAA rated General Obligation bonds rose to 5.01 percent yesterday, reflecting higher levels of perceived risk.
This bond-market news comes at a time when governments and public entities are trying to refinance their debts. During the financial crisis many governments brokered debt conversions with variable interest rates. This allowed government borrowers to keep their costs low, temporarily. About $109 billion in such deals expire this year. Governments will have to re-fi at higher rates or get new guarantees.
As the WSJ notes, the problem of a short-term cash crunch is likely more concentrated among smaller borrowers such as hospitals and schools. Most state and municipal borrowers will likely be able to rollover their debts.
This July 4th weekend marks the end of operation for 19 of Virginia’s 42 public highway rest stops, a move that will save the state $9 million.
The Wall Street Journal reports this isn’t limited to the Old Dominion; Louisiana, Vermont, Maine, and Colorado have shut down some public rest areas in recent months not only to save money, but because they’ve become obsolete – replaced by clusters of privately operated gas stations, fast food restaurants and motels right off the interstate. RV users even have the option of overnighting at many of Wal-Mart’s 4000 parking lots nationwide.
Public rest stop advocates, such as the American’s Truckers Association and AAA, argue closures are a threat to safety. Fatigued drivers have more accidents.
Other incentives are also at work. The Association of Blind Merchants opposes the move because federal law grants them priority – about 600 of their members stock rest-area vending machines.