Word on the Street: Don’t Buy Greenville Bonds

Fitch just rated the city of Greenville a AAA investment based largely on how pretty the rainbows and unicorns are in the downtown. Don’t be a sucker and buy these offerings unless you like high risk/high reward investments. First, via Reuters, we have some highlights of the report by Fitch. As you read this remember that the city of Greenville paid Fitch to make this report so Fitch is incentivize to paint a rosy picture with their data even though their report starts out by claiming Greenville has “moderately above-average” debt:

The city’s financial resources are healthy, following surplus results in four out of the past five fiscal years. Reserve levels have historically been in excess of the city’s prudent fund balance policy to maintain an unassigned fundbalance equal to no less than 20% of the following fiscal year budget. Fiscal2011 ended with a modest net surplus (after transfers) of $0.8 million or 1.3% of spending (operating expenditures and transfers out). The unrestricted fund balance (the sum of assigned, unassigned and committed fund balance under GASB 54) was $15.9 million or a strong 25.6% of spending.

Financial flexibility remains ample with modest expenditures cuts to date and stable revenue performance despite a weak national economy. The general fund revenue base consists largely of property taxes (approximately 50% of revenue) and business licenses (33%). The tax base has exhibited moderate growth through the recession, offsetting areas of revenue weakness related to economic conditions. Commercial and residential permit activity in 2012 is rebounding somewhat.

Tax collections have declined, which may be indicative of local economic and housing market strain. The city’s tax rate is competitive and has not been increased in at least the past 15 fiscal years. State law imposes a limitation on the millage levied for operational purposes to growth in the CPI and population. The limitation may be overridden in certain circumstances by vote of the city’s governing body.

So 50% of the operation budget of the city comes from property taxes which are down sharply. But hey don’t worry, the city government can vote to raise your property taxes above the rate currently allowed by state law – which would not drive people out at all!

Ready to invest?

But wait, there’s more:

Management is forecasting a $1 million addition to reserves in fiscal 2012 due to favorable variances to budget for expenditures. During the year employees received a 2 % salary increase, and the general fund restored transfers for capital which had been deferred in recent years. The city did not freeze open positions nor did it make layoffs.

The adopted fiscal 2013 budget appropriates $600,000 of general fund balance for capital projects. Fitch believes reserve levels will remain healthy despite this planned draw. The city plans to give all employees a 2% cost of living adjustment and to increase pay-go funding by approximately $1 million relative to the fiscal 2012 budget. The city has no plans to increase its millage rate.

Uh-huh. The city claims another million bucks is going to magically appear so they’re passing out raises and building a bunch of stuff. Fitch thinks this means the reserves will remain healthy. How’s that work? Because they have a magical “downtown” which is crowded with rich kids and drunks so it produces money:

The majority of recent economic development activities have focused on the redevelopment of the city’s downtown area, further enhancing its regional draw. Notably, ‘ONE,’ a $100 million downtown office and retail project, is currently under development and has secured large tenants, such as CertusBank and Anthropologie, the first national retailer to open in downtown Greenville. Fitch notes that the city’s local hospitality and accommodations taxes, which can be seen as indicators of the city’s economic activity, have proven resilient during the recession and are projected to post sizeable year-over-year gains of 9% and 11.4%, respectively, in fiscal 2012.

Economic indicators are generally positive. The city’s unemployment rate in May 2012 was 7.4%, which compares favorably to that of the nation (7.9%) and the state (9.3%). Median household income is below that of the state and nation, but per capita indicators exceed national levels.

Greenville’s local economy has diversified in recent years away from its traditional basis in manufacturing, with robust growth in professional/business services, education/health services, and leisure/hospitality. The biotech industry has grown measurably in recent years as well, through collaborative projects at the Greenville Hospital System (GHS). Once home to a two-year residency program, GHS has recently developed into a four-year medical program in conjunction with the University of South Carolina Medical School. Classes will begin in mid-September of this calendar year. GHS also houses the Institute for Oncology Research and the Steadman Hawkins Clinic of the Carolinas for orthopedics, both of which work extensively with local biotechnology firms on R&D in their respective medical areas.

The local economy also benefits from the Clemson University International Center for Automotive Research (CU-ICAR). The Center houses Clemson’s graduate automotive engineering center, a 250-acre advanced-technology research campus that is home to BMW, Michelin, Sun Microsystems, Microsoft, and others that have invested over $200 million to date.

For those of you that don’t know Anthropologie is a hideously expensive version of Pier One designed to appeal to people who are extremely wealthy. It seems like a large part of the fiscal plans of Greenville rely on rich north-easterners and higher ed students. Of course both groups come to Greenville to save money so …

But here’s where the laughter starts:

Pension costs for fiscal 2011 represented an average 6.9% of spending ($4.3 million). General city employees and police officers participate in state-administered plans and firefighters in a city-administered plan. The city fully funds its pension obligation to both state plans. Annual contributions to the fire department pension plan consistently exceed the annual required contribution (ARC), however, despite this commitment the plan’s funded ratio has regressed in recent periods due to market losses. The most recent funded ratio remains satisfactory at 75% assuming a Fitch-adjusted 7% rate of return. Fitch notes that funding level for the state pension plan for general city employees is weak between 60% and 70%, applying the same 7% rate of return, which could translate to higher local contributions in the future.

Where is anyone getting a 7% rate of return these days? This entire house of cards is predicated on the imaginary returns of a booming stock market. How’s that worked out pension funds so far? If anyone out there knows where i can get 7% shoot me an email because I’ll dump everything in to it.

I’m thinking that I’d like to keep my money somewhere safer than in the bonds issued by people who think there’s some way they’re earning 7% on every dollar in this economy. You should do the same.



2 Responses to “Word on the Street: Don’t Buy Greenville Bonds”

  1. Matt on July 28th, 2012 11:23 pm

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  2. More on That Phony Fitch Rating for Greenville : Greenville Dragnet on August 27th, 2012 2:03 pm

    [...] when I said buying Greenville bonds was dumb partially because Fitch gave them a AAA rating based on the idea that Greenville was getting 7% on investments to fun… which were already in the [...]

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