Morningstar Advisor - August/September 2012 - (Page 50)

Spotlight lack of spending controls and drops in revenues. This resulted in negative reserves and significantly limited financial flexibility. To fund basic operations, the city borrowed from the market for cash flow purposes, which we generally consider to be a credit negative. The city has adopted a plan to eliminate its deficit reserve position, although executing it will be challenging given revenue raising constraints set by law, spending mandates, and a contentious political atmosphere. Debt and Long-Term Liabilities San Antonio vs. Detroit Key Statistics San Antonio Detroit Population (2010) Full Market Valuation ($ hundreds) (2011) Market Valuation Per Capita Per Capita Personal Income % U.S. Average Median Household Income % U.S. Average % Unemployment (2011) Total Fund Balance % of Spending (2011) Overall Debt Burden ($ hundreds) Overall Debt Burden as % of Taxable Assessed Valuation (2011) Principal Amortization (10 years) 1,290,196 $83,199,409 $64,485 79.8% 83.1% 7.4% 25.8% $7,866,380 11.0% 49.6% 759,340 $20,246,209 $26,662 55.1% 54.6% 19.9% –11.5% $4,611,913 49.0% 42.2% Next, we measure financial commitments, including debt, pension, and other post-employment benefit (OPEB) obligations. San Antonio’s debt levels are above average, although considerably lower than Detroit’s. Capital needs for San Antonio are moderate, and its long-term liabilities are well managed. The city participates in state pension plans, which are more than 90% funded. OPEB obligations account for a minimal amount of city spending. Detroit has an extensive debt profile and a complex swap portfolio. Pension liabilities for Detroit are well funded, at comparable levels to San Antonio. However, Detroit’s high funded ratios are because of the city’s previous debt issuance to fund its pension obligations. Detroit’s current unfunded liability for OPEB plans are massive and are expected to further pressure future budgets. Management and Operating Environment Mar-01 Historical Reserves as % of Spending San Antonio Detroit 30% 20 10 0 –10 –20 –30 2007 2008 2009 2010 2011 Nasdaq Index ongoing budgetary oversight. No operating environment constraints are noted. Detroit is subject to state oversight. The political environment for the city has been contentious between management, its unions, the state, and local elected officials. In our opinion, the political atmosphere has made it difficult for the city to achieve stability in finances and operations. To remain solvent, we think that Detroit’s management team, whether elected or state appointed, needs to further restructure the organization, cut expenditures, and balance budgets. Overall Credit Quality Dec-00 00Jan-01 Dec-00 0-00Feb-01 ec-00Mar-01 v-00Feb-01 00Jan-01 Dec-00 ec-00 0-00 Feb-01 -00Feb-01 v-00Mar-01 Jan-01 ec-00 0Jan-01 00Feb-01 v-00Feb-01 Jan-01 ec-00 0Jan-01 00Feb-01 c-00Mar-01 Jan-01 Our analysis then centers on the overall management of the entity. For local governments, this focuses on management’s ability to control its debt and financial profile. We consider whether a government has put in place sound policies and procedures. Fiscal planning and the operating environment, and any obstacles imposed by the operating environment, are also included in our analysis. San Antonio’s management is strong, with prudent financial policies and extensive We believe that the long-term credit quality of San Antonio is good. With a stable economy, sound financial profile, and strong management, the city should remain a stable investment with minimal risk exposure over the next several years. In contrast, Detroit’s long-term credit profile is poor and is expected to remain so for at least the next two years. The instability of its economic base, financial operations, and ability to pay obligations is concerning. K Rachel Barkley and Elizabeth Foos are municipal credit analysts with Morningstar. 50 Morningstar Advisor August/September 2012

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2012

Morningstar Advisor - August/September 2012
Contents
Contributors
Letter From the Editor
How Much of the Behavior Gap Is Your Fault?
What’s Your View of the Muni-Bond Market?
A Balanced Life
How to Get to Know EMMA
A Strong, Robust Fund Business
Dividend Investing Abroad
Four Picks for the Present
Investment Briefs
Fund Expenses Through the Decades
Autos on Comeback Track
Lessons From the Muni-Bond Rebound
Municipal-Bond Landscape Shifts
Municipal Bonds 101
A Tale of Two Cities
Unraveling the Mysteries of Money
Small Companies Mean the World to Him
The Chinese Art Market and the Origin of Bubbles
The Myth of the Dumb Investor
Stocks That Can Stand the Heat
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The War on Savers

Morningstar Advisor - August/September 2012

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