From a municipal credit perspective, the events occurring in Ferguson, MO, cannot be ignored. The NE suburb of St. Louis has experienced a rapid increase in poverty since the early 2000s. A recent Brookings Institute study shows that the geography of poverty is spreading away from urban centers and concentrating in suburban locations like Ferguson, MO, where poverty rates are growing 3x faster than in cities. The rapid rate of this change can hamstring municipal finances because the demand for social services can outpace the ability to change policies or increase revenues.
Partnering together, HIP (Human, Impact & Profit) and SNW can measure the extent to which a municipal credit is able to handle the rapid rate of socio-economic change, and can translate this into factors that affect municipal credit quality. HIP scores and ranks issuers based on Health, Wealth, Earth, and Equality pillars, and has done so for 4,000 bonds. A HIP Score above 50 indicates a municipal credit is having a positive impact and therefore is better able to address issues in the community. For example, the health and wealth categories for Ferguson, MO, are below average or even bottom quartile in many impact-related metrics. This is similar to several low-income, high-poverty areas with a higher degree of credit risk – like Modesto and Fresno, CA, as well as Detroit and Memphis. Previous research indicates that a low HIP Rank for cities correlates with higher risk of bankruptcy and financial stress (read the paper here).
The City of Fresno is a credit with a high suburban poverty rate, and its credit quality has deteriorated rapidly. Fresno has a HIP Score of 39.1%, and its credit rating fell from A2 (upper medium investment grade) in 2002 to Ba3 (below investment grade) in 2013. In contrast, the City of Chicago’s Board of Education (BOE) HIP Score is 74.4% despite having confronted concentrated poverty for decades. We see significantly less credit quality deterioration in BOE – Baa1 in 2014 from A2 in 2006. Not only do we see significantly less credit quality deterioration in BOE, but find the risk reward trade-off compelling in this name. HIP Scores help SNW identify credits that over time should help build portfolios with better risk-adjusted returns, as credits with higher HIP Scores are better positioned to minimize the impact of rapidly changing socio-economic conditions that could potentially lead to financial distress.
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