If there is one thing most Americans can agree on, it is
that the quality of their government is bad and getting worse
except maybe it isnt, at least at the state
level. Statehouses have acted decisively on budgetary
discipline while Washington dithers, shrinking aggregate
deficits from $191 billion in the 2010 fiscal year to a
projected $47 billion for FY 2013,
according to the Center for Budget and Policy
States are also in the midst of a governance and
transparency revolution. That is the upshot of an annual survey
on online access to public spending released last week by the
U.S. Public Interest Research Group (U.S. PIRG). All but four
of the 50 statehouses now offer easily navigable web sites
where concerned citizens can monitor outlays down to the
check-book level, up from 32 in 2010, the
D.C.-based watchdog found. We were impressed to see the
progress over the past few years, says Phineas Baxandall,
the USPIRG analyst who ran the project.
The relative rankings of the states, which U.S.
PIRG graded pedantically at A through F, also turned out
to be encouragingly unpredictable. Republican and Democratic
administrations were equally likely to be stars or dropouts.
States with backwater reputations like Kentucky and West
Virginia were among the A students, while supposed bastions of
advancement like Wisconsin and Vermont both earned D-minuses.
Texas was valedictorian with a grade of 98, though more thanks
to independently elected comptroller Susan Combs than its
famous governor Rick Perry, Baxandall says.
How relevant are these findings on transparency to bond
investors? A bit, market pros say. Governance accounts for
fully 30 percent of a states credit rating, says Emily
Raimes, an analyst with Moodys. But the agency looks at
top-down best practices such as whether budgets and audits are
delivered on time, as well as initiatives and referendums
that might interfere with the budgeting process. (Take
that, California.) Transparency is not a part of
governance that impacts ratings, she says.
Indeed, U.S. PIRGs idea of virtue does not correlate
with that of the ratings agencies. Iowa, which failed U.S.
PIRGs transparency test altogether, gets an AAA credit
rating from Moodys, while public access avatars such as
Kentucky and Louisiana receive much weaker Aa2s.
Joseph Narens, a municipal credit analyst at fixed-income
mega-investor Pimco, is less dismissive of U.S.
PIRGs work. Transparency is a precondition but not
sufficient condition for buying bonds, he says. If
youre not forthcoming, youre dead.
Information from the web sites U.S. PIRG monitors
can be useful in seeing how efficiently a state government
spends its current revenue, Narens adds. But bond analysts and
buyers are at least equally concerned with future obligations
for employee pensions and health care, a realm where
statehouses can quickly get more murky. Some of these
governments have extremely underfunded pensions and no firm
plans to do much about it, he says.
Narens and Raimes both broadly agree with Baxandall that
states are becoming more open with financial information,
pushed by a combination of technology, federal securities
market regulation and investors now more vigilant about credit
risk since the 2007-2008 crisis. Baxandall does sound a warning
note, though, about quasi-public agencies: port authorities,
transit systems, water boards and the like that are heavy bond
issuers in their own right.
While many of these bodies were originally spun off from
state governments to make sure they could repay their borrowing
from a clear revenue stream, they have largely ducked the
transparency wave washing over elected officials. They
are lagging where they should lead, Baxandall notes. That
is something investors should certainly think about.