Oregon Scores Well in Volcker Budget Report


Timothy Iltz is Co-Portfolio Manager of Aquila Tax-Free Trust of Oregon
Vice President and Municipal Bond Analyst, Kirkpatrick Pettis Capital Management


The Volcker Alliance, a think tank headed by former Federal Reserve Chairman Paul Volcker, recently released its report, Truth and Integrity in State Budgeting: Preventing the Next Fiscal Crisis. The report covers fiscal years 2016 through 2018 and measures all 50 states in five key budgeting areas: budget forecasting, budget maneuvers, legacy costs, reserve funds, and budget transparency. Each state was given a grade between A and D- for each category and the grades reflect each state’s three-year average for the critical budgeting areas. The report ranked Oregon as one of the top states for managing legacy costs, a measure that evaluates how well states are funding promises made to public employees, including pension funding and health care.

Over the past three years, Oregon has earned an A average for its ability to manage post-employment benefit (OPEB) funding and pension liabilities. The Volcker Alliance reports that Oregon has a public employee pension funded ratio of 83% for 2018, placing the state in the top 6 plans in the nation. Oregon also earned an A average for budget maneuvers, which evaluates whether the state used one-time revenues, borrowings, asset sales, and other measures to achieve short-term budgetary balance. Budget forecasting was the only area where Oregon fell short, with an overall grade of C, which was partially due to the fact that the state does not use consensus revenue forecasts. However, Oregon was noted for its use of multi-year revenue forecasts and revenue growth projections.

In managing the Aquila Tax-Free Trust of Oregon, we maintain a close watch on Oregon’s economy, budget and liabilities, and we are pleased with the results of the Volcker Alliance’s assessment of Oregon’s fiscal health.


Oregon Local Bond Measure Election Analysis


Earlier this week, Oregon residents approved over $940 million of general obligation bonds across the State, which was historically strong. Although results have yet to be certified, and therefore still preliminary, bonds approved by this election far outweigh the $852 million approved at the previous Oregon November special election in 2017. There are four scheduled election dates in Oregon each year: the 2nd Tuesday in March; the 3rd Tuesday in May; the 3rd Tuesday in September; and the 1st Tuesday after the first Monday in November. In November 2008, Oregon voters approved Ballot Measure 56, which repealed a law requiring more than 50% of a county’s registered voters to vote in bond measure elections held in May and November. As a result, the May election has become an important election to follow for new bond measures.

By election measure, approximately 59% of the bond issues were approved; however, 80% of the total requested par amount was approved by voters. Oregon typically sees more ballot measures during general elections, which are held in November, of even-numbered years. Accordingly, the current election falls flat versus the 2016 November general election, which approved a staggering $1.76 billion of new supply.

Oregon Bond Post

Election results were dominated by Salem-Keizer School District’s $620 million issue, which is estimated to cost taxpayers $1.24/$1,000 of assessed value. Overall, 90% of the total par-amount approved at the election was for school districts making capital improvements to existing facilities and constructing new facilities to accommodate enrollment growth. Furthermore, a significant marketing point for several of the school bond issues was the Oregon School Capital Improvement Matching program, which is a grant program, offered by the Oregon Department of Education for the support of communities that pass general obligation bonds for school improvements.

Some elections were closer than others. Nestucca Valley School District’s general obligation bond was last reported as being favored by only 21 votes. If approved, the bond measure would fund the construction and renovation of school facilities. Also, tax-rate and the overall par amount requested did not seem to weigh into voter decisions as much as demographics and geography. For example, both measures in Douglas County failed. The election also approved a wide variety of projects ranging from park and recreation facilities and road improvements to addressing overcrowding and safety in schools.

Overall, this election will provide a significant source of additional supply to the Oregon bond market. The year has been off to a slow start, and while this election will help alleviate some of the supply concerns, we expect that issuance will be lower this year than last year.


Got Bonds? An update on Oregon municipal bond issuance


2017 has seen a significant shift in issuance due to the $1.76 billion in general obligation bonds approved during the November election and the $1.5 billion approved during the May election. As a result, new money issues have lead the charge in Oregon in 2017. Overall, 2017 has been a strong year for issuance with new issues outpacing last year at over twice the issuance through June. Yet, due to a large amount of maturities and calls, demand remains robust with new issues continuing to price aggressively. Net issuance is the difference between the volume of municipal bonds issued and the amount matured or called. Net issuance in Oregon for the first half of the year has been positive. However, in June, net issuance plummeted by $2.56 billion due to $2.17 billion of municipal bonds maturing or being called.

Oregon Bond Net

Source: Bloomberg

Demand for Oregon bonds has strengthened in recent months due not only to the impact declining net issuance, but also the increased dollars sitting on the sidelines as the result of bonds maturing or being called. We expect supply constraints and strong demand for municipal bonds will continue for at least the next several months as municipal bond issuance is unlikely to satisfy investor demand. Lipper US Fund Flows data released recently indicates municipal bond mutual funds have seen an average weekly year-to-date inflow of approximately $236 million as investors are facing increasing difficulty sourcing bonds. In addition, credit spreads between high and low investment grade municipal bonds have tightened to the point that investors are assuming measurable credit risk for the addition of only a few basis points.

Tim Iltz
Vice President, Municipal Bond Credit Analyst
Kirkpatrick Pettis Capital Management

Investments in bonds may decline in value due to rising interest rates, a real or perceived decline in credit quality of the issuer, borrower, counterparty, or collateral, adverse tax or legislative changes, court decisions, market or economic conditions.


Oregon Local Bond Measure Election Results


Local bond measures won at Oregon’s May 16, 2017 special election. Although results have yet to be certified, and are therefore still preliminary, $1.5 billion of general obligation bonds were approved by voters across the State. By election measure, 62% of the issues were approved; however 83% of the total requested par amount was approved. For a special election, these results compare favorably with the November 2016 general election, which approved $1.76 billion of issuance. Oregon typically sees more ballot measures during general elections, which are held in November of even-numbered years. However, even the 2014 general election only produced $615 million of potential new supply to the bond market.

In 2008, Oregon voters approved Ballot Measure 56 which repealed a law requiring more than 50% of a county’s registered voters to vote in bond measure elections held in May and November. This has benefitted local governments with bond measures and local citizens supporting those measures. According to election results compiled by the Oregon Secretary of State, no Oregon counties received more than 50% of ballots from eligible voters. Josephine County had Oregon’s highest voter turnout this election, with 46.36% of registered voters casting ballots. The County’s large turnout was largely attributed to several local option levies including a public safety levy which was approved following 5 separate failed attempts at elections from 2012 to 2016.

Oregon chart 1

Source: Kirkpatrick Pettis Capital Management and various Oregon County Clerks.

The majority of the bonds approved were for school districts making capital improvements to existing facilities and constructing new facilities to accommodate enrollment growth. School district’s accounted for over 90% of the total requested amount and over 70% by number of measures. Most notably, Portland Public Schools passed its $790 million construction bonds, which is the largest bond any local government has placed on a ballot in Oregon history. Overall, this election should provide a substantial amount of supply to the bond market, particularly following the success at the November 2016 general election. Collectively, the elections approved over $3.26 billion of new bonds, with many of these issues of acceptable size and credit quality for the portfolio.

Source: Kirkpatrick Pettis Capital Management and various Oregon County Clerks.

Source: Kirkpatrick Pettis Capital Management and various Oregon County Clerks.

Voters also appear to be less price-conscious, given the high percentage of measures passed with relatively high taxes rates. Of the measures presented with estimated tax rates over $1.00 per $1,000 of assessed value, 75% were approved and both measures over $2.00 were approved. However, certain governments continue to face opposition. Mt. Hood Community College’s $75 million issue to build a new technology center and seismically upgrade campus buildings was defeated by 57% of voters. This marks Mt. Hood’s sixth defeat for a bond since 1974.

Nevertheless, given the success of recent elections, local governments are already making plans for the November 2017 election. In a unanimous vote, the Hillsboro School District board approved a plan to present a $408 million capital construction bond on the November ballot. The District is issuing the bonds to finance capital construction related to an anticipated 2,000 new students expected to move into the District over the next several years.

Timothy Iltz
Vice President, Municipal Bond Analyst
Kirkpatrick Pettis Captial Management


Oregon’s Retirement Conundrum


Tim Iltz VP, Municipal Bond Credit Analyst

Tim Iltz
VP, Municipal Bond Credit Analyst

Oregon’s Public Employees Retirement System (PERS) has once again become front page news in anticipation of the release of the 2017-19 contribution rates. The headline making news this week is that PERS now has an unfunded liability which has reached $21.8 billion or $16.2 billion when including side accounts. However, it is important to keep in mind that approximately 900 public employers participate in Oregon’s PERS, including school districts, special districts, cities, counties, and state agencies. Each of these participants has a different contribution rate and surplus or liability. System wide, rates are estimated to increase by 4.66% or 3.62% on a weighted basis.

While none of this is good news for participating Oregon local governments, it does not impact all participants equally. For example, Junction City School District and South Lane School District are both located in Lane County, and both serve the mission of educating K-12 students. However, Junction City School District has a total net contribution rate of 22.33% of covered payroll for tier-one/tier-two employees while South Lane School District has a net contribution rate of 4.37% of covered payroll. These rates are also affected differently by the proposed increases; Junction City School District’s contribution rates are estimated to increase an additional 4.61% to 26.94% while South Lane School District’s rates are estimated to increase 3.69% to 8.06%. Due to the large variance in rates and liabilities, we review each holding on an individual basis rather than resorting to broad generalizations. Read more “Oregon’s Retirement Conundrum”


The Value of Independent Municipal Bond Credit Research


Timothy Iltz Municipal Bond Analyst

Timothy Iltz,
Municipal Bond Analyst

The value of municipal bond credit research is difficult to measure, particularly by any quantitative measure. Quite often, the value of credit research is not solely the extent to which it may add to performance, but the extent to which it may limit potential drags on performance.

Historically, individual investors and portfolio managers alike have relied heavily upon the credit reports published by the independent ratings agencies. While these reports can be enlightening and often revealing of the credits they review, they can also be confusing to investors. Of particular concern is the recent trend of upgrades versus downgrades, which is an indication of credit trends. Read more “The Value of Independent Municipal Bond Credit Research”