Wasmer Schroeder Review, My Stance on a Municipal Bond Legend and Their Texas Municipal Bond Holdings

The following work will look into the city of Dallas, Texas and the performance of its fixed-income municipal bond holdings with relation to their asset allocation, degree of credit strength, diversity of tax-payer income, major credit strengths and weaknesses, and other similar and related features of its current and former fixed-income holdings. Throughout the writing the municipalities’ current on hand assets, financial statements, general year after year trend, and projected internal rating of the city, will be used to analyze the performance, strengths, weaknesses, and risks of the area, and to make an educated review of how the city is faring financially. In short, this paper will give an in-depth breakdown of what the financials of Dallas, Texas look like, and of how a prospective investor could potentially use this information to make adequate decisions on how best to utilize the city’s fixed-income securities in the midst of a diversified portfolio, speculative risk, or wealth-management decision. The following blog post will walk through my own personal Wasmer Schroeder review of the company, and will look into their Texas Municipal bond holdings in detail, subscribe to our blog for additional details and information.

The Wasmer Schroeder Texas Municipal Bond Holdings, Review of Wasmer’s Bonds

Beginning with a thorough demographic profile of Dallas, as well as a look into the city’s economic condition, it becomes quickly apparent that the city has a steadily increasing population, much in line with the general trend of the state as a whole. Dallas in particular also shows a decreasing poverty rate over the past several years, a noteworthy increase in median home values over the past 5 years (with an average 10.2% annual increase in market value since 2013), and a steady rate of growth, at just over 4% annually on average, in the median household income of the area (1% higher than that of the entire state). In line with the city’s mainly better than state-average statistics, a significant drop in the unemployment rate has occurred since 2009, and has continued to fall well into 2018, closely aligned with the current trend of the United States economy during that time.

This beneficial trend with regards to low unemployment numbers might show a reasonably strong susceptibility to the numbers fluctuating alongside economic cycles, in that the Dallas, Texas economy did not stand alone, nor stand out, with its unemployment numbers during the 10-year time frame, and in-fact showed an economic state that was more or less on par with that of the US as a whole. While Dallas in particular may show generally lower unemployment numbers, and somewhat higher median incomes when compared to the state of Texas’ more rural areas, (factors which strongly correlate to the health of a region’s economy), the city is not an outlier with regards to immunity to economic cycles, and the cyclical nature of the economy should be taken into account when analyzing economic measurement indexes of the municipality. 

Consequently, in further looking at the city’s economic state, a basic analysis shows that the majority of wealth indicators within the demographics table provided, are in line with state and United States levels, with the exception of the individual poverty rate. While over the past four plus years Dallas’ poverty rate has shown a decreasing trend as the economy of the country as a whole begins to rapidly recover starting in 2014, the poverty rate of Dallas, Texas is particularly gruesome in relation to its compared benchmarks, which include the poverty rate of the state and the poverty rate of the country. Aside from this one small blip however, every other major economic factor in the base demographic table of the information packet demonstrates better numbers for the city than those for the rest of the state, and in some cases even for the US as a whole. Dallas shows higher median home values than the state average as the recession begins to move into an expansion, as well as an unemployment rate that is significantly lower than its marks as the economic state of the nation begins to improve. 

My Wasmer Schroeder Review, and Why I Think That Their Muni Bonds Are OverValued

In wrapping up our demographic analysis of the city of Dallas, it quickly becomes evident that the population is increasing steadily, and that this regular increase in the population year after year does not look to be enough to offset the remaining debt that sits on the city’s books. Companies in Dallas are decreasing the amount of property tax revenue paid to the municipality, a huge source of the areas revenue, with nearly $6.2 billion in 2008 coming in in tax revenue, in comparison to just under $5 billion in 2017. Combine this with nearly $30 billion in debt via municipal bonds, notes, pensions owed, and the like, and you get a city that, as a brief financial analysis of their income and holdings show, is unprepared and gradually becoming more unprepared by the minute, to meet their growing debt obligations. Aside from this, while the city may have nearly $3.4 billion in annual revenues coming into the municipality, their vast expenditures each year leave them with a negative gross profit balance of nearly $277 million (using just revenues minus total expenditures). In short, the city of Dallas, with regards to their finances, doesn’t meet the criteria for what one would usually consider a clean bill of financial health, and it looks to be in trouble with regards to its lack of income and high levels of debt. 

Subsequently, we can take a look at the city’s tax base profile to further dive into their problem of a lack of income, of excess expenditures, and of what is likely a metropolis that holds too much debt on their books. The overall employment prospects of the city look to be relatively diverse, with eleven major employers each holding similar numbers of employees, and regarding property taxes-the city’s major revenue source as stated in the former, real property amounted for the vast majority of property tax revenue of the city. In taking a whole-view look at the overall tax revenue of Dallas, property tax, mentioned as “ad valorem taxes,” on the municipalities’ governmental funds statement, is disproportionately accounted for in comparison to the other types of revenue that the city brings in, with nearly half the total revenue year after year from 2008-2011 being accounted for by way of property taxes. Regarding the market value of the city, it looks to be shrinking, as the market value of the city’s real estate holdings is rapidly depreciating, and the city’s vast tax revenues along with it. As a whole, the city is very heavily concentrated and dependent on the real estate industry and with the high metropolitan property tax revenues that come with it, its dominant breadwinner looks to be dissipating, where its Standard and Poor’s rating will likely soon follow. 

What is Wasmer Schroeder, A Great Company Overall, Just With OverValued Bonds in Core Research

In moving forward on our analysis of the city, we look into the operating performance for this last fiscal year for Dallas, Texas, where we looked at the governmental funds balance sheet where their fiscal year ended September 30, 2017. Given the basis of accounting, these assets are generally current in nature: cash, short-term investments, and short-term receivables. Most notably absent are capital assets. The three categories that are used to break up the funds involved in the balance sheet for Dallas are general, debt service and nonmajor governmental funds. Looking at the assets the first line is pooled cash and cash equivalents and the majority of the money comes from general and nonmajor governmental funds. This account group includes undeposited receipts, petty cash, bank accounts managed by State agencies and institutions, and pooled cash accounts managed by the State Treasurer.

The debt service for assets was particularly low at almost $14,000 but looking at general assets, it took about one-fourth of the total assets and the other three-fourths was accounted from nonmajor governmental funds. The city of Dallas, Texas did a good job by having a low amount of liabilities. The total liabilities accounted for were just over $200,000 where these will most likely be paid in a calendar year. The two main liabilities for Dallas were unearned revenue that can be used for future periods and contracts payable. Fund balance is the difference between assets and liabilities in essence, what would be left over if the assets were used to satisfy the liabilities. Overall, just from looking at the balance sheet the city is in good shape as its assets triple its liabilities. 

The revenues are shown by source or type, such as various taxes, fees and charges, intergovernmental aid, and so on. Analyzing the revenue, about half of their revenue from governmental funds is derived from ad valorem tax. An ad valorem tax is a tax based on the assessed value of an item such as real estate or personal property. The most common ad valorem taxes are property taxes levied on real estate. Ad valorem property taxes are typically a major, if not the major, revenue source for both state and municipal governments, and municipal property ad valorem taxes are commonly referred to as simply “property taxes.”

Other notable revenue earnings are sales tax, franchise fees and service to others that makes up a majority of Dallas’ revenue. The total expenditures for Dallas are slightly more than the revenue earned. A major expenditure for Dallas and rightfully so is general government and public safety. Major corporations involved in public safety are police, fire and EMT responders that make Dallas a safer city. Lastly, the debt involved for expenditures is about a fourth of all expenditures and the majority is in principal and capital outlay. 

The core operating fund did not break even because if you look at the the expenditures, they outweigh the amount of revenues. Following this,  if you look at the fund balance from the beginning of the year compared to the ending balance it is also reduced at the end of the year. I believe that Dallas has the sufficient reserves, because the revenue continues to increase annually and Texas has one of the highest property taxes in the country to provide more resources for the city. 

What is Wasmer Schroeder, My Review of The Company

The general obligation debt service fund provides for the payment of principal and interest on the City’s outstanding general obligation bonds, certificates of obligation and equipment acquisition notes, as well as interest on outstanding general obligation commercial paper. The City of Dallas does not issue bonds to the general public. Debt financing is used to pay for capital projects.  By using debt, the project costs are allocated over the life of the asset. Capital projects may include improvements to and/or construction of the City’s street system, parks and recreational facilities, libraries, police and fire protection facilities, flood protection, and storm drainage systems. In 2010-11, a commercial paper program was implemented to interim finance voter-approved capital improvement projects. The fees associated with the commercial paper program are included in the General Fund budget. The interest on outstanding commercial paper is paid by the Debt Service Fund. 

When looking at the debt profile of Dallas, Texas right away you can notice that a vast majority of their debt is net pension liability and bonds. As we have learned in previous finance classes, state and local pension plans are costly and are most of the time a big portion of the debt and specifically long-term debt. The amount of bonds that the city had involved were worth about $2 million at the beginning balance and we see at the ending balance it is reduced to $1.85 million and this shows that they are paying off some long-term debt. 

The City participates in funding three single employer, contributory and defined benefit employee pension plans. Membership is a condition of employment for all full-time, permanent employees.  The combined plan provides comprehensive retirement, disability, and survivor benefits for the city’s police officers, firefighters and their beneficiaries as authorized. The members with 20 years or more of pension service to normal monthly pension benefits beginning at age 50 equal to 50 percent of the base pay they earned. The supplemental plan provides benefits to members that receive a supplemental pension based upon the difference between compensation for the civil service position held before entrance into the Supplemental Plan and compensation while participating in the Supplemental Plan. I believe the debt burden is affordable to the tax base because Dallas and the area have been growing since the recession and should be able to handle the burden debt will have on those cities. 

Analysis of Texas’s Municipal Bond Holdings

For governmental activities, the total net pension liability was $6,939,883, and for business-type activities, $322,474. The amount of the ERF net pension liability allocated by business-type activity is $196,236 to Dallas Water Utilities, $9,032 to Convention Center, $21,469 to Airport Revenues and $59,917 to Sanitation and $35,820 to nonmajor funds. With net pension liability continuing to rise over the years many say social security in the future will be in doubt for many of us when we are older and about to retire.      

Moreover, the growth and expansion in Dallas, Texas accomplished over the years has made it possible for this city to become the ninth largest city in the nation. Overall, the city’s outlook demonstrates to remain a strong economy according to financial statements, such as a higher number in assets compared to their liabilities. The gap in total revenue compared to the total expenditures from 2008 through 2011 diminished from a 329,723 thousand dollars to 152,904 thousand dollars. The usage of debt, the project costs are allocated over the life of the asset.  Capital projects may include improvements and construction of the City’s street system, parks and recreational facilities, libraries, police and fire protection facilities. The strong population growth, decrease in unemployment rate, and increase in median household income reflects a stable economy. 

The increase in employment from several employers, such as Southwest Airlines Company, increased over a nine year period, from 2008 through 2017. The total percentage of employment from the principal employers increased from 10.13 percent to 12.77 percent. The poverty rate has decreased as well at the city level. With a low poverty rate, the credit strength for the median income household means there is increase in wealth.  The population growing trend brings business and diversity to the city, expanding in a broader segment in industries. The capital expenditures used towards the city are used efficiently. The most applied cost are public safety (most likely reducing the crime rate), streets, transportation, culture and recreation, library, public improvements, planning and zoning, and general administrative services. 

Upon analyzing the revenue for Dallas, we find that the most contribution from the city comes from ad valorem tax, sales tax, franchise fees, and serve to other. The city of Dallas demonstrates to hold a diverse industry employment mix and it continues to support steady and progressive local economic growth. 

Weaknesses of The Bonds

For the year ending in September 30, 2017, the total revenue fell short compared to the total expenditures. The city of Dallas expenses are greater than their ability to generate revenue. The deficiency in revenues is under expenditures generating a negative amount of 138,343 thousand dollars. The budgeting performance performed weak with an operating deficit at the total government fund level. Dallas, Texas continues to show difficulty in funding pension plans  and lack in improving contributions, though the city established a required contribution in 2017. 

The city’s debt and liability is weak due to total government fund debt service is 15 percent of total government fund expenditures.   

Credit ratings provide insight on the capacity and willingness of a city to meet its financial obligations. The final credit rating for the city of Dallas, Texas based on the financial statements provided, we concluded the appropriate credit rating is an BBB+, it is classified as an upper-medium grade. The city demonstrates adequate capacity to meet its financial commitments, but are more susceptible to adverse economic conditions and changes in circumstances. 

Compared to that of Standard and Poor’s rating of Dallas, Texas, our overall rating fell short than their rating of AA-, where we rated it at BBB+. S&P rating is higher because of their analysis that the city is stable and strong in the local economy and continued growth in a near term and stable financial metrics. The rating suggest that the city’s changes in pension plans will detain deterioration in funded statues. 

Final Thoughts on My Wasmer Schroeder Review, Great Company To Work For, Not So Much for Their Municipal Bond Holdings

The rating concluded of an A rating is based on the findings that the unemployment in the city is much higher than the US average. Although the unemployment rate at the city level did decrease compared to the state level from 2015 through 2018, the rate at nation level, the city has a higher rate. As the city continues to grow in population and expand, the unemployment gap should diminish. The poverty percentage from the last years , 2013 through 2018, closed only by a 5.3 percent decrease. Although the decrease is stable, it is decreasing a slow rate. 

Although the city is showing strong economic empowerment and diversity, with stable financial performance, the expected continued deterioration in the funded status of the city’s police and fire pension system combined with growing carrying costs for debt, pension, and other post-employment benefit obligations is significant. Despite the adjustment and forced contributions to tension plans, the liability in pension plans lack stability. The downgrading of a city’s credit worthiness require higher interest rates in order to purchase them. This will drive up the costs to raise fundings. The debt and contingent liability profile will need to improve and concentrate on affordable  plans to stabilize the growing pension liability. It may be forecasted that pension liabilities will be projected to continue to grow before they will shrink. Aside from the credit weaknesses mentioned, the city does reflect very strong budgetary flexibility, strong economic growth, decrease in unemployment rate at the city level, increase in median income, low poverty rate, and diverse work labor. 

In conclusion, we were most definitely assigned Dallas, Texas based on the demographic information given, and our city’s “Category B,” likely represents large, metropolitan cities with high amounts of revenue, high amounts of debt, high amounts of tax revenue, and likely low ratings that barely qualify as “investment grade” bonds. Given that the city of Dallas heavily relies on real estate in order to fund their local government operations, and given that the value of their real estate holdings is continuing to drop significantly, their vastly inflated tax revenues right along with it, it is likely that “Category B,” focuses on large cities that are heavily dependent on tax revenues from property taxes in order to stay afloat. As a whole, we confirm the idea that the Standard and Poor’s rating for Dallas, Texas is too generous in their AA- rating, and feel that the municipal bonds of the city of Dallas would in-fact be incredibly risky to buy or hold, and that a prospective fixed-income investor should look into a more stable city instead in order to satisfy their investor’s itch.

Sources:

https://finance.fandom.com/wiki/Firm_Foundation_Theory
https://finance.fandom.com/wiki/Castle-in-the-Air_Theory
https://money.cnn.com/data/markets/

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