Wednesday, September 30, 2009

Ever make your way as far into the interior as Coruscant?

I had the following debate today with an old muni master. Which would you rather own, assuming the same yield. Prince George's County MD, which is a wealthy Washington D.C. suburb, or New York City? Both came with BAB deals in the last two days, hence the debate. My friend took New York. I took Prince George's. Here's the low down on both.

  • Population: New York 8.2 million, Prince George's 820,000
  • Unemployment: New York 10.3%, Prince George's 7.5%
  • Median Household Income: New York $38,293, Prince George's $55,526
  • Case-Shiller Home Prices, last 12-mo: New York -10.35%, Prince George's (part of DC metro area) -9.78%
  • Credit Rating: New York Aa3/AA, Prince George's Aa1/AAA

Here is the positives for New York over Prince George's. Obviously New York is a bigger economy with much more economic diversity. In addition, Prince George's bond issues have a fairly unusual "limited tax" stipulation. Typically a GO bond documents require the municipality to use their full and unlimited taxing power to repay bond holders. In a lot of cases, the property tax rate is determined by what is needed to fund debt service (as well as other government services). However, Prince George's has a limit of 2.4% of assessed value period.

Despite this, I like Prince George's better. First, much of the County's employment is based around the Federal government, which is the one part of the economy that is still growing. New York on the other hand is in the eye of the storm in terms of finance lay-offs. But more importantly to me, New York has a more complicated budget.

In reality, neither is likely to actually miss any bond payments. So the risk is a California-style budget battle, where the situation is unresolved for months and months causing spreads on bonds to widen dramatically. Isn't that much more likely to happen in the Big Apple? Prince George's just doesn't have a complicated enough budget to create this kind of problem. New York does. Hell, New York has gone through such budget battles multiple times in the past.

Anyway, food for thought among the muni guys in the audience.


Anonymous said...

"Prince George's County MD, which is a wealthy Washington D.C. suburb"

Not arguing with the numbers, just providing local color: PG County neighborhoods range from barely ok to very scary. No Washingtonian would describe it as 'a wealthy suburb'

Accrued Interest said...

PG isn't Montgomery, but if household income is $55k, that ain't bad. Besides I'm from Baltimore hon! I don't go down to Warshington! What do I know?

Unknown said...

Would love your thoughts on NJ muni's in general and all those damn tobacco bonds many state's (including jersey)issued.

air23cal said...

First time I have heard PG County described as "wealthy" but I guess I am comparing to Montgomery County, Fairfax County, and the City of Alexandria.

Tom M. said...

As a DC native, I'll reinforce other's comments regarding PG county. Its the poorest of DC's wealthy suburbs, poorly run, and corrupt.

SeanDC said...

I have lived in the DC area for about five years (after ten years living in NYC), and I would second the other posters: PG certainly does not give you the feel of a wealthy suburb, and the portions close to DC have significant violent crime problems, though there are a few higher-income pockets in other parts of the county. And I would say diplomatically that the county leadership does not have a reputation for transparency, accountability, disciplined spending of public money, etc.

NYC of course has plenty of poverty and corruption as well. It has a lot of different types of businesses, but in terms of economic diversity I think the city has actually had a significant reliance on revenues generated by financial-services compensation. I remember NY State Comptroller Carl McCall's high-profile annual projections of total Wall Street bonuses that were published with great fanfare for many years.

Having lived in/near both areas, I would probably go with the NYC, where the problems are more well-known and would be more likely to be reflected in the yield, rather than PG, where non-locals would look at the basic stats and at the AA+ rating and perhaps conclude all is rosy.

Piet said...

New York Unemployment Trends - August 2009

New York Unemployment Situation in Heat Map form:
here is a map of New York Unemployment in August 2009 (BLS data)

versus New York Unemployment Levels 1 year ago

GS751 said...

Wouldnt the muni with the higher income and lower UE be a no-brainer.. I wonder if there are any studies done on correlations between UE, Income and Muni performance?

Anonymous said...

As DC gentrifies, PG county is where most of the displaced persons are going.

Make of that what you will.

Unknown said...

what were the prices, coupons, is there any decent insurance wrapper and were the maturities similiar? any call options? For me these would be next steps to look at....but that's me here in CA.

Accrued Interest said...

In the conversation, we were talking hypothetically about two bonds with the same features/yield otherwise. In reality, NYC came about 10bps cheap to PG.