Over the past several years, a number of rating actions have affected state and local credits. The most frequently cited reasons for negative rating actions include depressed economies, poorly funded pension systems and fiscal stress caused by declining energy prices. Traditional credit analysis, which focuses on economic factors, demographics, debt burden (including pensions), finance, liquidity and governmental framework, among other factors, is useful in predicting these rating actions. However, we have also seen negative rating actions caused by political discord, which most frequently occurs when there is a split in the political makeup of the executive and legislative branches of government. With the gap between the views of Democrats and Republicans widening, we believe it is increasingly important to include political factors when analyzing municipal credits.
Analysis of Political Willingness
Political willingness is defined as elected officials’ willingness to make fiscally prudent yet politically challenging decisions that may be controversial, even to the extent of going against their party platform or alienating their political base. To properly analyze and measure political willingness, one must understand the underlying political dynamics of key state decision makers: governors and legislators. Politicians are often driven by political ideology and beliefs—including those of their political parties and campaign supporters—apportioned in two- or four-year electoral cycles. As we have seen throughout the country, divided governments (when one party controls the governorship and the other controls at least one house of the legislature) tend to interfere with fiscally prudent decision making (see Figure 1). The states that best fit this profile include Illinois, New Jersey, Pennsylvania and Connecticut. However, New Jersey recently elected a Democrat, Phil Murphy, and the Democrats now have control of both the governorship and legislature.