Joseph Krist

Municipal Credit Consultant

FUNDING BILL AND MUNIS

The omnibus appropriations bill passed by Congress included a little-noticed provision that would make it more difficult for municipalities to use eminent domain to condemn and seize underwater mortgages. The bill would ban the Federal Housing Administration from refinancing loans that have been seized via eminent domain. Language in the spending bill says it “prohibits funds for HUD financing of mortgages for properties that have been subject to eminent domain.”

Proponents of eminent domain such as San Francisco-based Mortgage Resolution Partners had planned to use FHA-insured loans to refinance loans that have been seized by municipalities and written down to their current appraised value. But so far, the use of eminent domain has been thwarted by industry groups like the Mortgage Bankers Association (MBA)and Securities Industry Financial Markets Association, which have strongly opposed Mortgage Resolution Partners’ efforts in cities like Richmond, Calif., Las Vegas and Newark, N.J.

Fannie Mae and Freddie Mac are not allowed to finance loans involved in an eminent domain takeover while  Department of Housing and Urban Development officials have declined to take a position on the issue, contending they would have to consider the circumstances when actually presented with an application to refinance a mortgage seized via local governments exercising eminent domain.

The MBA has supported a prohibition for a number of years, According to chief lobbyist for the Mortgage Bankers Association, the use of eminent domain to achieve principal reduction would have created capital market implications. Municipalities that resorted to eminent domain would have turned into “no-fly zones,” he said, where lenders would not finance new mortgages.

LEGISLATIVE OUTLOOK FOR MUNIS

Last year, Rep. Randy Hultgren emerged as a major voice in Congress in support of municipal bonds. Recently he said municipal bonds should be encouraged, not limited, because state and local governments face challenges financing projects through other means. The Illinois Republican said at the Government Finance Officers Association’s winter meeting that communities have used munis to improve their infrastructure after disasters, and they haven’t necessarily had other tools to finance the projects. He noted that localities aren’t getting many funds from the federal government and their states’ governments.

Hultgren, who is on the financial services committee discussed challenges that munis face at the federal level. They include President Obama’s recent budget requests that proposed capping the value of the municipal bond tax exemption at 28%. Another challenge is tax reform. A proposal released last week by House Ways and Means Committee Chairman Dave Camp, R-Mich., would impose a 10% surtax on municipal bond interest for high earners. It also would eliminate the tax-exemption for new private-activity bonds.

Hultgren said he thinks Camp put out his plan to see what kind of pushback he would receive. It’s important for people to be vigilant and explain the importance of the tax exemption for municipal bonds, Hultgren said, because if they don’t, the exemption may be seen as a tax preference that can be easily changed in tax reform.

Hultgren said he is going to continue push for munis to be included in the definition of high-quality liquid assets in a federal banking rule that becomes effective Jan. 1. “Excluding investment-grade securities from HQLA’s definition will decrease the demand for such securities, and will hurt municipalities’ abilities to finance infrastructure projects”, he said.

He has introduced two bond-related bills in the last few months, which he likely would reintroduce the in the new Congress. One of the bills would increase the annual issuance limit for issuers of bank-qualified bonds to $30 million from $10 million. The other bill would increase the maximum size of an industrial development bond issue and would allow more types projects to be financed with these bonds.

SINGLE PAYER HEALTH COVERAGE UNLIKELY IN VERMONT

Gov. Peter Shumlin, a long-time supporter of moving to a universal, publicly-financed health care system in Vermont, detailed this week his Administration’s health care financing report, set to be delivered to the Legislature in January. The financial models unveiled by the Governor would require both a double digit payroll tax on Vermont businesses and an up to 9.5% public premium assessment on individual Vermonters’ income to pay for Green Mountain Care, the statewide public health care system proposed in Act 48.

The Governor acknowledged that given current fiscal realities, such a financing plan would be detrimental to Vermonters, employers and the state’s economy overall. Therefore, he said, despite his steadfast support for a publicly-financed health care system, he reluctantly will not support moving forward with a financing proposal at this time or asking the Legislature to consider or pass it.

“Pushing for single payer health care when the time isn’t right and it might hurt our economy would not be good for Vermont and it would not be good for true health care reform. It could set back for years all of our hard work toward the important goal of universal, publicly-financed health care for all. I am not going undermine the hope of achieving critically important health care reforms for this state by pushing prematurely for single payer when it is not the right time for Vermont. In my judgment, now is not the right time to ask our legislature to take the step of passing a financing plan for Green Mountain Care.”

Although the Administration explored several different benefits and financing proposals, the preferred proposal outlined by the Governor’s Deputy Director of Health Care Reform Michael Costa would cover all Vermonters at a 94 actuarial value (AV), meaning it would cover 94% of total health care costs and leave the individual to pay on average the other 6% out of pocket. Lower AV proposals create significant administrative complexity and reduce disposable income for many Vermonters.

Paying for that benefit plan would require:  An 11.5% payroll tax on all Vermont businesses; a sliding scale income-based public premium on individuals of 0% to 9.5%. The public premium would top out at 9.5% for those making 400% of the federal poverty level ($102,000 for a family of four in 2017) and would be capped so no Vermonter would pay more than $27,500 per year. Even at these tax figures, the proposal would not include necessary costs for transitioning to Green Mountain Care smaller businesses, many of which do not currently offer insurance. Those transition costs would add at least $500 million to the system, the equivalent of an additional 4 points on the payroll tax or 50% increase in the income tax.

MIXED NEWS FOR TOBACCO

A new federal survey has found that e-cigarette use among teenagers has surpassed the use of traditional cigarettes as smoking has continued to decline. The survey, released Tuesday by the National Institute on Drug Abuse, measured drug and alcohol use this year among middle and high school students across the country. It is one of several such national surveys, and the most up-to-date.

It was the first time this survey measured e-cigarette use, so there were no comparative data on the change over time. The survey found that 17 percent of 12th graders reported using an e-cigarette in the last month, compared with 13.6 percent who reported having a traditional cigarette. Among 10th graders, the reported use of e-cigarettes was 16 percent, compared with 7 percent for cigarettes. And among eighth graders, reported e-cigarette use was 8.7 percent, compared with just 4 percent who said they had smoked a cigarette in the last month.

A 2013 youth tobacco survey by the federal Centers for Disease Control and Prevention released in November found that the share of American high school students who used e-cigarettes rose to 4.5 percent in 2013 from 2.8 percent in 2012. The share of middle school students who used e-cigarettes remained flat at 1.1 percent over the same period. Some experts said the new data suggested that the rate might have increased substantially since 2013, though it will be impossible to know for sure until the C.D.C. releases its 2014 data sometime next year.

We view anything that reduce purchases of actual cigarettes as negative for holders of tobacco securitization bonds.

WATER AGREEMENT IN THE PARCHED WEST

Officials from water agencies in Arizona, California and Nevada signed an agreement last week to jointly add as much as three million acre-feet of water to Lake Mead by 2020, mostly through conservation and changes in water management that would reduce the amount that the states draw from the lake. The agreement, signed at the Colorado River Water Users Association’s annual conference in Las Vegas, is aimed at forestalling further drops in the level of the lake that could endanger not just the water supply for 40 million people, but also the electricity generated by dams there and upstream at Lake Powell.

Three million acre-feet, roughly what six million households use in a year, would add about 30 feet of water to a lake whose level is now just a few feet above its record low. The agreement is a stopgap solution that is unlikely to solve the long term needs of the region. Arizona, in particular, has reason for concern. In the 1960s, it bartered away its senior rights to Colorado water to get California’s support in Congress for the Central Arizona Project.

Should Lake Mead run short, Arizona’s share of water would be rationed while California would continue to receive its full allocation — a prospect that Arizonans have feared for decades. The level of Lake Mead, now about 40 percent full, is only about 10 feet above the point at which the federal government would declare a shortage and begin rationing water to downstream users. A further 25-foot drop would dry up one of two water intakes that supply 70 percent of Nevada’s population with water.

Only last week, Nevada workers completed a three-mile, $817 million tunnel into the lower reaches of Lake Mead, giving the state a steady water source should a declining lake level disable intakes at higher elevations. At the same time, the Southern Nevada Water Authority approved plans to spend $680 million to build a pumping station for the same intake — a reflection of the fact  that falling lake levels could render useless the existing pumps higher up Lake Mead’s basin.

Last week, Wyoming released the findings of research into what may be the most unusual of all the efforts to resuscitate the Colorado: cloud seeding. With financial help from Arizona, California and Nevada, Wyoming has seeded snow clouds for a decade, hoping to build a snowpack that will deliver more water to the Colorado and its tributaries in the spring.

Scientists have long been skeptical that seeding clouds with certain chemicals actually works; the National Research Council concluded in 2003 that while the process clearly changes the character of clouds, there was no proof that it produced more precipitation. But the Wyoming study found that snowfall increased by as much as 15 percent after clouds were seeded, and that the added snow increased stream flows by as much as 3.7 percent. The research found that cloud seeding could cost as little as $27 per acre-foot of water — or as much as $427 per acre-foot. But even the higher cost is lower than that of desalination, an alternative to using Colorado River water that is being considered in some states.

HOLIDAY GREETINGS TO ALL

We will take the next two weeks off the celebrate the holidays. Our next posting will be on January 8th, 2015. Best wishes for good cheer and good health to all.

 

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Municipal Credit Consultant

SIFMA DATA PROJECTS FLAT VOLUME FOR 2015

SIFMA released the results of its Municipal Issuance Survey for 2015. The respondents expect total municipal issuance, both short- and long-term, to reach $357.5 billion in 2015, up slightly from the $348.1 billion estimated issuance in 2014.

Short-term issuance is expected to remain largely unchanged in 2015, with $42.5 billion in short-term notes expected, compared to $42.8 billion in 2014.  Long-term issuance is expected to rise in 2015, with $315.0 billion in long-term bonds expected, compared with $305.3 billion in 2014.

Long-term alternative minimum tax (AMT) issuance is projected to rise to $10 billion in 2015, a 16.7 percent increase from 2014; variable-rate demand obligation (VRDO) issuance to rise slightly to $9 billion in 2015, recovering from the record low of $6.6 billion issued in 2014.

Survey respondents offered a range of views on interest rates in the coming year. The federal funds rate is expected to rise from 0.13 percent in end-December 2014 to 0.75 percent by end-December 2015. Forecasts include: The two-year Treasury note yield is expected to rise from 0.50 percent end-December 2014 to 1.15 percent by end-December 2015; The 10-year Treasury note yield is also expected to climb from 2.4 percent end-December 2014 to 3.25 percent end-December 2015.

One of the factors cited for the projection of flat issuance is the increasing use of direct lending from banks by municipalities. This sector of municipal borrowing has been characterized by weak disclosure, making it difficult to assess the true debt burden of many municipal borrowers. There are a number of initiatives underway to improve the measurement and disclosure of this source of debt.

PR LEGISLATURE PASSES HTA DEBT BILL

Legislation to increase Puerto Rico’s petroleum tax to finance a bailout of the Highways & Transportation Authority and reliquify the Government Development Bank finally squeaked through Capitol on Monday. The long, strange trip of the legislation took a surprise turn Monday night when New Progressive Party Rep. Pedro “Pellé” Santiago broke ranks with his minority delegation and voted for the bill, which passed with the minimum 26 votes needed. Santiago’s vote was decisive because Popular Democratic Party Rep. Luis Raul Torres voted against the final measure despite finally agreeing to back the bill in the first House vote last week in spite of obtaining the inclusion of multiple amendments he was pushing for.

After the vote Santiago said that “Mine was the 26^th vote and I take responsibility for that,” Santiago said in a radio interview. The people elected Gov. Alejandro García Padilla in 2012 and gave him a mandate. There are two years left to deliver and I don’t want to be an obstacle in that path.”

Versions of the legislation were both passed by one-vote margins in the House of Representatives and the Senate last week as part of a special legislative session called by Gov. Alejandro García Padilla to finally get the tax hike through the legislature. The House was first to approve a substantially amended bill with the Senate following after introducing its own changes.

The House returned to work on Monday but did not concur with the Senate amendments, so a conference committee was named to hammer out a single version to send to García Padilla for signature. The conference committee version passed the Senate in a 14-12 vote along partisan lines before the surprise vote in the Senate. Left in the final version was a Senate bid that scraps an automatic hike in the petroleum tax to keep up with inflation and language to cap interest rates on issuing debt backed by the levy at 8.5 percent. Another upper chamber amendment to make the cut calls for a restructuring of the HTA.

The bulk of the House’s wording made it through, including the stipulation that the steep tax hike will take effect with a planned broader reform of the tax system in the first quarter of 2015. The bill sets a deadline for the oil tax to be implemented with the tax reform before March 15.

Puerto Rican Independence Party Sen. María de Lourdes Santiago indicated a potential court challenge to the constitutionality of the oil tax hike, as did an NPP Sen. arguing that it compels lawmakers to vote for the broader reform that has yet to be filed.

The bill will increase the petroleum excise tax from $9.25 to $15.50 a barrel. The levy had been increased from $3 just last year. Proceeds of the bond deal would be used to wipe out a $2.2 billion loan from the GDB to the HTA in light of its dwindling cash reserves.

P3 AND ELECTIONS

For the second consecutive year, the fate of a P3 transportation project will be decided by a newly elected governor. Earlier this year, a Va. highway P3 project was held up by incoming Gov. Terry McAuliffe for additional review.  The Maryland Transit Administration delayed the deadline for private-sector bids on its $2.45 billion Purple Line light-rail project for two months to give newly elected Gov. Larry Hogan time to evaluate the proposed public-private partnership. Hogan, an avowed opponent of the Purple Line and the $2.9 billion Red Line rail proposal in Baltimore, defeated his Democratic opponent Lt. Gov. Anthony Brown in an upset in November by a 51.4% to 46.9% margin. Brown supported state funding for the rail projects. Hogan said during the campaign that preferred spending transportation dollars on roads rather than the rail transit projects. He said he would cancel the two rail projects but later softened the stance enough to say the Red and Purple lines are “worth considering.”

Bids from four international consortiums will be selected March 12 rather than Jan. 9 as originally scheduled. The successful consortium will invest $500 million to $900 million in the Purple Line in exchange for the concession to operate and maintain the system for 35 years. The concessionaire will receive availability payments of up to $200 million a year, which can be used to repay a federal Transportation Infrastructure Finance and Innovation Act loan of up to $732 million being sought by the state. The light rail line could be operational by 2020 if construction gets under way as scheduled in late 2015. The successful consortium will invest $500 million to $900 million in the Purple Line in exchange for the concession to operate and maintain the system for 35 years.

Maryland Transit Administration said that it did this to give the incoming administration more time to evaluate this complex project and in the meantime, is continuing with the solicitation process, right-of-way acquisitions, and agreements.” The Maryland Board of Public Works had been expected to pick the private partner in spring 2015.

In Virginia,  a comment period was recently concluded regarding the plan to build a new highway by a private consortium, US 460 Mobility Partners. In this case bonds had been issued to finance a portion of project construction which was halted pending USACE’s [United States Army Corps of Engineers] decision on a 404 environmental impact permit. This action gave US 460 Mobility Partners the right to terminate the design‐Build Agreement if work has stopped for 120 consecutive days during a waiting period. VDOT estimates that the FHWA and USACE will issue their decisions on the final SEIS and a preferred alternative by the first quarter of 2015.  At that time the 404 permit work would be restarted.  The 404 permit decision is anticipated by the second quarter of 2015.

Bondholders have been concerned that the lack of permit approval could cause VDOT to be in default under its various agreements with US 460 Mobility Partners. Should that be the case and should such a default remain uncured, the bonds would be subject to extraordinary mandatory redemption. To meet the requirements of such a call, the unspent bond proceeds, including the balance in the capitalized interest account, will be applied and the additional amount needed will be sought from VDOT as a termination payment.

So P3 projects continue to face a mixed reception for a variety of reasons with opposition coming from various angles and segments of the political spectrum. What makes these two examples unique is that the obstacles are coming from the offices of state executives rather than from local grass roots opponents which has been the more traditional source of opposition. It serves as a reminder that these projects, while innovative, require as heavy a level of investor scrutiny as do traditional public finance projects.

CA REVENUE REPORT FOR NOVEMBER

The CA State Controller reported  that November California revenues fell 2.3 percent short of plan for the month, although the State is 3.1 percent ahead of forecasts for the fiscal year to date. Disbursements were also 3.1 percent lower than expected, and remain 2.4 percent behind projections for the first five months of the fiscal year.

Personal income taxes were the major disappointment of November, some $260 million below estimates. Lower-than-expected paycheck withholding was the primary shortfall, in spite of national employment growing by 321,000 jobs in that month alone. Since California accounts for more than 10 percent of all jobs, the State should also post a gain when job data are released in late December. Personal income taxes were up relative to last November by 6.0 percent, or $188 million. Part of November’s shortfall could be due to timing.

Retail sales taxes, which have generally been weak this year, continue to trend below plan. Those taxes fell $103 million behind expectations for the month, and are approximately 6.0 percent behind projections for the fiscal year. In contrast, corporate taxes beat forecasts by $164 million in November.

Since July 1, total revenues are about $1.0 billion ahead of budget projections, with sizable “overshoots” by corporate and personal income taxes more than offsetting an underperformance in retail sales tax receipts. Disbursements were $237 million less than forecast during the month, and fiscal year to date, disbursements are $1.3 billion less than anticipated. Spending has been less than expected for education, disability services, and other social services.

Spending usually exceeds revenues during the first several months of the fiscal year, but this year’s gap has been significantly less than projected. Total receipts are more than $1.3 billion ahead of projections, while total disbursements are more than $1.3 billion below estimates. The difference, or the State’s increase in temporary borrowing, is $2.7 billion less than projected. The total outstanding loan balance of $18.5 billion is being financed via $15.7 billion of internal borrowing and $2.8 billion from external sources.

 

 

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Municipal Credit Consultant

PR MOVES AHEAD TOWARDS HTA REFINANCING

The current soap opera that is the effort to reengineer a portion of outstanding Highways & Transportation Administration (HTA) debt took another turn when Gov. Alejandro García Padilla announced Sunday that he had enough votes to pass a bailout of the HTA and prevent a threatened  a shutdown of bus and Urban Train services. The federal government had warned Puerto Rico officials about the potential fallout from a shutdown of the mass transit systems. The consequences could include loss of federal funds and owing money to Washington.

The U.S. Department of Transportation ‘s Federal Highway Administration (FHA) and Federal Transit Administration sent letters to Puerto Rico Transportation & Public Works Secretary Miguel Torres saying that the FHA is “deeply concerned” that if the HTA ceases operations the island government would not be able to meet federal requirements on highway maintenance, enforcement and inspections. It warned that federal funds cannot be used to cover expenses from claims tied to the potential termination and consulting contracts if HTA workers are laid off.

The governor’s live televised message came after a day of talks with House Speaker Jaime Perelló and the three majority Popular Democratic Party lawmakers  who had said they would vote against the tax hike. A special session to approve the bailout was in recess.

The Government Development Bank said last Wednesday it was delaying moves to protect its own shrinking liquidity and suggested the potential for at least a partial government shutdown. The GDB said it has no legal authority to float a loan to the HTA to cover payroll and keep mass transit systems operating.   “Even with legal authority, granting a loan to the HTA with no repayment source would represent the type of fiscal irresponsibility that this administration has repudiated,” GDB President Melba Acosta and the board said in the statement. “It is those kinds of moves that were the main reason for the fiscal challenges the island faces now.”

“We are now confronting the consequences of the irresponsibility of these loans that were taken, situations so serious that it threatens to shut the operations of the HTA and important public works projects,” the governor also added. On Wednesday, the House passed the tax increase.

The Puerto Rico Aqueduct & Sewer Authority is also aiming to issue at least $770 million in bonds next year. The issue, planned for the first half of 2015, would be carried out only after the Government Development Bank carries out the planned $2.9 billion bond sale to bail out the Highways & Transportation Authority. That deal is now expected in 1Q 2015.  One unknown at this time is the impact of the news that the U.S. Federal Bureau of Investigation raided the offices of Puerto Rico’s Highways and Transportation Authority (HTA) on December 3, taking documents and arresting the organization’s treasurer for alleged bribery in programs using federal funds. Proceeds from the PRASA bond issue would go to pay off credit lines maturing this spring and about $500 million in capital spending over the next two years.

Lost in all the political maneuvering is an answer to the question of how any of this addresses the fundamental causes of Puerto Rico’s financial difficulties. None of the proposals alter the weak economic fundamentals underpinning the Commonwealth’s finances. So at best, each of these transactions serves as a temporary bandage on a hemorrhaging financial wound.

CDC ISSUES 2013 SMOKING STATS

Last week we noted a small victory for tobacco sales in one MA locality. Such events must continue to be viewed in the larger context of trends in adult smoking habits. These are reflected in the release by the Centers for Disease Control of statistics on smoking for 2013. The cigarette smoking rate among adults in the U.S. dropped from 20.9 percent in 2005 to 17.8 percent in 2013, according to new data published by the CDC. That is the lowest prevalence of adult smoking since the CDC’s National Health Interview Survey (NHIS) began keeping such records in 1965. The report also shows the number of cigarette smokers dropped from 45.1 million in 2005 to 42.1 million in 2013, despite the increasing population in the U.S.

Drilling a bit deeper, statistics impacting individual “stick” sales showed that among current cigarette smokers, the proportion of those who smoke every day decreased from 80.8 percent in 2005 to 76.9 percent in 2013. The proportion of cigarette smokers who smoke only on some days increased from 19.2 percent in 2005 to 23.1 percent in 2013. Among daily smokers, the average number of cigarettes smoked per day declined from 16.7 in 2005 to 14.2 in 2013. The proportion of daily smokers who smoked 20 to 29 cigarettes per day dropped from 34.9 percent in 2005 to 29.3 percent in 2013, while the proportion who smoked fewer than 10 cigarettes per day rose from 16.4 percent in 2005 to 23.3 percent in 2013.

Cigarette smoking remains especially high among certain groups, most notably those below the poverty level, those who have less education, Americans of multiple race, American Indians/Alaska Natives, males, those who live in the South or Midwest, those who have a disability or limitation. Regionally, the lowest rate was in the West (13.9%) while the rate was highest in the Midwest (20.5%).

SEC DISCLOSURE PROGRAM CLAIMS FIRST ISSUER

Four years ago, a school system in California assured investors that it was making adequate financial disclosures. In fact, The Kings Canyon Unified School District had not filed or was late in disclosing a half-dozen financial statements, something it did not report in documents used to market about $7 million of bonds in November 2010. In July the district became the first municipality to accept the SEC’s leniency offer for borrowers that report by December 1 any failures in providing adequate documentation to investors.

As the leniency program ends, borrowers could be fined if they are charged with fraud. The SEC has increased its focus on the municipal market in light of the occurrence of several high profile bankruptcies by municipal borrowers. Previously, the agency has settled with the states of New Jersey and Illinois and the city of Harrisburg, for misleading investors about their financial state. Last year, in a case against an agency in Washington state, the SEC levied its first fine against a municipal issuer that misled investors.

As we have discussed in prior editions of the MuniCreditNews, the leniency program introduced in March is aimed at municipalities that fail to file timely reports on rating changes and other information of interest to investors, while claiming in bond documents that they do. It’s also open to the bankers who underwrote the debt. The SEC said borrowers could settle without fines if they turn themselves in. Banks’ penalties are capped at $500,000.

While corporations must file quarterly financial statements and have four business days to report information relevant to investors, municipalities only submit annual reports and agree to disclose material events within 10 business days. Dozens of underwriters are said to have sought have sought leniency under the SEC offer. The institutions had until Sept. 10 to do so. An SEC spokesman in Washington, declined to comment on how many submissions the agency has received. The SEC’s did say in November that the agency had received a “tremendous number of submissions.”

The SEC in 2012 issued guidance to banks instructing them to review the disclosure practices of governments whose bonds they underwrite. The program will hopefully drive the market further in that direction. When the Kings Canyon district settled with the SEC, it agreed to comply with disclosure rules within 180 days and make sure it does not break the law again. The district’s business manager, said the failures resulted from staff turnover, not an effort to deceive. “We weren’t out to purposely mislead or do any harm,” he said. “That doesn’t relieve us of the responsibility.”

DEFAULT REDUX IN VICTORVILLE

The Southern California Logistics Airport Authority has announced yet another default on  three issues of its outstanding subordinate tax allocation debt. The Authority has been issuing and refinancing debt associated with the reuse and redevelopment of a former military airfield into a facility designed to provide warehouse and transportation facilities for commercial use. The impacts of the Great Recession on both economic activity and property values have led to slow and variable valuation growth in the project area on which the bonds depend for incremental tax revenue to support debt service payments. Since FY 08-09, incremental value has dropped some 5.7% annually. While multiple refinancings have lowered debt service requirements, the changes have not been sufficient to lower those costs enough. Hence the latest notice from the Authority of an impending payment default.

The bonds are another example of why, at the end of the day, economics nearly always trumps all other factors. Whether it be land development, project finance, or service revenue based credit, if the economics are not there to support the plan, the plan will fail. Something to ponder by investors in speculative credits.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.