Monthly Archives: July 2016

Muni Credit News July 28, 2016

Joseph Krist

Municipal Credit Consultant

CALIFORNIA PENSION RETURNS HAVE NEGATIVE LOCAL IMPLICATIONS

The California Public Employees’ Retirement System (CalPERS) reported a preliminary 0.61 percent net return on investments for the 12-month period that ended June 30, 2016. CalPERS assets at the end of the fiscal year stood at more than $295 billion. Fixed Income earned a 9.29 percent return, nearly matching its benchmark. Infrastructure delivered an 8.98 percent return, outperforming its benchmark by 4.02 percentage points, or 402 basis points. A basis point is one one-hundredth of a percentage point. The CalPERS Private Equity program also bested its benchmark by 253 basis points, earning 1.70 percent.

For the second year in a row, international markets weighed CalPERS’ Global Equity returns. However, the program still managed to outperform its benchmark by 58 basis points, earning negative 3.38 percent. The Real Estate program generated a 7.06 percent return, underperforming its benchmark by 557 basis points.

So we have a very mixed bag. The total absolute return is unacceptably low. Two of the discrete investment sectors reflected negative and/or below benchmark performance. Some positive performance still reflected poor performance relative to benchmarks.

CalPERS 2015-16 Fiscal Year investment performance will be calculated based on audited figures and will be reflected in contribution levels for the State of California and school districts in Fiscal Year 2017-18, and for contracting cities, counties, and special districts in Fiscal Year 2018-19. The ending value of the CalPERS fund is based on several factors and not investment performance alone. Contributions made to CalPERS from employers and employees, monthly payments made to retirees, and the performance of its investments, among other factors, all influence the ending total value of the Fund.

CalPERS has underperformed its targeted 7.5% return over the past 3, 5, 10 and 20 years. The low overall return means that there will be pressure on localities and their employees to increase their contributions for pensions. For localities, the lower investment performance is a credit negative as they face higher expenses not necessarily coincident with the state of the economy at the time of those requirements.

HAMILTON COUNTY REFUNDS STADIUM BONDS

Regular readers know by now of our ongoing interest in the issue of public financing for professional sports facilities. Hamilton County, OH has been undertaking a financing program for stadia for the NFL Cincinnati Bengals and the MLB Cincinnati Reds since 1998. The program has utilized sales tax revenue bonds with proceeds of those taxes dedicated to the repayment of those bonds. While there have been no issues in terms of the level of resources available for bond repayment, the program has been controversial as the County’s overall fiscal position has been tight and difficult choices have had to be made as to the priority of programs for funding.

The structure of a currently outstanding issue of these bonds and the continuation of a favorable low interest rate and high demand market has made possible the refunding of some $320 million of debt related to the stadium finance program. The refunding is designed to achieve ongoing actual savings on debt service but will also be used as an opportunity to adjust the security provisions supporting the bonds which will make more monies available to the County for current spending

Those changes include an increase in reserves held by the Trustee for the bondholders. Previously, the County had been required to hold funds equal to 10% of one half of 1% of sales tax collections. The County will now be able to take those $7.4 million of funds and use them for any County purpose. In exchange, the size of the trustee held reserve is changed to of average of annual debt service to the lesser of100% of those amounts. The debt service reserve requirement can be fulfilled through a Credit Support Instrument from Build America Mutual.

Clearly the County through the refunding and the use of a surety for the debt service reserve is trying to address the concerns from its citizenry about the level of County resources benefitting the two teams. It is another indication of public misgivings about the propriety of using public funds to support what are in the end facilities used to generate a high level of private profit.

NJ TRIES AGAIN ON TRANSIT FUNDING

With the Republican convention now concluded, NJ Governor Chris Christie can try again to reach an agreement with the NJ legislature over how to raise increased funds for the State Transportation Trust Fund. Under a plan released Friday by Democratic leaders in the Legislature, the state would spend $20 billion over the next 10 years on roads, rails, bridges and other transit projects, using new revenue from higher gas taxes and borrowing.

The proposal would raise the gas tax by 23 cents a gallon to be offset by a phase out of the estate tax over 3.5 years at an annual cost of $552 million. In addition, the plan would increase the earned income tax credit for the working poor – annual cost: $137 million; increase income tax exclusions for retirees over four years, to $100,000 for joint filers and $75,000 for individuals – annual cost: $164 million; give a $500 income tax deduction to all motorists with incomes below $100,000 – annual cost: $20 million; and give a $3,000 income tax exemption for all military veterans – annual cost: $23 million. The total cost of the tax cuts and credits: $896 million.

The NJ debate is occurring within a context of changes in gas taxes nationwide. Six states have changes to their gas tax rates. California and North Carolina are decreasing their tax rates, while Washington State is instituting its second gas tax increase in less than a year. Three other states, Iowa, Maryland, and Nebraska, will see revisions via formula. All states are dealing with the phenomena of much better vehicle fuel efficiency and decreases in driving frequency by millennials.

KANSAS RATINGS PAY THE PRICE

S&P Global Ratings dropped its rating for Kansas to “AA-,” from AA, three months after putting the state on a negative credit watch. S&P earlier dropped the state’s credit rating in August 2014. The ratings agency cited the state’s lack of cash reserves, even after multiple rounds of budget adjustments during the past year. Budget director Shawn Sullivan said the S&P report criticizes the state’s ongoing diversion funds for highway projects to general government programs and says the state continues to underfund pensions for teachers and government workers.

The state says that it is unfair to see diverted highway dollars as a one-time source of funds to help balance the budget because the state has done it regularly for years. It also feels that criticism of Kansas for underfunding its public pension system, which includes delaying nearly $96 million in payments otherwise due under the current budget, is unfair. The state wants more of the focus to be on the fact that with funding improvements mandated in 2012, the state is spending significantly more on pensions than it did in the past.

Our view is to wonder what has taken the rating agencies this long to recognize that the current administration is so ideologically driven as to effectively preclude a more positive reading of recent events.

RATINGS GO DOWN WITH THE TUBES

Somerset, Kentucky general obligation bonds were downgraded to Baa2 from Baa1 on Monday, because of park subsidies totaling $7.6 million since 2007, by Moody’s Investors Service. The financial support from the city’s general and sanitation funds was for SomerSplash Waterpark, which opened in 2006 with six water slides and other attractions, including a “lazy river” for tubing and a wave pool.

“The downgrade to Baa2 reflects the further deterioration of the city’s financial reserves and consecutive operating deficits that result, in part, from ongoing and substantial general fund subsidy of its water park,” said Moody’s.

Somerset operations are “unusual” because the city owns a 155-mile-long gas pipeline that connects eastern Kentucky gas fields to major interstate pipelines. The pipeline has historically provides “substantial” margins that have subsidized general operations of the city such that tax revenues cover only half of expenses. The Gas Department is an enterprise fund that is self-supporting, and does not receive revenues from the general fund, The Gas Department is an enterprise fund that is self-supporting, and does not receive revenues from the general fund, according to the city’s 2015 audit.

In fiscal 2015, the general fund received $2.7 million from the Gas Department and $3.1 million from the Water Department, representing 46.5% of general fund revenues. The outlook remains negative for this formerly A1 credit due uncertainty from the ongoing support of the water park as well as potential risks surrounding the operations of the Gas Department.

We believe that recreational facilities should only be financed on a standalone basis. This is just one more of the countless examples of small communities being forced to pressure their general fund revenue bases to support clearly non-essential activities.

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

Pension liabilities are increasingly moving front and center in the analysis of municipal credits. As states and cities attempt to make adjustments to future benefits for their employees, resistance from those employees has led to increasing litigation in the state and federal courts on this matter. This issue of Muni Credit News discusses two recent court decisions impacting those efforts to change benefits – one state and one federal – which had differing results for the cities involved.

CHICAGO OPEB DECISION – THE DEVIL WAS IN THE DETAILS

Recently a hearing was held in ongoing litigation between the City of Chicago and its employees over efforts by the City to reduce its expenses related to other post employment benefits (OPEB) primarily healthcare expenses. Last week, a Cook County judged ruled on motions filed by the employees to compel the City to provide “lifetime healthcare benefits”.

The decisions rendered by the Court were a mixed bag for the City. In one ruling against the City, for three classes of employees, terms established under 1983 and 1985 amendments to their benefit packages were not time-limited and were in effect when the those classes entered into the Funds’ retirement systems. They provided those sub-class annuitants with healthcare benefits which were “lifetime” or “permanent”. Krislov & Associates, who represents the fund members who filed the lawsuit put the number of employees hired before the 1989 cutoff at about 20,000.

For benefits established under 1989, 1997 and 2003 amendments to the Illinois Pension Code, the judge ruled that they were time limited at creation. By their express terms, these amendments specifically did not provide the annuitants with “lifetime” or “permanent” healthcare benefits. Rather, the annuitants who became members of the retirement systems during the effective period of these amendments could, and d id, agree to the amended time-limited healthcare benefits as conditions of their membership in the system.

Accordingly, the Court ruled that a cause of action for relief to employees as to the City’s and Funds’ obligations under the 1983 and 1985 amendments exists, but claims under the 1989, 1997 and 2003 amendments were dismissed with prejudice.

The employees argued that the City of Chicago Annuitant Medical Benefits Plan handbook (“City Handbook”) constitutes a binding agreement requiring the City to provide lifetime subsidized healthcare premiums. The Court found that the Handbook’s provision for termination of the Plan clearly contradicts any contractual obligation to provide lifetime healthcare benefits. The Police Handbook does not contain any provision promising lifetime subsidized healthcare benefits. Because Plaintiffs failed to show the existence of any valid contract for the provision of lifetime subsidized healthcare benefits, that claim is dismissed with prejudice.

The City argued that all of Plaintiffs’ claims under the 1983 and 1985 amendments are barred by the statute of limitations. The Firemen and Municipal Funds contended that all of Plaintiffs’ claims arising under each of the amendments to the Pension Code are time-barred. Initially, Plaintiffs argued that the City waived this argument by not raising it on the City’s motion to dismiss the Amended Complaint. However, the City asserted this defense after this court ruled that the city has a derivative obligation to provide, through the collection of the special tax levy, the monies used by the Funds to subsidize/provide healthcare for the Funds’ annuitants. Therefore, the City did not waive its right to assert a statute of limitations defense. Because the rights claimed by Plaintiffs under the Pension Clause are contract based, the ten-year statute of limitations applies.

One class of employees known as Sub Class 3 did receive for now, a favorable ruling. The Court said that the Sub-Class 3 annuitants were not parties to the original litigation, let alone the later settlement agreement. Indeed, the exact language of the 1989 settlement agreement only covers the Korshak and Window Sub-Class annuitants. The original litigants could not bind the non-party Sub-Class 3 participants to the 1989 settlement agreement, nor could the non-party Sub-Class 3 participants have preserved any of their claims through that 1989 settlement. So, the court ruled it has not been established when members of Sub-Class 3 knew or should have known of any claims they possessed.

The court would not assume that the members of Sub-Class 3 were aware of the facts in the I987 litigation or were put on notice of the potential for their claims against the Funds. Nor would the court assume without sufficient evidence as to how many, if any, of the Sub Class 3 participants either knew of the terms of the 1989 settlement agreement or, as of August 23, 1989, “had a reasonable belief that their injury was caused by wrongful conduct” of the City or the Funds. The Court said that speculation about the matter was not a sufficient basis upon which to grant the current Motion to Dismiss.

A status hearing is set for Aug. 11. The city could seek to settle the case, offering some sort of payout to compensate for the lost subsidies to resolve the dispute and obtain more clarity in financial planning going forward, or the litigation could go on. The city’s recently released 2015 certified annual financial results showed a reduction in the unfunded OPEB liability to $781 million from $965 million.

FEDERAL PENSION RULING FAVORS TEXAS CITY

Fort Worth operates a defined benefits pension plan for the benefit of its employees. All of the plaintiffs are vested members of the plan. At the time each of the plaintiffs vested, the three highest annual salaries received by the retiring employee were averaged to reach a base amount, which was then multiplied by the employee’s years of service and then subjected to a 3% multiplier. The plaintiffs also had the right to a cost-of-living adjustment, or “COLA.” Like most public pension plans in Texas, Fort Worth’s is underfunded. Over the years, Fort Worth has sought to improve the financial condition of its pension plan. In 2012, the City made two primary changes. For new employees, it replaced existing formula to one averaging the five highest paid years. It also uses a 2.5% multiplier instead of a 3% multiplier.

The second noteworthy change concerned the COLA. The City eliminated cost-of-living adjustments for future employees, provided that current employees would instead receive a simple 2% COLA, and allowed current employees who had previously taken the ad hoc COLA “to revert to 2% simple.” Due to a collective bargaining agreement, City firefighters were not affected but shortly after that agreement expired, however, the City imposed essentially the same reform on its firefighters. Two lawsuits us challenged those ordinances – one by a pair of police officers, the other by a trio of firefighters.

Both cases were resolved at the summary judgment stage. State law under Section 66(d) provides that on or after the effective date of this section, a change in service or disability retirement benefits or death benefits of a retirement system may not reduce or otherwise impair benefits accrued by a person if the person could have terminated employment or has terminated employment before the effective date of the change; and would have been eligible for those benefits, without accumulating additional service under the retirement system, on any date on or after the effective date of the change had the change not occurred. Section 66(d) applies to all non-statewide public retirement systems except in San Antonio and in political subdivisions where voters have rejected it by ballot measure.

The Court had to decide whether Section 66 prohibits pension reform that would decrease expected but as-yet unearned benefits. This case came down to the meaning of the word accrued. The Court found that Benefits accrue on an ongoing basis as service is performed, and accrued benefits are those benefits that have been earned to date. Meanwhile, vesting is a one-time event giving rise to a right to the accrued benefits. “In summary, the notion of benefit accrual quantifies actual benefit accumulations. The Court found that the term “benefits” refers to payments and does not encompass the formula by which those payments are calculated. It stated that when it comes to public pension protection, Texas is known to be an outlier, citing literature that notes that Texas as one of only two states that takes a “gratuity approach” to public pensions, meaning pension benefits are viewed as gratuity rather than a contractual or statutory right.

The Court concluded that Section 66 permits prospective changes to the pension plans of the public employees within its reach. If the changes to the pension plan impact only benefits that have not yet accrued, amendment is permissible. It went further and said that the reform has been designed to protect all accrued benefits while impacting only the rate at which future benefits accrue. This aspect of the Pension Reform therefore passes constitutional muster.

This is a definite win for Texas cities. The Texas courts and the state legislature have weighed in on the subject and now cities, absent further state action, have firm guidance on how they can deal with their pension liabilities. We see this as credit positive for Texas cities with unfunded pension liability issues.

Muni Credit News July 21, 2016

Joseph Krist

Municipal Credit Consultant

PHILADELPHIA BUDGET STORY

Philadelphia will be getting lots of attention later this summer as the site of the Democratic National Convention. The City hopes that the event will draw positive attention to many aspects of local development which have occurred in the three decades since the City reached its nadir as a center of urban decline and mismanagement. In the interim before the convention, we get a chance to view the outlook for the City’s near term finances.

City Controller Alan Butkovitz this week recommended that the Pennsylvania Intergovernmental Cooperation Authority (PICA) accept the City’s FY2017-2021 Budget Plan. The budget submission highlighted areas of concern about the City’s financial future. One is the newly adopted Sugary Drink Tax, a contentious point of revenue development for the City.

The City estimates that $416 million will be collected over the five years, before additional costs for collection, advertising and auditing. The City has indicated that the revenues from the Sugary Drink Tax will fund three major initiatives: expanded Pre-K, community schools, and debt service for Rebuilding Community Infrastructure program when those programs are fully funded.

At the same time, opposition to the tax from producers as well as consumers is expected to move from the political arena to the legal front. The Controller acknowledges that PICA must be mindful of any litigation that could occur from critics of the Sugary Drink Tax, who have vowed court challenges against the tax. “While no litigation has been initiated, the outcome of such litigation could significantly affect the forecasted revenues and obligation amounts over the life of the Plan,” admits the Controller.

The Plan also comes up short in the area of labor costs. The City Controller’s analysis also indicated that the Plan does not include any potential costs above $200 million in obligations for future labor agreements over the five years. AFSCME DC 33 and DC 47 Local 810 Courts are currently in negotiations. “The City would be responsible for identifying additional funds to cover any costs above the budgeted amount,” said the Controller.

GREEN BONDS

As the municipal market continues to evolve, new classifications of bonds have been developing to meet the needs of specialized investors. The mutual fund industry has been familiar with primarily equity funds that advertise themselves as socially responsible investors. They allow individuals with strong political or ethical beliefs to participate in the investment markets without feeling as if they have compromised those values.

This trend has expanded into the municipal market. There are funds and fund sponsors who practice “green investing” through our market. in response, issuers are working to achieve that status for their issues. Green Bonds are so designated according to generally accepted Green Bond Principals as promulgated by the International Capital Market Association. The purpose of the label is to allow for investors to evaluate the environmental merits and benefits of bonds so labeled.

The latest example of Green Bonds is an issue of $415 million scheduled for sale next week by the City of Aurora, CO. The City Utility Enterprise is offering water revenue particular project was designed to increase the efficiency of its existing water system and expand water supplies without the acquisition of additional land for its water rights. This is consistent with the principals supporting a Green Bond designation.

A Green Bond designation does not lead to any changes in the basic characteristics of the bonds in terms of security or structure. In the case of the Aurora issue, the bonds are traditional first lien net revenue bonds of the water system featuring a traditional serial/term maturity structure. The only thing different is the Green Bond designation. The benefit is that it helps to expand the market for the debt by supporting an expanded class of investors. It looks like a win/win for the overall municipal market.

PENNSYLVANIA FUNDS ITS BUDGET

Early in July, Governor Tom wolf signed a budget that was underfunded by over $1 billion. That led to general derision and threats of further downgrades. The reaction seems to have spurred the legislature and the Governor to get together on a revenue package to fund the shortfall. Perhaps now the Commonwealth can move forward with its recently postponed general obligation bond issue.

That final revenue package is expected to raise nearly $1.3 billion through a $1.00-per-pack tax increase on cigarettes, an expansion of gambling, liquor reforms and applying the personal income tax on Pennsylvania Lottery winnings. There is an increase tax on the expanded vaping industry but cigars will not see a tax increase. Other revenues under consideration include tuition at the 14 state universities rising by as much as 3 percent in the coming academic year to fill the anticipated budgetary shortfall that the State System of Higher Education is facing. Tuition has increased 13 percent over the last five years. A rise of 3 percent would mean a $212 increase in the yearly tuition rate, bumping up the base rate to $7,272.

Among other tax changes signed by Gov. Tom Wolf this week, the state’s 6 percent sales tax will be extended to the purchase of digital downloads including games and music. This tax expansion is expected to be worth about $47 million in 2016-17, according to Wolf Administration estimates.

Missing from all of the budget deliberations is any serious reform of the Commonwealth’s underfunded pension liability. The pension issue is the elephant in the room in terms of the Commonwealth’s long-term credit outlook. The short-term resolution of the FY 2017 budget could be enough to hold off a rating downgrade in the near term. Absent meaningful reform of the Commonwealth’s pension situation, we see the credit as a consistent underperformer.

TEXAS HIGH SPEED RAIL HITS SPEED BUMP

Texas Central Railroad and Infrastructure, Inc. and Texas Central Railroad, LLC, propose to build a 240-mile high speed rail line between Dallas and Houston, Tex. In April of this year, Texas Central filed a petition for an exemption from the state prior approval requirements due to oversight from the U.S. Surface Transportation Agency. Such oversight would ease the process of right of way development and acquisition. That process is being used by opponents of the route and the plan overall to delay and/or halt the project. this in turn, has complicated financing for the project. Texas Central anticipates beginning construction in 2017 and plans to initiate passenger service as early as late 2021. Texas Central estimates the cost of construction, which is being privately financed, to be over $10 billion.

Texas Central made its request for federal jurisdiction based on the claim that the Line is part of the interstate rail network, despite the absence of a physical connection with Amtrak. Texas Central compares itself to the state-owned Alaska Railroad, which is located entirely in the State of Alaska, does not physically connect at any location with the interstate rail network and relies on water carriers to interchange and connect with other United States railroads; yet, the railroad is part of the interstate rail network and subject to the Board’s jurisdiction. The Alaska Railroad and the water carriers that it uses to connect to the interstate rail network are part of the noncontiguous domestic trade statutorily subject to the Board’s jurisdiction.

The Surface Transportation Board declined the request to supervise the project. The proposed Line would have no direct connection with Amtrak, such as a shared station or a clearly defined arrangement to connect passengers using through ticketing. The Line and Amtrak need not share the same track, but with no direct connection to the interstate rail network the construction and operation of the proposed Line is not subject to the Board’s jurisdiction.

While the Texas project is entirely private, we are interested in it for its potential precedent setting impact for high speed rail projects which hope to rely in whole or in part on municipal bonds for their financing. Understanding the various obstacles which could impact construction planning and scheduling and their potential effects on financing viability will be important to the credit analysis by potential investors in these sort of projects.

PROMESA CHALLENGES CONSOLIDATED

A U.S. Federal Judge consolidated the various cases brought up by a hedge fund firm, an insurance firm and private investors to resolve the issue on whether the Puerto Rico Oversight Management and Economic Stability Act (Promesa) has stayed their lawsuits. The government recently had asked the court to stay the three lawsuits, contending that there is a disposition to that effect contained in Promesa, but the judge declined to do so. Currently, there are six cases in the Federal District Court in Puerto Rico and one in New York related to bond defualts and fiscal matters.

A hedge fund recently sued to stop the Government Development Bank from transferring assets. National Public Finance Guarantee Corporation, which insures approximately $3.84 billion of debt issued by the Commonwealth of Puerto Rico and related entities, and a group of bondholder plaintiffs want the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act to be declared unconstitutional.

Muni Credit News July 19, 2016

Joseph Krist

Municipal Credit Consultant

ALASKA BUDGET CRISIS REVISTED

Two years ago I had the good fortune to spend time in interior Alaska. The trip gave me an appreciation for its vast scale, unique attributes, and the role of nature and the State in the creation of a unique role for its State government. These are some of the reasons that back in the first quarter of this year we commented on the looming budget crisis facing the State of Alaska in the face of consistently lower oil prices. The state is facing huge ongoing deficits as oil prices remain stubbornly low. This is forcing the State to consider – given its history – radical approaches to manage the state fiscal position going forward in an era of diminished oil revenues.

The State Office of Management and Budget has just issued a report suggesting two potential remedies for consideration by the Legislature. One remedy proposed is the “No Action Plan” and requires a state budget of $1.5 billion revenue. This revenue level assumes an optimistic $55/bbl price of oil, increasing over time to offset production declines. The other is the “SB128 but No Tax Plan” and assumes a budget of $3.4 billion, $1.5 billion current revenue at $55/bbl plus $1.9 billion, the amount expected if SB128 passes the legislature, but no other revenue measures. State budget reserves will be completely depleted in FY18 without new revenue measures. In FY19, Alaska could be facing these scenarios.

The budget would be one-third of the current FY17 budget and only one-quarter of the FY15 budget. Most government agency operating budgets would be 10 to 20% of current levels, a level similar to state spending experienced in the late 1960’s. School funding would be reduced to 32% of the current $1.25 billion, dropping to $400 million. Local education employment would fall from the current 24,400 to an estimated 10,000 statewide. The Alaska Performance Scholarship and Power Cost Assistance would end in FY19.

Medicaid and other health formula funding would be reduced by 25% to maintain as much federal coverage as possible. All other health programs would be shut down, privatized, or significantly reduced. These include senior benefits, child care benefits, homeless assistance, victim’s assistance, housing programs, pioneer homes, health clinics, public health labs, etc. Fish and Game, Environmental Conservation, and Natural Resources combined would have $18 million in operating revenue compared to $134 million total in FY17. This represents less than 10% of the FY15 funding level.

Transportation’s operating budget would be less than $40 million compared to the $218 million. Road maintenance and ferry service would end for some segments and be significantly curtailed on others. Many of the 240 state maintained airports would be closed, and the rest would have reduced operations. The legislature would have a budget of $11.6 million compared to the current $64 million 15% of FY15. The current budget is just over $1M per legislator, it would drop to $193,000 per legislator. There would be no ‘on behalf’ retirement payments, no school debt reimbursement, and no community revenue sharing, shifting all those costs to local governments. There would be no rural school construction funding or rural school maintenance.

Most prisons would be closed, and prisoners either released early or send to out of state facilities as a result of funding at 25% of current level. Public safety would be 25% of current level, leaving most areas without trooper presence. The capital budget would be less than $20 million costing the state federal highway match funding. AVTEC and most University campuses would lose all state funding. Any remaining campuses would receive one-third or less of current revenue. Up to 50% of state and university facilities would need to be sold or shuttered. State Library and Museum facilities would operate only at the level that could be sustained by earned revenue and fund raising.

State employment would drop by an estimated 12,000 employees (25,000 total, ~13,000 UGF funded, cut 70% of UGF employees, and cut 25% of state employees on other fund sources due to lack of matching funds). The drop in state and education employment plus the reduction in Medicaid would precipitate significant reduction in health care spending compounding overall state job losses. The amount spent for the Permanent Fund Dividend would nearly match the total state budget.

If the Senate Bill 128 (the Permanent Fund Protection Act) is passed in its current form, state revenue will increase by ~$1.9 billion and provide total Unrestricted General Fund revenues of $3.4 billion. The budget would be 78% of the current FY17 budget and just over half, 56%, of the FY15 budget. Most government agency operating budgets would be cut an additional 25% from the current levels and operate at 40-60% of the FY15 level. School funding would be reduced to 80% of the current $1.25 billion, dropping to $1.0 billion. Local education employment would see 3,000 to 5,000 fewer employees from the current 24,400.

Medicaid and other health formula funding would be reduced by 10% to protect federal coverage. All other health programs would see an additional 25% reduction, impacting senior benefits, child care benefits, homeless assistance, victim’s assistance, housing programs, pioneer homes, health clinics, public health labs, etc. Fish and Game, Environmental Conservation, and Natural Resources combined would have $100 million in operating revenue compared to $134 million total in FY17. This represents about 59% of the FY15 funding level. Higher fees for permitting and inspections would be expected.

The transportation operating budget would be $163 million compared to $218 million. Road maintenance and ferry service would be curtailed. Many of the 240 state maintained airports would be closed or have reduced operations. The legislature would have a budget of $48.5 million compared to the current $64 million over 60% of FY15. The current budget is just over $1 million per legislator, it would drop to $800,000 per legislator. There would be no ‘on behalf’ retirement payments, no school debt reimbursement, and no community revenue sharing shifting those costs to local governments.

The Alaska Performance Scholarship and Power Cost Assistance would be reduced and eliminated within 5 years. There would be no rural school construction funding and minimal rural school maintenance. Corrections would be reduced an additional 10%. Two or possibly three prisons would be closed and some prisoners would be housed out of state. Public safety would be reduced an additional 10% from the current level, leaving some areas without trooper presence. The capital budget will remain at the minimal level to meet federal highway and other match requirements at $100 million. University funding would be reduced another $80 million likely forcing campus closures and possible divestitures to communities. Some state and university facilities would need to be sold or shuttered. State employment would drop by another 2,000 employees on top of the 2,100 fewer expected by the end of FY17.

Clearly these are worst case scenarios designed to stimulate thought and debate. Many of the contemplated spending cuts would be self-defeating for the State and its economy. We do note that the document does not make any reference to the State seeking to address its problems on the backs of its bondholders. Perhaps the harsh if beautiful environment and self-sufficient spirit of most Alaskans serve to better focus the mind on solutions in a way that warm tropical winds do not.

CHICAGO RELEASES FY 15 FINANCIAL REPORT

The City of Chicago released its Comprehensive Annual Financial Report for calendar 2015. It includes a huge reported increase($17 billion) in liabilities consisting almost entirely of unfunded liability in the city’s four employee pension funds, covering police, firefighters, laborers and white-collar workers. The increased figure reflects two changes in how the liability is reported. First, it had to report the true shortfall in assets for its pension funds, using real actuarial figures. And it had to reduce the assumed rate of return on pension assets from 7.5 percent to 5 percent, an action that pushed up the unfunded liability.

The number also reflects the impact of the recent Illinois Supreme Court decision overruling, on constitutional grounds, a prior city pension rescue plan that relied on a combination of tax hikes and benefit cuts. The court ruled out those cuts, saying full benefits amount to a contractual promise that cannot be infringed.

There is some good news in that the shortfall between what the city is now contributing and what it actuarially should be contributing is down to the lowest level since between 2006 and 2011, depending on which fund is examined. But the city still isn’t meeting its actuarially required contribution or ARC and won’t fully begin to do so until 2020-22, under the current plans. The funds now have just 20.3 percent to 33.6 percent of the assets needed to pay promised benefits.

On the positive side, the amount of unrestricted cash in the city’s operating fund has roughly doubled in the past year, to $93 million, and that the city spent $106 million less than budgeted in its operating fund. Also, the city has removed all variable-rate and swap debt, but total outstanding general obligation debt rose about $1 billion during the year, to $23 billion.

On balance, there are positive things that stand out. The adoption of more realistic earnings assumptions for the pension funds, the improved ARC shortfall ratio, the reduction of exposure to variable rate risk, and the restraint on City spending relative to budget must be noted. While Chicago has a plethora of problems, lack of understanding on the part of the mayor is not one of them.

PROPOSED TRADING TAX WOULD INCLUDE MUNICIPALS

Municipal bond investors always have to be on the lookout for innocent sounding legislative proposals that target something else but hurt municipal bonds. The latest example is from Rep. Peter DeFazio (D-OR). Last week, he introduced legislation that would levy a 0.03 percent tax on transactions of stocks, bonds and derivatives to discourage speculative financial trading. “The ‘Putting Main Street First Act’ is designed to stop the sorts of high-speed trading that adds volatility to the markets.

According to supporters, a “Wall Street speculation tax” would not only help move our financial markets away from dangerous high-frequency trading, but also raise significant revenue to address unmet needs.” Oh by the way, according to the Joint Committee for Taxation, the tax would raise $417 billion over ten years.

While well intentioned, the tax would, by including munis, be effectively throwing out the baby with the bathwater. “This tax is a great way to raise money for the federal government by making the financial sector more efficient,” said Dean Baker, Co-Director of the Center for Economic and Policy Research. “The cost of the tax will be fully covered by the savings from reduced trading. This means that the ordinary investor will be left unharmed by this tax. The only people who feel the impact will be the short-term traders and the financial intermediaries.” We could not disagree more as it pertains to municipal bonds. Fortunately, DeFazio admits that there is no chance of passage in the current Congress.

Muni Credit News July 14, 2016

Joseph Krist

Municipal Credit Consultant

SAN DIEGO STADIUM PROCESS KICKS OFF

We have previously commented on efforts to get the City of San Diego to finance the bulk of the cost of a new stadium for the NFL’s San Diego Chargers. Those efforts took a major step forward when the San Diego City Clerk announced that the Chargers secured enough valid signatures for the team’s proposal to raise local hotel taxes for a downtown stadium and convention facility to appear on the November ballot.

The announcement will provide another opportunity for proponents and opponents to make their cases regarding this project. The project itself will consist of the football stadium and an adjoining convention center annex. The existing center’s exhibit floor spans more than 525,000 square feet. The Chargers are proposing a total of 260,000 square feet of new exhibit space, of which 100,000 square feet would be on the stadium floor adjoining the proposed convention center.

That is much more exhibit space than a previous city plan to enlarge the center on the waterfront, which has been supported by the mayor and hotel industry but has been blocked in court. The grouping of the convention center expansion with the stadium is a shrewd move by the Chargers given that it ties their stadium to revenues from the hotel industry which wants an expanded convention center on its own.

The Chargers would contribute $650 million for the stadium portion of the project, using $300 million from the NFL and $350 million from the team, licensing payments, sales of “stadium-builder” ticket options to fans, and other private sources. The city would raise $1.15 billion by selling bonds that would be paid back with the higher hotel tax revenues. That $1.15 billion would cover the city’s $350 million contribution to building the football stadium, $600 million to build the adjoining convention center annex, and $200 million for land.

The initiative would raise the city’s tax on hotel stays from 12.5 percent to 16.5 percent to finance a $1.8 billion stadium and convention center in downtown’s East Village, next to Petco Park (the stadium for MLB’s San Diego Padres). City Attorney Jan Goldsmith says the initiative would need approval from two-thirds of voters. But Goldsmith more recently indicated there was a chance that approval by somewhere between a simple majority and two-thirds would leave the fate of the initiative in limbo until a Supreme Court decision whether to uphold or overturn the lower court ruling, which said only simple majorities are required for tax increases by citizens’ initiative.

Opponents include politicians (mostly Republicans when it comes to the stadium portion), business organizations and neighborhood groups. Neighborhood and citizens groups have raised the issue that such a tax increase should contribute revenue for other priorities and that higher hotel taxes could damage local tourism. They would prefer to see higher taxes applied to basic services. They do support an expansion of the convention center on its own.

The outlook for voter approval is uncertain, especially if a two thirds vote is required. Now that Cleveland has one the NBA championship, San Diego bears the dubious distinction of being the major league city with the longest “championship drought”. The performance of the Chargers on the field has not been particularly successful over the past two decades and the popularity of the Spanos family and its ownership has been uneven at best. These are the qualitative factors that make these deals so interesting and we will continue to monitor the situation through the fall. Quantitatively, The proposed 32 % tax rate increase would lift San Diego from 21st highest in the nation for hotel, or transient-occupancy, taxes, up into a tie for third. The new rate of 16.5 percent would be slightly above San Francisco at 16.25% and Los Angeles at 15.5%.

HARRISBURG BACK IN THE NEWS

The Harrisburg Parking Authority sent notices of default to the executive director of the Pennsylvania Economic Development Finance Agency asking for payments due totaling $1,468,732. The money comprises mostly unpaid payments from 2014 and 2105, when the system didn’t generate enough revenue. The EDFA floated the bonds for the long-term lease of the city’s parking assets as part of the overall restructuring of Harrisburg’s finances in 2013.

City council members agreed to “sell” city parking assets in late 2013 under a 40-year lease. Since then, parking revenues have not generated enough moneyto ma ke all the payments listed in the deal’s “waterfall of payments” after debt obligations and operating expenses. City officials believe they are still owed their full payments, as the city ranks first in the prioritized waterfall. But parking officials claim that the language in the asset transfer agreement is “ambiguous,” as to whether it must pay unpaid payments from prior years when revenue falls short.

The dispute could wind up in court to determine if the city is owed full payments from prior months and years when revenue lagged. The city was promised $3 million this year, for example, from so-called waterfall payments. But parking officials approved a parking budget in December that called for $2.1 million in payments this year, while still paying full payments for “performance fees” for parking managers.

Although overall revenue fell short of initial projections by about 12 percent, the system made money, ending the first six-months of this year with more than $800,000 in cash. Parking officials have previously said they would have to raise parking rates if the city insists on its full payments. But city officials have said that the system should instead defer on “performance fees” for parking managers and cut operating expenses. The parking system could draw funds from its capital reserve fund to pay the city.

In the meantime, the bonds that financed the long-term lease of the parking system in Harrisburg have been reduced to junk status, by S&P Global Ratings, downgraded two notches to BB+. Parking officials in June started withholding some revenue payments from the city and plan to continue to hold that money in a separate account until “there is resolution on this matter,”. Meanwhile, the city will continue to get the $3 million in so-called waterfall payments it expected this year.

Parking officials released an unaudited financial report for 2015 at Monday’s meeting that showed overall revenues for the parking system fell $1.2 million short of expectations. The biggest disappointment came from enforcement revenue (-$1.6 million) while meter revenue exceeded expectations by $764,000.

The confrontation serves to show the limits of financial engineering in the face of daunting economic challenges. The City’s fiscal position may have been temporarily shored up but the underlying fundamentals remained essentially unchanged. It leads us to once again repeat or view of the need for strong economic fundamentals whether it be a tax backed or revenue backed, public or private.

PUERTO RICO WATER LEGISLATION

The PRASA Revitalization Act was signed into law this week. by amending the moratorium act, the law establishes a securitization mechanism, whereby the utility would pledge 20% of what it charges its clients, for new debt that could reach as much as $2 billion. It establishes a securitization mechanism, whereby the utility would pledge 20% of what it charges its clients, for new debt that could reach as much as $2 billion.

For now, the legislation establishes limits to ensure no more than $900 million is issued in new money—a key amendment from the Senate that helped in overcoming the deadlock with the House. The utility is called to use any new debt raised to pay its suppliers, who are owed about $150 million, as well as to restart its $400 million capital improvement program. The remaining capacity, which is estimated to be about $1.1

The legislation’s enactment is meant to facilitate the issuance of debt on an expedited basis. This could provide for issuance before the establishment of an operating oversight board included as a major part of the PROMESA by the U.S. Congress. We have concerns about the execution of such a large transaction outside of the terms of PROMESA. While it is understood that Puerto Rico is resistant to the oversight of the board, efforts to circumvent its oversight can only be interpreted as interference with that oversight. this would be against the interests of all of Puerto Rico’s stakeholders.

Muni Credit News July 12, 2016

Joseph Krist

Municipal Credit Consultant

NJ TRANSPORTATION ROADBLOCK

Over the Christie years, budget battles have been a primary characteristic influencing New Jersey’s bond ratings. One of the factors which was seen as a positive was the New Jersey Transportation Trust Fund credit and the constitutional provisions securing debt issued by that credit. Our view of reliance on legal versus economic supports for credits were enunciated in connection with Puerto Rico in our last issue.

So it was with dismay that we view the events of this week in connection with efforts to fund the New Jersey Transportation Trust Fund. Gov. Christie , a Republican, reached a deal with the Democratic-led State Assembly to raise the gas tax by 23 cents per gallon and to lower the sales tax. But Democratic leaders in the State Senate said they could not support the legislation because it would harm the state budget. The issue was that the sales tax cut would have reduced state by over $1 billion.

In response Gov.Christie’s administration declared a state of emergency and said that nonessential transportation projects would be suspended to conserve the money left in the state’s depleted transportation trust fund. The governor had directed the state transportation commissioner and the executive director of New Jersey Transit to submit plans for an “immediate and orderly shutdown” of most state-funded work. Projects with other sources of funding or that were deemed critical to safety were not affected.

Gov. Christie’s administration released a list of projects that will be shut down, saying they would be postponed for at least seven days. The 50-page list of transportation projects that will be shut down includes work in every corner of the state, from Bergen County in the north to Cape May at the southern tip. The State Transportation Department’s projects totaled $775 million, and New Jersey Transit’s projects added up to $2.7 billion.

The governor’s decision to shut down projects was highly unexpected prompting concerns over workers losing their jobs. State lawmakers had seen an opportunity to raise the gas tax ( the second lowest in the country), at 14.5 cents per gallon. There have been many suggestions that the tax be raised not just because of its low rate but based on the belief that users should pay more of the cost of road construction.

The volatile reaction by Mr. Christie is consistent with his habit of lashing out at those with opposing views. It also raises suspicions that his actions are being influenced by his vetting as a possible running mate for Donald J. Trump. This yet another example of an issue we have recently commented on(June 23) , namely the issue of political ideology as a credit negative.

Legislative Democrats are said to be examining several options for a transportation funding deal such as legislation to phase out the estate tax in exchange for raising the gas tax, but Mr. Christie said he did not support the idea.

As far as investors are concerned Transportation Trust Fund bonds are secured by the state’s absolute, unconditional contract payments subject to annual legislative appropriation. The state makes contract payments to the authority from the Transportation Trust Fund (TTF) account of the general fund. The accounts are funded with certain statutorily- and constitutionally-dedicated revenues for Transportation System bonds and with only constitutionally-dedicated revenues for Transportation Program bonds.

Bondholders have no direct lien on any of the dedicated revenues, and the legislature has no legal obligation to appropriate funds to the authority. Importantly, approximately 84% of New Jersey’s net tax-supported debt is subject to appropriation. The importance of maintaining access to the capital markets provides strong incentive for the state to make these appropriations.

PROMESA TAKES ITS RATING TOLL ON OTHER TERRITORIES

Fitch announced negative outlooks for Guam and U.S. Virgin Islands credits following the enactment of S.2328, the ‘Puerto Rico Oversight, Management, and Economic Stability Act’ or ‘PROMESA’ on June 30, 2016. According to Fitch, PROMESA fundamentally alters the premises used to rate certain tax backed debt issued by territorial governments distinct from and above a territory’s highest ratings.

In Fitch’s view, the adoption of PROMESA demonstrates the capacity of the federal government to adopt legislation controlling territorial bankruptcy in much the same manner that a state might do to control the ability of municipalities to seek bankruptcy protection. Previously, territories were assumed to be like states which would not themselves be subject to insolvency proceedings. PROMESA creates a framework to allow an oversight board to initiate proceedings aimed at restructuring territorial tax backed debts as if the territory itself was a municipality.

This is along the lines of concerns that we expressed last week. The securities being placed on Rating Watch Negative have been higher than the general credit quality of the respective territories based on their legal security structures. While the PROMESA legislation seeks to preserve the relative rights of lien holders, provisions of Chapter 9 that would otherwise protect holders of specific tax backed liens from automatic stay provisions require further assessment according to Fitch in light of the new legislative scheme.

Fitch notes that although PROMESA does not establish an oversight board for territories other than Puerto Rico, our extension of the inherent logic of the act to the rating of the tax backed debt of other territories would be consistent with the approach taken when rating municipal debt in states where local governments are not currently authorized by state government to file proceedings under Chapter 9. Fitch notes that it makes no distinction between entities in states that allow for local government bankruptcies and those that do not based on Fitch’s belief that, if a state deemed an entity’s best option to be a filing, the state would make the legal provisions necessary for that entity to file. Fitch’s view is that the same approach should be taken with respect to the federal power to authorize territorial bankruptcy.

PENNSYLVANIA MISSES AGAIN

This year, the state legislature has sent a spending plan to the Governor for his signature not too many days past the deadline for enactment. The problem this time around is that they have not agreed on how to pay for it. If signed as is, the “budget” is short on the revenue side by over $1 billion. The legislators have yet to agree on new sources of funding. They are considering gambling revenues, a possible increase in the base for sales tax collections, or a cigarette tax increase (see May 31 and May 17 issues).

An increase in the sales tax base would likely include the retail sales of clothing. This would be unpopular on both sides of the transaction with obvious opposition from consumers but also from retailers and localities. Many border localities have been able to entice retailers to establish and even relocate from New York to Pennsylvania bringing jobs along with them. Any reduction in that competitive advantage would be viewed poorly by those localities.

The Governor has decided to sign the underfunded budget rather than risk an ongoing budget debacle while his state hosts his party’s National Convention. The recurring failure to adopt timely budgets along with the recurring failure address the Commonwealth’s structural budget issues (education, pensions, property tax relief) combine to sustain the Commonwealth’s downward rating trajectory. We view the Commonwealth’s credit as an underperformer for the foreseeable future.

CHICAGO OPEB DISPUTE MOVES NEXT PHASE

In 1987, litigation was filed by the City of Chicago to establish what its legal obligation to fund the healthcare costs of its retirees. In many ways it was a forward thinking step. Other post-employment benefits as a source of credit pressure have really come to the fore since the turn of the century. Prior to that time, they were not a prime consideration for most investors. This step by the City has not been the stabilizing factor it hoped it would be.

Since 1988 the City of Chicago and its four pension funds have been party to the settlement of City of Chicago v. Korshak regarding how much the City, the funds and annuitants pay for healthcare. Much has changed in the time since that settlement which expired on June 30, 2013. Over that time, the City’s fiscal position worsened, a new administration took over in the City, and the Affordable Care Act was enacted. These factors led the City to seek ways to try to eliminate City support for retiree healthcare benefits. The City had hoped to rely on the fact that beginning in 2014, under the ACA, non-Medicare eligible retirees would be able to access insurance through new regulated marketplaces, or exchanges. The ACA increases access for retirees not yet eligible for Medicare by outlawing practices that previously made finding healthcare coverage difficult.

The City has been reducing subsidies for retiree healthcare costs since 2013. The retirees are now challenging Chicago’s efforts to phase out most retiree healthcare subsidies – or other post-employment benefits — which had cost the city about $100 million annually. They argue the benefits are protected by the state constitution’s pension clause and that the city is seeking to breach its contract with retirees. That position is based on a 2014 decision from the Illinois Supreme Court (Kanerva v. Weems) in which the court did not rule on whether changes the state made to retiree premium subsidies actually impaired retiree benefits, just that they are protected under the state constitution pension clause which gives benefits contractual protections against being impaired or diminished.

The Cook County Circuit Court heard oral arguments on July 6. It is expected to issue a ruling on the city and pension funds’ motion to dismiss in the next two weeks. This will not be the final step in the process as both sides are interested in a certain outcome. That will undoubtedly come through an appeal to the Illinois Supreme Court. There is much riding on the outcome for the City and its investors.

Muni Credit News July 7, 2016

Joseph Krist

Municipal Credit Consultant

And so it’s done. Puerto Rico covered only about $150 million of the $958 million in constitutionally guaranteed debt it owed Friday, according to the government. In all, it missed $911 million out of the $2 billion in debt-service payments due. “When I became governor, Puerto Rico was a colony of Wall Street,” Gov. Alejandro García Padilla told reporters in his typically theatrical style. “There should be no doubt today that I have chosen to protect the Puerto Rican people, and that we have been telling the truth all along”.

That statement reflected the fact that, at 3 a.m. Friday, the Puerto Rico government released its audited financial statements for fiscal year 2014. The Government reports a net deficit of $49.7 billion. The current FY 2014 operating deficit was $2.7 billion. The Government expressed concern over its ability to operate as a going concern. A 7% decrease in revenues was not met with anything close to cuts of that magnitude on the expense side. The report spends significant space on the difficulties facing the Commonwealth, PROMESA and its provisions. It projects the insolvency of its primary pension systems by 2018 and 2019 respectively.

Of the $958 million of bonds that carry the island’s full faith and credit, the government missed $780 million worth of general obligations (GOs), while paying about $150 million of the $178 million owed in Public Buildings Authority (PBA) bonds. Fiscal authorities stated that “over $800 million” in debt guaranteed by the commonwealth was still owed July 1 and the administration won’t use “clawed back” revenues to pay for this debt, and instead will leave the roughly $150 million on a separate account, while its final use has yet to be determined.

The rest of the payments due Friday, or about $1 billion corresponding to several public entities, were covered mostly by siphoning the entities’ debt-service reserves held by their trustees. As a result, the commonwealth defaulted on roughly half of the $1.9 billion due July 1, including the $780 million in GOs and $77 million tied to the Infrastructure Financing Authority.

On Thursday, the Governor signed executive orders authorizing the government to miss payments on its constitutionally guaranteed debt, while also declaring moratoriums on certain obligations of the Highways & Transportation Authority (HTA), Convention Center District Authority, the Public Employees Retirement System, the Industrial Development Co. (Pridco) and the University of Puerto Rico (UPR). Despite the executive orders, partial payments were still be made, although coming from debt-service funds already held by a trustee. In addition, the orders seek to preserve cash and protect against potential legal action by creditors.

At the same time Puerto Rico’s reported only about $200 million in cash in its operating account, according to the government’s statement. It warns it would need to continue taking emergency fiscal measures over the next six months to avoid depleting its liquidity.

We have many problems with the process that is included in Promesa that will likely allow Puerto Rico to evade its constitutional requirement to pay debt. We are not ignorant of the human and economic realities on the ground. However, the reasons notwithstanding, any precedent that allows constitutionally enshrined promises to be broken is troubling. We stand with those who fear the establishment of such a precedent. At the same time, it reinforces one of our basic tenets of credit. Namely, that one should always rely on economic viability rather than legal provisions to support investment in a credit.

DETROIT PUBLIC SCHOOLS

The split of the existing Detroit Public School District into two distinct entities took effect on July 1. Immediately, Standard & Poor’s downgraded its credit rating for Detroit Public Schools bonds and said there is more than a 50% chance of additional downgrades in the coming months as those bonds will remain with the old district when the school system splits into two entities. Standard & Poor’s lowered the district’s bond ratings because of the risk for bondholders and uncertainty about the restructuring plan that places their debt into a non-operating district.

DPS is being split into two districts as part of a massive restructuring brought on by a recently passed $617-million state-aid package. The school district previously known as Detroit Public Schools becomes two entities — one that will provide education to its students and one that will exist solely to collect property taxes to pay down the district’s debt. Standard & Poor’s is concerned that bondholders face much higher risk of repayment for bonds that will stay with a district whose debt is no longer secured by the state.

S&P downgraded one set of the district’s bonds from A to BBB and another set of bonds from A- to BBB- and kept the bonds under “Creditwatch with negative implications”. Despite the state’s promises to meet its financial obligations, Standard & Poor’s said the complicated nature of the restructuring results “in a more than 50% chance we will lower the rating over the next three months, and could take more than one rating action during that time if warranted.” S&P even said the rating could sink to a ‘D’ rating, which is far below investment grade, or could be completely withdrawn.

Steven Rhoades, the former bankruptcy judge now leading the District, has sought board approval for a bond refinancing for $235million of debt but was turned down. This despite district officials saying in an e-mail to the Detroit Free Press that the bonds must be refinanced because they are no longer tied to a traditional school district. “The original bonds are secured by state aid,” the district said. “Since (the old district) will not have state aid funding … the bonds have to be refinanced to reflect that they will be secured by property tax.”

ILLINOIS

Illinois lawmakers overwhelmingly approved a spending plan that will allow K-12 schools to operate for another year and keep other essential state services operating for the next six months. But before one gets too excited heed the words of Gov. Rauner who said “It is not a budget. It is not a balanced budget.”

The budget compromise voted on boosts general state aid to schools by $331 million. It also provides $250 million more for schools that have high concentrations of low-income students. No school district will get less state aid than it did during the just-concluded school year. About $1 billion is going to higher education, including money for grants made under the Monetary Award Program.

The bill also provides $720 million for state operations, such as food for prisons and other state facilities, gasoline for state cars and medical care for prisoners or residents of state facilities. About $670 million will go toward human services, including autism programs, breast and cervical cancer screenings, funeral and burial services for the indigent and additional services for seniors and the homeless. Road construction projects will be able to continue, and the state will be allowed to spend federal money as it comes in.

All in all the deal simply puts off any serious budget reform until after the legislative elections in November and potentially sets up another fiscal cliff for the State and its universities in January. This continues to be a political problem. The danger for investors is that once the November elections come and go that the budget players shift their focus to the next gubernatorial vote in two years. That will merely serve to delay a serious long term fix to the State’s credit problems.