Joseph Krist

Municipal Credit Consultant

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We close the year with updates on the status of major projects and issues which we have covered over the course of 2016. Our next edition will post on January 3, 2017.

STADIUM NEWS

N.F.L. owners have indicated their support for allowing the San Diego Chargers to move to Los Angeles and the Oakland Raiders to leave for Las Vegas, with plans for stadiums in the teams’ current cities having all but vanished. The potential relocations dominated discussion publicly and behind closed doors at a league meeting as momentum grew for the teams to make the moves. They would represent the most significant reordering of the N.F.L.’s geographic lineup in two decades.

The only thing left is for the Chargers to decide next month whether to exercise their option to leave for Los Angeles and for the Raiders to submit a formal proposal to relocate to Las Vegas. Nevada lawmakers have promised to contribute $750 million toward a stadium. Although the league has said it prefers teams to remain in their home markets, a growing number of owners acknowledged that the Raiders and the Chargers might end up playing in new cities as soon as next season. The Chargers have until Jan. 15 to decide whether they want to join the Rams or stay in San Diego.

The owner of the Indianapolis Colts, Jim Irsay said there was “no reason for optimism” that the Chargers and the Raiders would find a solution allowing them to stay put. In San Diego. Irsay said, “everything has been done that could be done” to get a new stadium. The owners smoothed the road for the Chargers to move when they approved a proposal to let the team raise $325 million to pay for half of the $650 million relocation fee that would be required for it to move to Los Angeles. Teams are ordinarily prohibited from having more than $250 million in debt under league rules.

The owners also approved a lease between the Chargers and the Rams — who are now building a stadium in Inglewood, Calif. — in the event the Chargers elect to move. The owner Dean Spanos of the Chargers said that he would announce whether he was moving the team after the regular season ended on New Year’s Day. Spanos has been unhappy with Qualcomm Stadium, one of the oldest stadiums in the league. A ballot measure that would have let the Chargers build a stadium in downtown San Diego with hundreds of millions of dollars in taxpayer money was soundly defeated in November.

The executive who oversees relocation efforts for the N.F.L., said the owners could give the Chargers an extra year to decide whether they wanted to move to Los Angeles, to give them more time to negotiate a stadium deal in San Diego.

The Raiders appear committed to moving to Nevada, where state lawmakers approved a new hotel bed tax that would contribute $750 million toward construction of a domed stadium in Las Vegas. The Raiders have not applied to relocate, however, and the owners were told that an application would not be filed until the Raiders’ season ended. With their best record in years, the Raiders are likely to play in the postseason. If they make it to the Super Bowl, their season will extend into February.

In an effort to keep the team from moving, the Oakland City Council on Tuesday gave the Fortress Group exclusive rights to negotiate a stadium deal on behalf of the city and Alameda County. The investment group has yet to produce a stadium proposal for the Raiders to consider.

BULLET TRAIN

California’s bullet train plan is the state’s biggest public works project. If all goes to plan, the $64 billion rail line would carry passengers between San Francisco and Los Angeles in 2 hours 40 minutes. Other rides would make stops in the Silicon and Central Valleys. Currently, construction is happening in the Central Valley with three construction contracts awarded and executed to build the first 119 miles of the system. Completion however, will not occur in the near future. A segment between San Jose and a station near Bakersfield is expected to begin operating in 2025. The target date for the San Francisco-Los Angeles line isn’t until 2029.

The funding is coming from a mix of federal grants through the American Recovery and Reinvestment Act, California Proposition 1A funds (which are bonds that were voter approved), and cap-and-trade proceeds. Unexpectedly, there has been a reduction in overall capital costs from $67.6 billion to $64.2 billion and this trend may continue.

TAPPAN ZEE BRIDGE

The New NY Bridge, as the Tappan Zee replacement is known, has reached a major milestone with the topping off of the eight main span towers, and with the final concrete pour completed this week. The New NY Bridge is on track to meet its scheduled opening in 2018 and is on budget at $3.98 billion. Additionally, 90 percent of support structures on the project are installed, including the fabrication and placement of 126 steel girders sections. To date, 3,000 roadway panels have been installed to connect the Rockland and Westchester shorelines up to the main span, taking one of the largest active bridge projects in the nation one step closer to completion.

STATE PRISON TRENDS

The Sentencing Project recently observed that since 2011, at least 22 states have closed or announced closures for 92 state prisons and juvenile facilities, resulting in the elimination of over 48,000 state prison beds and an estimated cost savings of over $333 million. The opportunity to downsize prison bed space has been brought about by declines in state prison pop­ulations as well as increasing challenges of managing older facilities. Reduced capacity has created the opportunity to repurpose closed prisons for a range of uses outside of the correctional system, including a movie studio, a distillery, and urban redevelopment.

In Manhattan, the Osborne Association, a non­profit organization, is working to convert a closed women’s prison into a space that provides services to women leaving incarceration. An entrepreneur in California purchased a closed correctional facility and plans to repurpose it as a medical marijuana cultivation center. At least four states – Missouri, Ohio, Pennsylvania, and West Virginia – have con­verted closed prisons into tourist destinations which are open to visitors and even host Halloween events.  Some prisons have closed following the termination of a contract due to prison population declines or other factors. In recent years states like Colorado, Mississippi, Kentucky, and Texas have closed pri­vately owned or managed prisons.

During 2016, our readers will recall that the Department of Justice announced plans to phase out the use of private for-profit prisons to house persons convicted of federal offenses. The Obama administration cited declines in the federal prison population as one reason for-profit contracts could be phased out. As of 2016, BOP maintained con­tracts with 13 private prisons. Illinois officials sold the closed Thomson Correctional Cen­ter to the overcrowded federal Bureau of Prisons for $165 million to house persons convicted of federal offenses. States like Michigan have continued to manage previously closed prisons. In 2012, Michi­gan officials reopened the Muskegon Correctional Facility which had closed in 2010; Pennsylvania prisoners were incarcerated there during 2011.

AMERICAN DREAM MALL

On its third developer since 2003, the mall, which started out as Xanadu and along the way became American Dream, is now slated to open in fall 2018, the developer, Triple Five Group, says. After an eight-month hiatus, hundreds of construction workers are back at work on the site. The developers had planned to sell more than $1 billion worth of tax-free bonds in September to help pay for the project, but the offering was delayed by a lawsuit. By the time a judge had decided in Triple Five’s favor, interest rates had started climbing after Mr. Trump’s victory, and investor appetite for bonds cooled as rates rose.

The developer says that the company had leased 70 percent of the 2.9 million square feet available at American Dream. The company, which has already poured $700 million into the project, is now spending roughly $1 million a day on construction. On top of the $1.9 billion already spent, Triple Five is still planning to sell $1.15 billion in high-yield bonds to finish the project. The company is also seeking $1.5 billion in bank loans. The project’s subsequent delays and setbacks, as well as the likelihood that American Dream now wouldn’t open until after he leaves office in early 2018,  led Governor Christie to say it was no longer a “front-burner” issue for his administration.

TAX EXEMPTION GETS SURPRISING SUPPORT

Leadership from the U.S. Conference of Mayors had a meeting with the president-elect at Trump Tower last Thursday and expressed surprise with his reaction when they pressed Trump to keep the exemptions. “He’s the president-elect, and he said he would keep it,” said Tom Cochran, the CEO and executive director of the U.S. Conference of Mayors. “My lobbyist has been up on the Hill, and they said to us everything is on the table. We didn’t know what would happen. “He definitely said he would keep the exemptions,” said Steve Benjamin, the Democratic mayor of Columbia, S.C.

We’ll see. It would be a welcome development for our market. We have to keep in mind that almost simultaneously his son in law was touting the tax credit based “infrastructure” plan which has been widely discussed. Our attitude is to wait and see until we see what actually “infrastructure” means going forward. Is it what have historically considered as public goods or is it the development of facilities for the commercial benefit and profit of private entities?

PUERTO RICO

We would have to include a final discussion of Puerto Rico in light of recent actions and comments. The Financial Oversight & Management Board told the Gov. Alejandro García Padilla administration to redo its proposed 10-year fiscal plan by removing additional federal funds from the plan that Puerto Rico was hoping to receive, which are deemed uncertain, particularly in a Donald Trump presidential administration.

Business entities on the island expressed their view. “The Puerto Rico Manufacturers Association [PRMA] does not support any policy that establishes debt restructuring as the primary issue. We support all initiatives aimed at government austerity and financial transparency, clarifying that we must defend all private and public jobs and we do not support any efforts to downsize government that may have a negative impact on our weak economy and very fragile labor market. Efforts must be made toward the consolidation of agencies, functions and services through budgetary austerity measures and other efforts toward governmental efficiency. However, retraining government employees should be a priority,” said PRMA President Rodrigo Masses.

David Skeel, is a board member who recently put in writing his views. They include the idea that creditors should recover as much as reasonably possible, while government agencies should get cuts. Skeel, a lawyer, said creditors must be protected from “unfair discrimination” and “best interests” in order to avoid another Detroit scenario. “The rule of law took a beating in the Detroit bankruptcy. Creditors who held that city’s GO [general obligation] bonds, which had the same priority as pensions, received only about 41% of what they were owed, and several classes of creditors that voted against the plan received far less. Pensioners, meanwhile, received 60% [to] 70%.”

He believes that Congress should explicitly require that recovery rates for creditors with the same priority cannot deviate more than a specified amount, such as 15% or 20%, as this would be a way to “discriminate fairly.” Additionally, he said a restructuring plan should guarantee as much recovery for creditors as is reasonably possible, as opposed to the “something’s better than nothing” ruling handed down in Detroit. Skeel also said any restructuring should address the obvious governance dysfunction that is frequently a primary cause of fiscal distress.

“Puerto Rico exemplifies this dysfunction, as about 120 government agencies provide services on the island with insufficient centralization to avoid overlap and to coordinate responsibilities. A plan that fails to eliminate or consolidate government agencies should be rejected as not feasible,” he stated.

The view that debts should be paid and that government be more efficient are ones which we are comfortable supporting.

CHRISTMAS GREETINGS

Although cultural issues are not the regular fare of this newsletter, we do make an occasional musical or movie reference as we express our views over the course of the year. So we note the announcement last week of the passing of Emerson, Lake, and Palmer guitarist and vocalist Greg Lake. Mr. Lake authored an enduring song for this season which gets great play on classic rock radio at this time of year. “I Believe In Father Christmas” contains a verse which richly summarizes our wish for our loyal and growing readership as we publish our last edition of 2016.

I wish you a hopeful Christmas,

I wish you a brave new year,

All anguish, pain, and sadness,

Leave your heart and let your road be clear.

Merry Christmas and Happy New Year from the MuniCreditNews and our partners at Court Street Group Research.

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

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THE HEADLINES…

HOSPITAL CONSOLIDATION CONTINUES

ALL ABOARD FLORIDA LITIGATION TRAIN CHUGS ON

NEW YORK STATE CREDITS GET GOOD RATINGS NEWS

DALLAS FINALLY GETS A DOWNGRADE

COURSE CHANGE COMING FOR MCDC

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HOSPITAL CONSOLIDATION CONTINUES

MultiCare Health System is a low double A rated not-for-profit health system based in Tacoma, Wash. Recently, it announced that it has reached a deal to purchase the for-profit Rockwood Health System. MultiCare Health System plans to purchase the assets of Rockwood Health System in Spokane from subsidiaries of Tennessee-based Community Health Systems, Inc. (CHS). The facilities are currently run on a for profit basis. Rockwood Health System includes Deaconess and Valley Hospitals and Rockwood Clinic, a multispecialty physician practice. When the transaction is complete, the agreement will expand MultiCare’s  network of to the state’s eastern region.

MultiCare may not stop its acquisition plans with this deal. MC said that “it is continuously looking for like-minded organizations dedicated to improving the health of communities that can join it on its journey to strengthen and expand its care network.”  Rockwood has a network of urgent and ambulatory care and surgery centers in and around Spokane which serves as a health care service hub for the 1.5 million people in the region comprising eastern Washington, northern Idaho and western Montana.

MultiCare will become the largest community-based, locally-governed health system in the state when the transaction is complete. The transaction is expected to be completed in the first quarter of 2017. Rockwood Health System will become part of MultiCare’s integrated not-for-profit health care system, which includes four acute-care adult hospitals, one acute-care children’s hospital, and a robust network of community-based primary, specialty and urgent care facilities.

We see this transaction as indicative of a continuation of the trend of consolidation in the healthcare industry. We feel that regardless of what results from a trump administration in terms of insuring Americans, that the pressure on costs and need to drive volume will continue to motivate market concentrating consolidations.

ALL ABOARD FLORIDA LITIGATION TRAIN CHUGS ON

The ongoing All Aboard Florida saga continues. Attorneys for Martin and Indian River counties would like a federal judge to examine the new bond financing strategy employed by the private developer of the passenger train project in order to evaluate the “full extent” of the proposal. Attorneys for the counties contended in court filings last week  that All Aboard Florida has told them and the court “half of the story” about its planned use of federal private activity bonds to fund two separate phases of the project to link Miami and Orlando.

“It is clear from what little information the defendants have provided that AAF has not abandoned its strategy of financing the project in its entirety with private activity bonds,” the attorneys said. “It has merely reshuffled the capital stack to secure that funding in a two-step process in order to circumvent the court’s prior ruling in these actions.”

The counties, in separate lawsuits, filed motions seeking a stay to conduct a “limited” amount of discovery. The motions were opposed by the U.S. Attorney General, on the behalf of the U.S. Department of Transportation.

The counties are looking for material that will support their views of AAF’s real financing intentions.  They are primarily interested in information about the  $1.15 billion PAB application to fund the much-contested second phase of the project between West Palm Beach and Orlando, which would take the train through Martin and Indian River counties without stopping. The counties are seeking documents about the first phase of the project from Miami to West Palm Beach as well, saying they want to ensure that bonds allocated to it would not fund phase two, raising questions about whether phase one debt will be used to finance the trains that would travel the entire 235-mile route.

AAF, a company owned by Fortress Investment Group LLC (FIG), recently developed a new plan to finance its Brightline-branded train service in two phases – a plan that AAF and USDOT have said would “moot” or negate a need for a final ruling in the federal lawsuits. The second phase has not received final federal clearance through the NEPA process.

The counties said in a joint filing that they want to see documents pertaining to the $1.15 billion application “because it goes to the heart” of whether DOT has truly withdrawn the PAB allocation. Project opponents as well as the counties said they also want to determine whether AAF and USDOT are attempting to navigate around U.S. District Judge Christopher R. Cooper’s Aug. 16 ruling to avoid “a looming adverse final decision.” Many observers believe that this is the case.

The case is of interest for projects like this in general as an ultimate ruling in the counties’ favor would be precedent-setting because it would – for the first time – subject USDOT bond allocations to strenuous NEPA reviews. AAF and USDOT have both said that a number of environmental, historical and public safety issues were not considered in the NEPA review that was conducted but to date has not been completed. The

Assistant U.S. Attorney General has said  that USDOT had not received an application for $1.15 billion of PABs from All Aboard Florida and the agency opposed the counties’ motions.

NEW YORK STATE CREDITS GET GOOD RATINGS NEWS

In a region where three of its bordering states face significant ongoing pension and budget issues, New York State has stood out as a positive outlier. That status was recently reinforced when Moody’s Investors Service announced that it has affirmed its Aa1 rating on New York State’s general obligation, personal income tax revenue, sales tax revenue, New York Local Government Assistance Corporation (LGAC), and New York City Sales Tax Asset Receivable Corporation (STARC) bonds. Moody’s also affirmed Aa2 ratings on most other appropriation-backed debt and affirmed Aa2 issuer ratings on state intercept programs and enhanced Aa2 ratings on most intercept financings.

Moody’s affirmed the Aa3 rating on DASNY 4201 School Facilities Program revenue bonds. Moody’s affirmed the enhanced Aa3 rating on certain DASNY OMRDD intercept financings. Moody’s also affirmed the enhanced VMIG 1 on variable rate demand obligations backed by stand by bond purchase agreements associated with the New York Local Government Assistance Corporation.

According to Moody’s the Aa1 rating reflects New York’s fiscal governance that has produced on-time budgets with moderate spending growth to match the state’s economic capacity, manageable projected budget gaps, the size and wealth of the state economy, and healthy liquidity. The rating also recognizes New York’s expensive business environment, reliance on financial services and other NYC-based economic drivers, high state debt burden offset by below-average net pension liabilities, and a history of structural budget gaps requiring reliance on non-recurring resources to achieve budget balance.

In affirming the rating, Moody’s also affirmed its outlook for the ratings. Moody’s stated that the outlook for New York is stable, reflecting its adequate liquidity, growth of formal and informal reserves, and continued control of spending growth. The outlook also reflects its expectation that the state will build on its improvements in fiscal management, close budget gaps largely with recurring solutions and contain its structural fiscal imbalance.

The State has managed to achieve this while operating in a highly dysfunctional political environment. Legislative leadership has been significantly impacted by ongoing federal corruption investigations which resulted in convictions and resignations of multiple senior leadership figures. Despite these changes, the annual budget process has proceeded relatively smoothly for several years. Some of this reflects that State’s status as the 3rd largest US state by population. New York continues to have a large and diverse economy with high per capita income at 121% of the US average and gross state product of $1.422 trillion in spite of some ongoing difficulties in its upstate region.

DALLAS FINALLY GETS A DOWNGRADE

We previously commented on the City of Dallas, Texas and its significant pension issues. These have finally impacted the City’s ratings. Moody’s Investors Service has downgraded to A1 the City of Dallas, TX’s outstanding general obligation limited tax (GOLT) debt. The rating action affects $1.6 billion of debt. At the same time, it put the city’s GOLT, Waterworks and Sewer Enterprise, Downtown Dallas Development Authority, Convention Center Hotel Development Corporation and Civic Center Convention Complex bonds under review for possible downgrade. The review of these ratings will be concluded within 60-90 days. We believe that downgrades are most likely.

Moody’s said that the downgrade to A1 from Aa3 on the GOLT debt is based on the city’s ongoing challenges surrounding its poorly funded public safety pension plan and a sizable potential liability associated with a back-pay referendum lawsuit. These challenges have been exacerbated by considerable draws on the public safety pension fund which have reduced liquid assets. The city’s recently announced reform plan includes actuarial projections that the unfunded liability will be amortized in 30 years.

As we have noted, the plan has significant implementation risk because it relies heavily on actions of the state legislature and includes only modest increases in cash contributions to improve funding levels. Absent enactment at the state level of material reforms, and/or a large cash-infusion to the fund, the public safety pension fund is likely to become insolvent within ten years. Also, senior leaders have repeatedly stated that a failure to achieve relief to its financial challenges, or an adverse court ruling in the pending back-pay case, could lead to consideration of bankruptcy.

We believe that the problems are serious and that there are no easy answers. We believe that the likelihood of an actual bankruptcy is relatively remote. Dallas’ issues are the product of a number of acts of poor judgment and poor management. One key difference between this and other recent distressed city credit is the nature and size of the City’s economic base. There may be a shortage of political will but there is not a shortage of means to address the problem.

COURSE CHANGE COMING FOR MCDC

The Securities and Exchange Commission will not bring any more settlements under its Municipalities Continuing Disclosure Cooperation initiative. The MCDC initiative promised underwriters and issuers would receive lenient settlement terms if they self-reported instances over the last five years where issuers falsely said in offering documents that they were in compliance with their continuing disclosure agreements. In total, the initiative led to settlements with 72 issuers from 45 states. In addition, 72 underwriters representing 96% of the underwriting market by volume paid a total of $18 million in MCDC settlements.

The SEC will instead focus on those underwriters and issuers that did not voluntarily disclose violations under the MCDC. The unit’s enforcement lawyers view the underwriters and issuers who may have committed violations but did not self-report as part of MCDC as a high risk for future violations, according to the head of the SEC enforcement division’s public finance abuse unit. “That is a group of particular interest to us and we intend to devote significant resources to identifying violations by those parties.”

This comes at the same time that a legislative proposal has been announced in the U.S. House of Representatives which would shift the responsibility for proper disclosure from underwriters to issuers. HR 6488 would amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to remove the exemption from registration for certain private activity bonds, to authorize the Securities and Exchange Commission to require the preparation of periodic reports by issuers of municipal securities, to authorize the Securities and Exchange Commission to establish baseline mandatory disclosure in primary offerings of such securities, and for other purposes.

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

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THE HEADLINES…

SAN BERNARDINO BANKRUPTCY NEARS CONCLUSION

SUPREME COURT REVISITS CHAPTER 11

HEALTHCARE UNCERTAINTY DEEPENS

NEW JERSEY PENSION SHENANIGANS

NUCLEAR SUBSIDIES IN ILLINOIS

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SAN BERNARDINO

The end of the four year journey through Chapter 9 for San Bernardino is in sight with the announcement that U.S. Bankruptcy Judge Meredith Jury confirmed the City’s bankruptcy planlast week, clearing the way for the city to exit bankruptcy. City officials don’t expect the plan — the comprehensive blueprint for how much the city will pay creditors and when — to become effective until March, after at least one more court hearing.

Judge Jury cited actions by the city to improve its finances and its governance, pointing to voter approval of a new charter and better working relationships among elected officials. At the same time, San Bernardino will pay many of its creditors far less than they would otherwise be entitled to — for many creditors, just 1 cent for every dollar they’re owed. But the plan also outsources of refuse and fire services.

The city estimates that while direct costs of the bankruptcy — attorneys and consultants — had cost more than $20 million, the city and its taxpayers saved more than $300 million in debts that were being discharged. A major provision was an agreement with the California Public Employees’ Retirement System — in that instance, an agreement to pay CalPERS everything it’s owed to the detriment of many creditors including debt holders.

SUPREME COURT HEARS ARGUMENTS ON CHAPTER 11

The Supreme Court heard arguments last week in a case that could upend the common practice that ranks lenders, employees and other creditors in order of priority as they try to recover their money when a company files for bankruptcy. The case has attracted wide attention from academics, workers’ groups and state tax authorities. A decision could affect how much power bankruptcy courts have to approve settlements that do not follow the conventional order of creditor priority and potentially block some parties, in this case the company’s former employees, from any financial recovery. The issue should be of concern to holders of municipal bonds, especially in the high yield space as many of the healthcare, project finance, and corporate backed credits populating that space are governed  by these procedures.

Jevic Transportation Company, a New Jersey trucking company, filed for bankruptcy in 2008, two years after a $77.4 million leveraged buyout financed by private equity which former employees say heaped too much debt on its books. The bankruptcy put 1,785 drivers and staff members out of work, but they sued for wages under a federal law and state law that requires employers to give 60 days’ notice before mass layoffs. The drivers assumed that the company owed them approximately $8 million in pay because they were not warned that their jobs were ending. At the same time, the drivers and other creditors filed suit against Sun Capital and Jevic’s main lender, the CIT Group, saying their buyout had fraudulently pushed Jevic into bankruptcy.

By historic precedents, employees who lose their jobs are supposed to rank higher in the line of those owed money than some others, so the drivers anticipated recouping their lost wages. But they got a surprise. Sun and CIT settled with the other unsecured creditors in their fraud case. In exchange for a $3.7 million payment to them, including the lawyers on the case, the creditors agreed to abandon their claim. The drivers were not part of that settlement and were left with nothing.

There are a few cardinal rules about bankruptcy that have been followed for decades. Lenders whose debts are secured by the company’s assets are paid first, for example. Next are the lawyers and professionals who work on the bankruptcy, followed by the so-called junior creditors, starting with employees who worked for the company who are owed wages, followed by employee benefits and unpaid taxes, among other groups. And those who hold the company’s shares, or equity, are generally last. Congress created this pecking order. Senior creditors must be paid in full before any junior creditors — unless all the parties agree otherwise.

The case which was the subject of oral argument is Czyzewski v. Jevic Holding Corporation. Should the Supreme Court side with Jevic and its owner and chief lender, the decision could upend bankruptcy law by altering the rights and expectations of these various groups. A friend-of-the-court brief signed by 19 law professors in support of the drivers says such a decision could lead to cases where the stronger parties in a bankruptcy gang up to squeeze out whichever creditors they decide to target: workers, say, or the Internal Revenue Service.

Alternatively, were the court to ban all bankruptcy settlements that do not strictly follow the order of priority, supporters on Jevic’s side say it could create chaos with a number of established practices involving payments to creditors, especially in the early part of a bankruptcy. And they say it could handicap the efforts of judges in finding the right resolution in an individual case. Some hold the view that if the court rejects priority in settlements, there is a danger that the position of secured creditors who now stand at the front of the line of repayment also could be in jeopardy.

The solicitor general took a position in a brief on behalf of the drivers that the absolute priority rule “is designed to protect intermediate creditors from being squeezed out by a deal between senior and junior creditors.” The law itself does not detail this priority rule, but it has been followed since the 1930s.

The company and its private equity owner contend that the settlement was the fairest result because if the company were liquidated, all of the small creditors would have been left empty-handed because of secured creditor liens on the company’s assets. By paying some of the small creditors a fraction of their claims, rather than zero, they argued, the settlement was in the best interest of most of the creditors. Their argument persuaded not only the bankruptcy judge, but also a divided panel of the United States Court of Appeals for the Third Circuit.

HEALTH INSURERS AND INVESTORS SHARE UNCERTAINTIES

The chief executive of America’s Health Insurance Plans, a leading industry trade group, spoke out last week and publicly outlined for the first time what the industry wants to stay in the state marketplaces, which have provided millions of Americans with insurance under the law. The insurers, some which have already started leaving the marketplaces because they are losing money, say they need a clear commitment from the Trump administration and congressional leaders that the government will continue offsetting some costs for low-income people. They also want to keep in place rules that encourage young and healthy people to sign up, which the insurers say are crucial to a stable market for individual buyers. Insurers could decide within a few months whether to pull out of the state marketplaces for 2018, a deadline they are pushing to have delayed.

Hospital groups also held a news conference to warn of what they said would be the dire financial consequences of a repeal if the cuts to hospital funding that were part of the Affordable Care Act were not also restored. While insurers say they do not plan to fight the Republicans’ efforts to repeal the law, they are in no hurry to see it unwound. And the industry said the industry would support a delay so it could prepare for the changes. “We would love to see a three-year time frame, as long as possible,” she said.

AHI acknowledged that the current law “needed to be improved.” But cited widespread agreement among Republicans about the need for some the law’s provisions, including covering people with expensive medical conditions. President-elect Donald J. Trump has also signaled his support of this popular provision. “There are common starting platforms,”  said the industry spokesperson without revealing details about her group’s positions, She said its top priority was to stop the immediate threat of eliminating the subsidies for plans sold to low-income people. House Republicans have already sued to block these payments, and the lawsuit is now delayed. If the new administration chose not to defend the lawsuit, the money would disappear, and insurers would probably rush to the exits because fewer potential customers would be available.

Other concerns include ensuring that enough young and healthy people sign up to stabilize the market. Republicans have discussed eliminating one of the law’s main tools, the so-called individual mandate, a tax levied on those who do not enroll. Insurers are emphasizing the need for some alternative, especially after criticism by insurers that the penalty is not large enough to persuade enough people to enroll. “There’s not one magic solution,” she said. She pointed to some of the provisions in Medicare that encourage people to sign up before they become sick. The insurers say they had no desire to return to the time before the law was passed, when people with pre-existing conditions were routinely denied coverage in the individual market.

As for alternatives, one is the creation of high-risk pools, where people with expensive medical conditions might be covered, bringing down the coverage costs for everyone else. “We would hesitate to rush back to that,” said the AHI. In the past, those programs, typically run by the states, have not been adequately funded. AHI  expressed concern over a potential overhaul of Medicare, pushed by the House speaker, Paul D. Ryan, who favors so-called premium support, or vouchers, as a way for people to find coverage. “We’re not big fans of that approach.”

So the focus of the debate remains centered on unsurprising issues – Medicare and Medicaid; low income patients; pre-existing conditions. These are the same issues which were the foundation of the healthcare funding debate as long as one can remember.

NEW JERSEY CONTINUES ITS HABIT OF PENSION REALITY DENIAL

A bill introduced earlier last week would allow the State of New Jersey’s $73 billion pension system to invest heavily in Transportation Trust Fund (TTF) bonds just as the state is planning to ramp up transportation spending over the next eight years. Currently, the state Division of Investment, which manages the pension system’s assets on a day-to-day basis, is only allowed to purchase up to 10 percent of an individual bond issue. The proposed legislation would remove that limit, but only for TTF bonds.

The sponsors of the legislation said it makes sense to give the pension system  the option to invest heavily in transportation fund bonds because that way all of the interest on the bonds would go into the pension system instead of to outside investors. They also said the state could save money on underwriting fees, which are levied as a percentage of the bond issues, to further stretch the TTF’s resources.

The bill’s introduction comes as lawmakers have been trying to find new ways to help address the pension-funding issue after the state’s credit-rating was downgraded again, largely due to the pension system’s ongoing problems. And that followed a new analysis by Bloomberg that determined New Jersey’s pension deficit has become the largest among U.S. states.

The legislation also comes in the face of a plan by a leading Democratic gubernatorial hopeful Phil Murphy to establish a public bank in New Jersey that would utilize taxpayer resources to circumvent big commercial banks by directly funding government priorities like long-term infrastructure improvements.

Under the TTF legislation enacted in October, the state would to issue $12 billion in bonds over the next eight years to help pay for road, bridge and rail improvements. Those funds will be combined with new revenue raised by a 23-cent gas-increase that went into effect at the beginning of November to support a total of $16 billion in planned transportation spending.

The proposal to allow the pension system to invest in the TTF bonds would enable the Division of Investment to exceed the 10 percent ceiling, but it would not require the agency to do so. The measure would also limit the funds that could be used by the pension system to invest in transportation fund bonds to those that have already been set aside for investment in fixed-income securities. The plan does raise concerns about whether there would be mechanisms in place to objectively determine a borrowing rate for the TTF. Otherwise, directly placed TTF debt could be a backdoor subsidy for the pension system. which have not been producing great returns in recent years.

“Allowing the TTF to borrow directly from the pension fund is a smart move that guarantees a rate of return while helping to support the infrastructure work that is so important to our economy,” said Sen. Dawn Marie Addiego, another sponsor. Hence, the concern. Smart is the word used for the variety of failed policies adopted on a bipartisan basis over the last 20 years to support the legislature’s unwillingness to honestly address the state’s pension needs. The sale of pension bonds, the under appropriation of general revenues, and unwillingness to find revenues to address the state’s pension needs have left the State in the unenviable fiscal position in which it finds itself today. This would be just another link in the long chain of irresponsible actions taken over those two decades.

Last month, lawmakers passed with wide bipartisan support a bill that attempts to help address the pension system’s funding gap by changing the way the state makes its pension contributions each year. Instead of making the payment in one lump sum at the end the fiscal year, which is the current practice, the bill calls for a quarterly payment schedule. That change is designed to better protect the pension contributions from falling victim to midyear budget cuts, but also to help the pension system generate bigger returns by getting more money into its investments as soon as possible. We’re not sure that we agree with that view. It could just be three more chances to underfund.

ILLINOIS FOLLOWS NY DOWN NUCLEAR SUBSIDY TRAIL

Exelon announced in June that, absent a rescue bill, it would close the Quad Cities station by June 2018 and the Clinton station by June 2017. Both are aging nuclear plants. In response, a bill that would subsidize Exelon Corp. to keep the two financially struggling nuclear plants in operation—and save as many as 4,200 jobs—was passed by Illinois legislators and now is on Gov. Bruce Rauner’s desk for final approval.

Supporters had dubbed the legislation as The Future Energy Jobs Bill. It would provide Exelon and Commonwealth Edison with a $235 million annual credit for the carbon-free energy produced by the otherwise unprofitable Clinton and Quad Cities nuclear plants. Critics contested the subsidy plan and called it a corporate bailout. Exelon and Com Ed officials said it preserved jobs and clean energy technology at the cost of no more than 25 cents per month on the average Com Ed residential customer’s bill.

Critics had cited a study using the IMPLAN economic modeling tool alleging that the Exelon-backed plan would cost about 43,000 jobs lost through 2030. A product of the Rural Development Act of 1972, IMPLAN is a system of county-level secondary data input-output models designed to meet the mandated need for accurate, timely economic impact projections of alternative uses of various resources. In this case, it predicted that Illinois government tax revenue would fall by $419.6 million and result in the large rate hike in U.S. history at $16.4 billion.

The legislation established a Zero Emission Standard (ZES) to reward the state’s at-risk nuclear plants. Proponents say the ZES would position Illinois as one of the first states to fully recognize the environment benefit of nuclear power, which does not produce carbon pollution. Nuclear power provides more than 90 percent of Illinois’ zero-carbon energy, supporters said.

There are more states in line to be targeted for these subsidies. Exelon has already made it clear that it will seek such help in Pennsylvania and as they have more success, we would anticipate that others would make such efforts. It is difficult to support market intervention moves like this but they are to be expected in light of the type of tax related transactions advocated by the President-elect.

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

MICHIGAN ATTEMPTS OPEB REFORM

An effort is underway in the lame duck session of the Michigan legislature by Republicans who last week introduced legislation to address rising costs for municipal retirees’ health care, including restricting public employees from counting banked overtime, sick leave or vacation days toward their salary before retiring. The 13-bill package is intended to help local governments that are struggling with unfunded obligations related to retiree benefits, including health care.

The legislation was not unexpected. Lawmakers have hinted in recent days that legislation to reform retiree benefits could be coming in the current lame-duck session, which ends in mid-December. Any legislation not adopted by the end of the year has to be reintroduced in the new legislative term that starts in January.

The bills would exclude overtime pay, sick or vacation leave, bonuses or other compensation “paid for the sole purpose of increasing final average compensation” in an employee’s base pay, according to bill language. They also would require increased financial disclosures to the state.

Cities, villages, townships and counties would be limited to paying 80 percent of annual retiree health care costs starting May 1, 2017, if the municipality offers such a benefit. The local unit also wouldn’t be allowed to offer health care coverage to a municipal retiree who is eligible for health care coverage from another employer.

For new employees hired after April 30, 2017, a local government could contribute only 2 percent of the employee’s base pay into a tax-deferred retirement health account, according to bill language. The bills wouldn’t affect existing labor contracts for their duration, though any contract that conflicts with the law after it’s enacted would be nullified. In addition, municipalities and labor unions would be barred from negotiating employee retirement health care plans or tax-deferred health savings accounts for contracts signed, renewed or changed after Jan. 1, 2017, according to the bills.

Legislators said the bills would only apply to municipalities whose retiree health care costs are less than 80 percent funded, or municipalities who fall below the 80 percent threshold for two straight years.

CHICAGO PUBLIC SCHOOL PENSION LAW CAUGHT IN POLITICS

In our last issue we referenced Illinois’  poisoned politics and their potential impact on efforts to shore up pension funding in Chicago. We did not have to wait long for Gov. Bruce Rauner’s veto of a bill that would have eased Chicago Public Schools’ massive pension burden which threatens to blow a $215 million hole into a budget that has been criticized by bankers and civic groups for its reliance on uncertain state assistance. Rauner said he vetoed the bill because it was not tied to broader pension reforms that he has demanded while Democratic Senate President John Cullerton denied assurances on pension reform were part of the CPS deal.

CPS has assumed in this year’s budget it would get the money and offered no immediate plan to cover the gap left by the governor’s veto. The district’s top education official said the action could put the city’s schools in a “horrible position.” Cullerton warned the move could lead to layoffs for thousands of teachers and employees, while Mayor Rahm Emanuel called the veto “reckless and irresponsible.”  The Senate voted to override Rauner’s veto but the override’s prospects in the House, which adjourned for the holidays without taking up the issue, were far from certain.

House lawmakers have 15 days to take up the override, but the body is not scheduled to return to Springfield until Jan. 9 — two days before new lawmakers are sworn into office. It likely would take all 71 House Democrats to overturn Rauner unless a few Republicans buck the governor. Lawmakers approved the CPS bill at the end of June, but Cullerton did not send the measure to Rauner until last month. The delay was intended to provide time to reach a deal on a larger pension measure, but that was never achieved.

“If he wants to tie it to something else like pension reform, that’s something I am supportive of. We haven’t talked about putting the two things together at this point in time,” Cullerton said. Rauner said Democrats went back on a deal that tied the measure to broader changes to the state’s highly indebted employee retirement system. In his veto message, Rauner said the agreement reached last summer was clear and Republicans supported the bailout for CPS only “on condition that Democrats re-engage in serious, good-faith negotiations.” Rauner also made reference to the Senate president’s remarks.

CPS has not said how Chicago’s schools might fill a $215 million hole in its budget. Last year, CPS banked on $480 million in state assistance that never arrived and resorted to cutting millions from school budgets in the midst of the school year to help close the gap.

Rauner’s veto occurred in the midst of the process by CPS  to reconsider an annual budget that now exceeds $5.5 billion. The district had to redraw its budget to make room for tens of millions of dollars in new expenses linked to the contract deal reached in October with the CTU. That budget already relies on property tax increases that include a measure to raise $250 million for teacher pensions. That measure was approved by the General Assembly in June as part of the package that also held the promise of $215 million more for pensions.

The Civic Federation earlier this year said it could not support the CPS budget because of its reliance on state money that might not arrive and a large amount of borrowing. “Because the district provides no plan of recourse should the funding fail to materialize other than noting that there would need to be midyear cuts, the (fiscal year) 2017 budget is in effect unbalanced,” the group said in August. This view balances our belief that any real improvement in the CPS fiscal position is not a reality in the near-term. With the governor about to enter the back half of his term, we see little likelihood that the politics of the situation will abate.

The politics date back to the Daley administration. According to the Chicago Teachers’ Pension Fund, CPS must pay a remaining balance of $730 million by June 30. The sheer size of that debt is partly the result of a long-term practice of not putting in enough money or skipping payments, including an entire decade when CPS made no pension contributions under then-Mayor Richard M. Daley.

Because of that underfunding, combined with recessions that battered the pension fund’s investments, the district now must pay hundreds of millions of dollars more each year, as required under a plan to reach a state-mandated funding level of 90 percent by 2059.

PREPA/PRASA

One would hope that in a crisis the common good might outweigh parochial interests in reaching a resolution but such is not the case currently in Puerto Rico. The Puerto Rico Aqueduct and Sewer Authority (PRASA) asked the Energy Commission (PREC) Friday to grant the water utility a “preferential power rate” that is stable and not subject to yearly fluctuations, arguing that Puerto Ricans will benefit more in the long run from cheaper water tariffs than lower power rates.

PRASA’s executive director of infrastructure insisted that PRASA was not asking for a subsidy because PREPA could give the water utility the low preferential rate by giving it a preferential share from the savings the power utility passes on to customers from the conversion of the Costa Sur power plant to a natural gas power plant. Her comments came in testimony at an Energy Commission hearing to evaluate a new power rate for PREPA customers by determining the adequate revenue requirement and other costs.

PRASA’s argument is that PREPA has not been honoring the preferential rate established for the water utility in 2013 of 16 cents per kilowatt-hour (kWh) that was slated to come into effect earlier this year. PRASA is evaluating the possibility of suing PREPA for “breaking the law.”

The law is Act 50 of 2013 which mandated PREPA to establish a preferential rate of 22 cents per kWh hour for all electric power service accounts held by PRASA. This preferential rate was subject to the price of natural gas and is an “all-in rate” covering all charges and fees in connection to the electricity purchased by PRASA. The preferential rate was in effect during fiscal years 2014, 2015 and 2016. From fiscal 2017 onward, the rate was slated to be lowered to 16 cents per kWh. It was also limited to a maximum annual consumption of 750 million kWh by PRASA. Any consumption that exceeds the amount will be annually billed at the average energy cost that PREPA charged its customers during the previous year.

The law states that PRASA had to use the savings from the preferential rate to achieve a reduction in the rates charged to its residential clients. Starting in fiscal 2017, PRASA was required to use the savings to, among other things, develop one or more capital improvement projects targeted to achieve greater operational efficiency, improve its system reliability and provide for future expansions of its system.

PRASA said that in December 2015 PREPA informed PRASA that it was revoking the preferential rate starting in July 2016 so PREPA is not charging PRASA 16 cents per kWh. Instead, PRASA is paying an average of 18 cents per kWh. Because PRASA’s facilities fall within four different tariffs, the utility could pay between 14 cents per kWh for some facilities to 25 cents per kWh in others.  During the first three years the preferential rate was in place, PRASA saved $37 million a year that were passed on to customers. Of PRASA’s operational costs, 25% goes to PREPA for power service. “Without a fixed preferential rate, we are subject to variations and that hurts our ability to have accurate financial projections…. PRASA is the biggest customer PREPA has,” PRASA has said.

When PREPA informed PRASA it was not honoring the 16 cents per kWh rate established by Act 50, Santiago said it was forced to go to the Energy Commission because of Act 57 of 2014, known as the Puerto Rico Energy Transformation and Relief Act, gave the commission regulatory power over PREPA. PRASA said having a cheap water bill is better for the typical consumer than having an economic power rate. By PRASA’s analysis “based on the savings that we have for fiscal year [$37 million a year], if we apply that, these customers receive over $7 a month,”. However, if that ($37 million) in saving is applied to power customers who use up to 800 kWh per month, customers only save $2 a month.

It is not helpful that in making its argument, PRASA was unable during the hearing to identify any projects that were slated to be financed through the savings. In reality, during the first three years of the preferential rate, PRASA used the saving to cover operating costs and avoid water rate hikes. When asked how PRASA would ensure that total savings generated from preferential rates are used for capital expenditures PRASA replied, “Right now, we haven’t been able to do that calculation. It was supposed to start in July. But savings will actually be assigned to capital improvements.” The answer speaks for itself.

VI BONDS TAKE ANOTHER RATINGS HIT

Those looking to other territories to obtain high yield triple tax-exempt returns had bad luck last week. The U.S. Virgin Islands effort to issue $225 million of bonds took a hit as Standard and Poor’s Global Ratings lowered the territory’s matching fund (rum cover-over) and Gross Receipt Tax (GRT) bonds, citing declining coverage and weak fiscal conditions as the reason for downgrading the former, and deteriorating economic and fiscal conditions for the latter. The Virgin Islands Public Finance Authority’s (PFA) senior-lien matching fund notes were lowered to ‘BB’ from ‘BBB’ and subordinate-lien matching fund notes were dropped to ‘BB-‘ from ‘BBB-‘. At the same time, a ‘BB’ long-term rating was assigned to PFA’s series 2016A senior-lien capital projects and working capital notes and its ‘BB-‘ to its series 2016B subordinate-lien working capital notes.

“The downgrade reflects weakened economic conditions, declining coverage and revenue trends, and continued reliance on this revenue source to finance operating deficits,” said S&P. “It also reflects our view of a closer linkage between the territory’s general fiscal condition and the repayment of the bonds, especially during times of significant fiscal distress.”

The matching fund bonds outlook is negative, which reflects its view that the continued significant economic, financial, and budgetary challenges the territory currently faces, absent corrective action, could lead to increased deficit financing and, over time, inadequate capacity or willingness to meet its financial commitment to its obligations, especially if market access becomes constrained.

GRT notes were downgraded seven notches from BBB+ to B. The downgrade reflects weak economic conditions, declining coverage, and the potential for further coverage dilution based on the need to issue additional debt to fund capital and cover operating deficits.

The downgrades comes on the heels of difficulties at the Juan F. Luis Hospital which was warned by CMS that it would face decertification if it did not come into compliance with CMS standards for participation by December 9. CMS further stated that it would end its current agreement with JFL by February 27 if the hospital does not comply.

“The negative outlook reflects our view that although coverage remains adequate, there are significant pressures that could lead to higher leverage, declining revenues, or both. To the extent that the USVI continues to face significant fiscal pressures, we believe significant additional deficit financing is likely,” S&P said. The government’s fiscal distress, as evidenced by its significant structural imbalance and continued reliance on deficit financing to fund operations, weak financial reporting, significantly underfunded pension liabilities, and negative fund balances, which could translate into increased debt issuance and, ultimately, impair the government’s ability or willingness to pay debt service on the bonds, especially in the absence of market access or bonding capacity.

Pledged revenues have exhibited either declining or flat growth absent tax rate increases and are levied on a limited and concentrated base. Flat revenues and rising debt service could continue to decline based on additional issuance, a weaker economy, or tax base erosion due to increased exemptions to promote economic development.

The senior-lien matching fund bonds credit reflects a narrow and concentrated base of tax generators with two companies, Diageo and Cruzan, generating all revenues. There is at least a lockbox flow of funds in which the pledged revenues are deposited directly by the U.S. Treasury into a special escrow account held by the special escrow agent.

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

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THE HEADLINES…

ALL ABORD FLORIDA SWITCHES TRACKS

CHICAGO PENSION ENABLING LEGISLATION IN THE BALANCE

PREPA PLAYS THREE CARD MONTE

TRANSIT FUNDING UNITES CHICAGO CITY COUNCIL

 

_________________________________________________________________________________

ALL ABOARD FLORIDA SWITCHES TRACKS

As we approach the dawn of a Trump administration, the ongoing saga of high speed rail in Florida merits continuing attention. It is anticipated that public private partnerships would have from increased support from the White House.  The difficulties encountered by many of these projects away from their financial aspects have been a source of  bewilderment to participants and observers across the spectrum of viewpoints. Our particular ongoing interest in this project reflects its role as a poster child for those difficulties.

The latest turn in this saga comes from Washington. The U.S. Department of Transportation, at the request of All Aboard Florida’s sponsors has rescinded its approval for $1.75 billion of tax-exempt bonds for the passenger railroad and instead approved $600 million for the Miami-to-West Palm Beach segment, the first phase of the project. The action is seen as an attempt to frustrate Martin and Indian River counties’ fight in their ongoing legal actions in federal court against development of the railroad.

The  counties have argued that All Aboard Florida cannot complete its project without the tax-exempt financing, and they contend that the proposed bond issue  is unlawful because the Department of Transportation approved the financing before a final environmental review was completed.

This week, All Aboard Florida asked the court to throw out the case. It contends that the issues raised by the counties cases are moot,” in documents filed in U.S. District Court in Washington, D.C. “The United States Department of Transportation has withdrawn the 2014 decision that (the counties) challenged. … Because there is therefore no longer a live case or controversy, DOT moves to dismiss.”

All Aboard Florida had previously signaled intent to use this tactic to the Department of Transportation in late October. The company has consistently maintained that in addition to the $600 million, it likely would request approval to sell $1.15 billion of bonds for phase two, from West Palm Beach to Orlando International Airport. The railroad needs the Florida Development Finance Corp., or a similar state board, to issue the bonds, and in court documents, All Aboard Florida has hinted  that the Finance Corp.’s 2015 decision to issue the bonds would carry over to the new financing.

Opponents, however, have challenged that assertion and asked the state board for more details. It is this sort of legal ‘jujitsu ” that raises concerns about the underlying fundamental economics of any financing that employs such tactics. In many ways it insults the intelligence of our market. By virtue of the fact that the deal faces a year-end deadline governing the issuance of private activity bonds, the effort to market such a deal between the holidays renders serious analysis of the financing virtually unachievable. So if caveat emptor ever applied to a deal in our market, this is it.

CHICAGO PENSION LEGISLATION STILL UNCERTAIN

As we went to press, the City of Chicago is trying to put together the finishing pieces of a plan to increase contributions to two city worker pension systems in the hopes a bill could start to move this week in Springfield. The effort has met resistance even before arriving in Springfield. The municipal employees pension fund board resisted provisions that would have given Mayor Emanuel the power to appoint an additional trustee and put the retirement fund in line behind city bond holders for city payments. The Emanuel administration gave on both points, winning support from the municipal pension fund board. Clearly this is an issue of concern to bondholders.

Unions were also resistant to the specifics of a provision that would increase the amount newly hired government workers would have to pay toward their pensions from 8.5 percent to 11.5 percent. The concerns centered around possible changes that would allow employees to pay less than 11.5 percent if outside analysts decided less money was needed to ensure the solvency of the retirement plans. Emanuel’s office says that duty should fall to the administration, while unions, including the American Federation of State, County and Municipal Employees, say the pension funds should set that figure.

Aldermen would have to work just as long as all other city workers before getting full pension benefits. Current aldermen are able to reach full benefits in just 20 years, instead of the 30 required of city workers. Under Emanuel’s plan, city taxpayers will be contributing hundreds of millions of dollars more a year to the municipal workers’ and laborers’ pension funds. That, along with increased employee contributions, is designed to ensure the funds have 90 percent of what is owed to workers in benefits within the next 40 years.

So let’s review what the City has done that ultimately needs this pending legislation to enable.  The City Council this year approved a new tax on city water and sewer service that will top 30 percent when fully phased in over the next four years. That’s expected to raise $239 million a year. The Council also approved a $1.40 increase in the monthly emergency services fee on all cellular and landline telephones billed to city addresses to raise about $40 million a year for contribution increases to the laborers’ fund.

In addition, the Council enacted a record $543 million property tax increase for increased contributions to pension funds for police officers and firefighters, and a $250 million property tax increase at the Chicago Public Schools to increase contributions to the teachers’ pension fund. Even if state enabling legislation is passed and signed (a huge assumption given the State’s poisoned politics), the city by the early to mid-2020s will have to come up with hundreds of millions of additional dollars a year to keep up with its proposed contribution schedules to the city’s four pension funds.

WHAT PLANET IS PUERTO RICO OPERATING ON?

“Several discrepancies have been pointed out in PREPA’s general accounting statements, which are significant numbers. Thirty- and 50-something million dollars that have an impact on the proposed rate. At the moment, PREPA has provided some explanations, but that is a resolution that the PREC will determine at the end of the  hearings, if their answer was appropriate or not and its veracity,” Such is the reaction to a request for a review of proposed increased rates for PREPA. “These are the things that could affect in determining what the final rate will be. If it is determined that PREPA’s request isn’t fair or reasonable and should be lower, then PREPA will be forced to repay its customers that rate hike that began in August this year, and should have then a retroactive reimbursement since August, when it began the temporary raise,” the PREC chief said.

The commission isn’t looking to implement an additional rate, but rather investigate whether the temporary rate increase established in August is justifiable. “I have to explain that this is an adjudicatory process and this is one of the benefits of having a regulating commission, because otherwise, Prepay would impose an increase and it couldn’t be questioned. We have to make sure the necessary revenue and the expenses Prepay will undertake the following months are just and reasonable and that is what will define a just and reasonable rate in Puerto Rico, whose base hasn’t been revised in 27 years,”.

Unfortunately, the time for adult supervision for PREPA since the law establishes a time limit for the body to issue its final determination. “Act 57 gives the PREC 180 days once a formal rate revision request is filed to evaluate it during this process, where there are interveners who represent different sectors according to their particular interests, and there is the Commission with its technical group. There were hearings some months ago of a public nature, and now what we will do is a technical and financial test of all the questions the PREC has regarding the petition. This is a very lengthy process, we have [been conducting it] for weeks and we are about to finish because the law gives us 180 days, which end in Jan. 11, 2017, so if the PREC exceeds that time it loses jurisdiction and Prepay could indiscriminately make that temporary rate permanent, which is what we must ensure, that we have all the necessary elements and criteria to make a fair determination,” said the PREC chairman.

He said the PREC will validate if the 1.299 cent hike established by Prepay is valid and reasonable in light of the evidence and testimony by interveners during the hearings. “We are in day one of 16 public hearings and there is a lot of evidence that will be presented under oath that will give more veracity to the information, and I repeat and insist, if we didn’t have it, the raise would be automatic and I think the people will notice that in the end elements that will help citizens will be revealed,” he said.

 

So if anyone wonders why it has been so hard for PREPA to work out a restructuring with creditors and position itself for its future capital needs, we offer this in a long line of exhibits.

 

CHANGE IN DC SPURS UNANIMITY IN CHICAGO
The Chicago City Council this week unanimously authorized a transit tax-increment financing district in hopes of securing $1.1 billion in federal grants to modernize the CTA’s Red Line before President Barrack Obama leaves office. November 30 was literally the deadline for the city to demonstrate its commitment to providing local matching funds $622 million in local matching funds needed to access “core capacity grant.” The remaining $428 million in matching funds will come from the CTA.

The agreements and the ordinances had to be fully in effect, then has to go to Congress for 30 days before it can be approved and closed under that grant agreement. City Council approval of the transit TIF legislation took on urgency after Donald Trump defeated Democrat Hillary Clinton, the mayor’s candidate for president.

Under a normal TIF, property taxes are frozen at existing levels for 23 years. During that time, the “increment” or growth in property taxes are held in a special fund and used for specific purposes that include infrastructure, public improvements and developer subsidies. This transit TIF would remain in place for 35 years. The Chicago Public Schools would get its 50 percent share of the growth off the top. The transit TIF would get 80 percent of the rest. The remaining 20 percent would be shared by the city and other taxing bodies.

The debt service table released by the city  shows the transit TIF generating $803,251 next year, $8.4 million in 2018 and $26.9 million in 2021. The revenue would rise to $46.3 million in 2024, $67.1 million by 2027 and $113.5 million by 2033. By 2033, the total take would be $851 million.

“But over the next 35 years, all of the TIFs the city currently has in place are going to begin to roll off. All of that’s going to return increment and value to the base. So the end result of this — even with this TIF in place — is that we have a tax rate that’s lower than the tax rate we have today.”

These are grand assumptions are assumptions about ongoing reassessments over the life of the TIF which support the projections. But flawed as the plan may be, it reflects both the support for transit financing at the local level we have recently documented as well as the level of uncertainty about the commitment of the incoming regime in Washington.

 

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.