Monthly Archives: February 2017

Muni Credit News February 28, 2017

Joseph Krist

joseph.krist@municreditnews.com

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THE HEADLINES…

KANSAS BUDGET VETO

MICHIGAN HOLDS THE LINE ON TAXES

INFRASTRUCTURE FOCUS – DAMS

PHILADELPHIA SODA TAX

SCRANTON KEEPS LOCAL SERVICE TAX

MORE PA. DISTRESSED CITY NEWS

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KANSAS BUDGET VETO

After years of declining revenues and lowered credit ratings, it appeared that the Kansas legislature might enact a package of tax increases to address a $364 million budget gap for the current fiscal year. Since 2010, the state has faced a stagnant economy which has not responded to the tax cut stimulus. Most recently, S&P Global Ratings issued a “negative” outlook for its credit rating for Kansas. Last summer, S&P downgraded Kansas’ credit rating, to AA-.

The hope that the state might rely on more than spending cuts was not realized as eighty-five of the 125 representatives — one more than was necessary to override a veto — voted to enact the plan over Mr. Brownback’s objections. But, the Senate voted 24 to 16 and sustained Mr. Brownback’s veto, falling three votes short of the minimum for an override. The proposal called for increased income tax rates, as well as the elimination of a controversial tax exemption that benefited business owners. It would have raised more than $1 billion over two years

The tax exemption has been the cornerstone of Governor Sam Brownback’s plan to create jobs. Mr. Brownback said that the proposal before the Legislature would hurt job creators. So now the legislature is expected to embark on a course of continuing to try to raise revenues as reliance on cuts would likely require additional cuts to local school aid which have proved highly unpopular. It is thought that an extended period of resubmitted legislation and vetoes will go on until a final resolution.

In light of recent ratings actions in places like West Virginia, we wonder how long the rating agencies will take to recognize the dysfunctionality of Kansas’ budget process and to downgrade the state’s credit. As long as the Governor clings to his ideologically based approach to the state’s finances, we see the state’s credit as a declining situation.

MICHIGAN HOLDS THE LINE ON TAXES

The Michigan House of Representatives voted down legislation to roll back the state’s income tax with 52 votes for and 55 against. House Bill 4001 would continue to cut the tax rate to 4.15 percent in 2018 and 4.05 percent in 2019. If the state’s Budget Stabilization Fund — more commonly known as the “rainy day fund” — was over $1 billion by 2020, the rate would drop to 3.95 percent. If that were still true in 2021, it would drop to 3.9 percent. There is currently $734 million in that fund.

The House Fiscal Agency estimated the rollback to 3.9 percent would result in incremental revenue loss to the state, reaching a $1.1 billion budget hole by Fiscal Year 2022, when fully phased in. The Michigan individual income tax is now the largest source of State tax revenue, with net revenue of approximately $8.0 billion in fiscal year (FY) 2013-14, representing 39% of combined State General Fund and School Aid Fund revenue. In FY 2013-14, the individual income tax provided 62.7% of General Fund/General Purpose revenue and 20.5% of School Aid Fund revenue.

According to the Senate Fiscal Agency, (Public Act 94 of 2007) which increased the individual income tax rate from 3.9% to 4.35% as of October 1, 2007. (An expansion of the use tax to certain services also was approved; however, the use tax expansion was repealed two months later, on the day that it was to take effect, and replaced with a Michigan Business Tax surcharge.)

The income tax rate was to remain at 4.35% for four years, then decline over six years back to 3.9%. Instead of the reduction from 4.35% to 3.9% over five years, Public Act 38 of 2011 made a single reduction from 4.35% to 4.25% as of January 1, 2013, although Public Act 223 of 2012 subsequently accelerated the rate reduction by three months, to October 1, 2012. the current tax rate of 4.25% is lower than the rate levied during most of the history of the individual income tax, including the 25 years between 1975 and 2000. Over the 48-year life of the individual income tax, the median average tax rate levied was 4.4%.

INFRASTRUCTURE FOCUS – DAMS

Infrastructure issues will be addressed in President Trump’s joint speech to Congress this week as well as in the budget. That will help to bring focus to an issue crying out for it. In 2016, the Association of State Dam Safety Officials estimated that it would cost $60 billion to rehabilitate all the dams that needed to be brought up to safe condition, with nearly $20 billion of that sum going toward repair of dams with a high potential for hazard. By 2020, 70 percent of the dams in the United States will be more than 50 years old, according to the American Society of Civil Engineers. In 2015, Representative Sean Patrick Maloney, Democrat of New York, introduced the Dam Rehabilitation and Repair Act, an amendment to the National Dam Safety Program Act, minimum safety standards. The bill is still pending, but it would not apply to a majority of the dams in the United States because more than half of them (69%) are privately owned.

There are 90,000 dams across the country, and more than 8,000 are classified as major dams by height or storage capacity, according to guidelines established by the United States Geological Survey. The average age of the dams in the U.S. is 52 years old. Other than 2,600 dams regulated by the Federal Energy Regulatory Commission, the rely on state dam safety programs for inspection.

Budgets for dam safety at the state level however, are not significant. They range from a high of $11.1 million in California to $0 in Alabama. State dam safety programs have primary responsibility and permitting, inspection, and enforcement authority for 80% of the nation’s dams. Therefore, state dam safety programs bear a large responsibility for public safety, but unfortunately, many state programs lack sufficient resources, and in some cases enough regulatory authority, to be effective. In fact, the average number of dams per state safety inspector totals 207. In South Carolina, just one and a half dam safety inspectors are responsible for the 2,380 dams that are spread throughout the state. Alabama remains the only state without a dam safety regulatory program.

So the problem will clearly require investment at both a state and federal level. It highlights the need to focus the discussion of infrastructure on maintenance of the existing infrastructure let alone its expansion. As for how much may be needed, $1 trillion may sound like a huge amount. But in the context of overall infrastructure needs, assuming every pipe would need to be replaced, the cost over the coming decades could reach more than $1 trillion, according to the American Water Works Association (AWWA). That is just for drinking water distribution. No dams, highways, roads, ports, or wastewater upgrades.

PHILADELPHIA SODA TAX

Is it the real thing? So far there is one month available on the tax on sugary drinks implemented as of January 1 in Philadelphia. The city is the first to put such a tax into effect. The tax is levied at a rate of 1.5 cents per ounce raising the wholesale price of the typical 2 liter bottle by about 50 cents. In January, the city collected $5.7 million some $91 million. That would require the city to collect the tax at a monthly rate of some $7.7 million.

The collections exceeded expectations even though the drop in sales by volume was well in excess of estimates. Supermarkets and distributors have claimed declines from 30 to 50%. The tax continues to be challenged in the courts. Three dozen state legislators filed a brief calling for the Commonwealth Court to overturn it. They contend that the tax is not constitutional, violates the law, and will result in lost sales tax revenue collection into the commonwealth’s general fund.

Opponents contend that successful implementation would spawn other efforts in Pennsylvania cities to tax sugar based products. They claim that other cash-strapped cities such as Harrisburg, Chester, and Williamsport will use the appellant’s tax as a way to increase their revenues. “It is not unrealistic to expect that next year there will be a ‘candy tax’ based upon volume in Philadelphia, a sweetened beverage tax based upon volume in Harrisburg, and a ‘snack/cookie tax’ based upon volume in another cash-strapped city.”

A city spokesman said the city’s “economist demonstrated that the PhillyBevTax would have little impact on state sales tax revenue and under certain circumstances could actually increase state sales tax revenue.” Boulder, CO voters approved a 2 cent per ounce tax last fall and voters approved “soda taxes” in the California cities of San Francisco, Oakland, and Albany.

SCRANTON KEEPS LOCAL SERVICE TAX

In the summer of 2016, the MCN discussed the efforts of local libertarian community activist Gary St. Fleur to legally challenge the collection of a local services tax by the City of Scranton, PA. Rejecting residents’ claims that Scranton violates a tax cap, visiting Senior Judge John Braxton of Philadelphia approved Scranton’s petition to levy the higher local services tax of $156 on anyone who works in the city and earns above $15,000.

Braxton approved Scranton’s tripled LST petitions for each of 2015 and 2016, up from the prior typical LST of $52 a year, as planks of the city’s Act 47 recovery plan. Neither of those petitions generated opposition. This time, however, eight residents formally opposed the city’s LST petition for 2017. They and their attorney, John McGovern, contended the city routinely goes way over a total cap on a group of taxes allowed under state Act 511, which includes the local services tax.

In a hearing on Feb. 13, city officials testified that while Act 511 allows the usual $52 levy the $104 LST increase. Braxton agreed with the city and rejected the residents’ claims. This means that eligible workers will continue to pay an LST of $3 week, or $156 this year, instead of $1 a week, or $52. The LST applies to about 32,000 people who work in Scranton.

Special counsel for the city, Kevin Conaboy, argued that the residents’ opposition was misplaced because they should have fought the tax on different grounds, called a mandamus action. Braxton agreed. He dismissed the opposition to the LST “without prejudice,” meaning the residents could pursue another avenue of attack. “Nothing in this order shall prevent respondents from objecting to the imposition of this tax at the appropriate time and through the proper procedural mechanisms,” the judge said in his one-page order.

So the issue may not be dead but for now Scranton can adopt a budget including those revenues as it continues its efforts to restore the city’s finances.

MORE PA. DISTRESSED CITY NEWS

Just to the south of Scranton, the City of Wilkes-Barre struggles with debt, budget, and infrastructure issues. Their project may not be large, bright, and shiny but it is of great importance to the city. The Solomon Creek wall repair would restore a flood control structure dating back to the 1930’s. Absent help from the state or federal governments, the city has pushed for a $5.5 million bond to pay for the repairs. As the transaction has been considered, the issue of whether or not to tie the project financing to a larger debt refinancing has been under consideration.

The restructuring would restructuring reduce upcoming annual long-term debt payments to make them more affordable in order to avoid possible distressed status and strict state oversight of spending under Act 47. The plan before the council was presented by the city’s consultant, PFM Financial Advisors LLC, of Harrisburg, and calls for lower payments this year and next. But the difference in payments is scooped up and tossed further along, leaving the city to pay higher amounts down the road. The city would refinance $3.9 million of its $86.2 million debt and issue $5.5 million in new money through a bond for the repairs. The debt payment would drop to $5.1 million from $5.4 million this year. Next year it would fall to $4.9 million from $7.6 million. But in 2019 and 2020, the payments climb to more than $8 million, decreasing to $1.7 million in 2036.

Final consideration of the plan has been postponed until March. This will provide more time for the city to consider alternatives including asset sales and renewed efforts to negotiate expense reductions associated with the city’s workforce.

P3 FOR PRIVATE COLLEGE DORMITORIES

Howard University is one of the leading historically black colleges and universities (HBCU) in the US. In spite of that status it faces many financial challenges as it attempts to remain competitive in a highly fluid environment. One of the challenges many schools face is in the renovation and expansion of on campus residential facilities. Howard has chosen a different course than the traditional tax exempt bond financed revenue bond model.

Howard Dormitory Holdings 1, LLC, a wholly-owned and title-holding company of Howard University (“Howard SPE”), Howard University (the “University”) and Corvias, a Rhode Island-based company, announced a 40-year partnership that will completely renovate and maintain two of the University’s largest residence halls and manage two additional halls. Corvias will renovate the East and West Towers of Howard’s Plaza Towers residence, located at 2251 Sherman Ave., N.W. and manage the University’s Drew and Cook residence halls, which are located on the north side of the main campus. The Howard Plaza Towers, and Drew and Cook residence halls were transferred by the University to the Howard SPE.

Corvias raised $144 million for the project from institutional investors. Proceeds will fund renovation and modernization, the retirement of some debt, transactions costs and the creation of a sizable reserve fund for future capital expenses. Corvias will manage the renovation and operations of the facilities on a day-to-day basis for a performance-based management fee, but all residual cash flow will flow to the University Parties. A portion of these funds will be dedicated to a reserve fund for reinvestment into the residence halls and a portion will be collected by the University Parties to fund other discretionary initiatives.

Disclaimer: The opinions expressed are 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.

Muni Credit News February 23, 2017

Joseph Krist

Municipal Credit Consultant

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THE HEADLINES…

TEXAS BUDGET

INDIANA TOLLING LEGISLATION

AND WHILE WE ARGUE ABOUT INFRASTRUCTURE FUNDING

CALIFORNIA PROJECT CAUGHT IN THE CROSSHAIRS

LOCAL JAILS COULD BENEFIT FROM IMMIGRATION CRACKDOWN

LEX CLAIMS CASE GETS MORE COMPLEX

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TEXAS BUDGET

The Governor’s Budget for the 2018-2019 biennium implements many of the 4 percent cuts suggested by state agencies and further reduces agency expenditures, except public school funding formulas and certain other priorities, by an additional 2 percent. It purports to do so without issuing new debt, raising taxes or utilizing the Economic Stabilization Fund. The Governor’s Budget calls for a business tax reduction, property tax reforms and maintaining funding for roads. This budget also calls for a constitutional amendment that would permanently limit the state’s spending growth to the rate of growth in population and inflation. This despite the fact that the legislature passed a budget for the current biennium that limited growth in state fund expenditures within this population and inflation benchmark.

It proposes to continue down the path to franchise tax elimination by cutting the rate to achieve another $250 million in savings for Texas employers. Other policy initiatives would adopt real revenue caps that prevent local governments from endlessly raising taxes without voter approval. Second, it calls for meaningful limits on the overlay of special purpose districts.

On the revenue side, The Governor’s Budget utilizes a four-year look back of historical population and inflation data. This methodology creates a 5.81 percent allowable growth rate, which is significantly below the lowest personal income growth estimate provided to the Legislative Budget Board (LBB) (9.9 percent) and well below the number adopted by the LBB (8 percent).

The budget does reference the local pension difficulties plaguing the State’s major cities but makes clear that, in the Governor’s view, there is no affirmative role for the State in resolving them. This budget calls for a constitutional prohibition on using state funds to bailout local pensions. A recent Attorney General Opinion has made clear that the state has no legal obligation to finance floundering plans. At the same time, the Governor’s comments on pensions are somewhat conflicting.

He expresses the view that the state government should get out of the business of micromanaging local pension decisions while unequivocally making clear that statewide taxpayers will not be on the hook to bailout local pensions. The entities that are financially responsible to their employees, retirees and taxpayers should work with municipal leaders, pensioners and stakeholders to develop solutions — are still dependent upon state action to implement meaningful changes.

In terms of how the biennial budget deals with the uncertainties of ACA repeal and replacement, it relies on block grants. In the Governor’s view, Block grants should be used for the administration of state-managed Medicaid programs, and Congress should act to authorize this important reform. The block grants should be designed in a way that protects states from cost growth due to population growth or the economy and should be accompanied by reforms that significantly reduce or eliminate federal requirements. The reformed Texas Medicaid program would include personal responsibility requirements for certain populations. This the approach favored by the most ideological conservatives.

One small in dollars but large in policy aspect of Gov. Abbot’s budget has already been challenged in the courts. A federal judge issued a preliminary injunction against a Texas plan to cut off funding for Planned Parenthood from the state’s Medicaid program. It is only some $4 million in question but it would complete efforts to eliminate PP from participation in Texas’ Medicaid program. State health officials let it be known in December that Planned Parenthood would no longer receive funding from the program. The group had 30 days before the change took effect unless it filed an appeal.

The preliminary injunction preserves what Planned Parenthood contends are funds to provide cancer screenings, birth control access and other health services for nearly 11,000 low-income women. Similar defunding efforts have also been blocked in Arkansas, Alabama, Kansas, Mississippi and Louisiana. All of these efforts simply create greater uncertainty about the viability of proposed budgets and, for the weaker credits, expose them to more downside risk.

INDIANA LOOKING AT INCREASED USE OF TOLLS FOR ROADS

House Bill 1002 passed the state’s lower legislative chamber. Among a variety of increases in fuel and motor vehicle taxes and fees, it also Repeals restrictions on when a tolling project can be undertaken. The bill also includes a provision which Requires the Indiana department of transportation (INDOT) to seek a Federal Highway Administration waiver to toll interstate highways. It also limits the first toll lanes under the waiver to certain interstate highways and provides for a public comment period and requires replies to the public comments for a toll road project by INDOT or a tollway project carried out using a public private partnership.

The bill, by requiring an outside consulting firm to perform a tolling feasibility study, could increase INDOT expenditures in FY 2017. The state of Wisconsin recently published a tolling feasibility study (December 2016) that was performed by a third-party vendor. The reported costs for this study were$700,000. INDOT reports the cost of a tolling feasibility study could be between $200,000 and $500,000. Increases in INDOT expenditures for a tolling feasibility study would come from the State Highway Fund.

AND WHILE WE ARGUE ABOUT INFRASTRUCTURE FUNDING…

# of bridges # deficient % deficient

Iowa	24,184	4,968	20.5%
Pennsylvania	22,791	4,506	19.8%
Oklahoma	23,053	3,460	15.0%
Missouri	24,468	3,195	13.1%
Nebraska	15,334	2,361	15.4%
Illinois	26,704	2,243	8.4%
Kansas	25,013	2,151	8.6%
Mississippi	17,068	2,098	12.3%
Ohio	28,284	1,942	6.9%
New York	17,462	1,928	11.0%

The table depicts the ten states with the largest number of structurally deficient bridges in the U.S. as reported by the American Road and Transportation Builders Association. Historically, Pennsylvania had been the dubious annual leader in this category but in the last two years has been overtaken by Iowa.

There are some common threads which run through this list. Pennsylvania, Illinois, and Kansas have all been known for their respectively dysfunctional budgeting processes. They have each let transportation funding lag with Kansas transferring money from highway funds to cover general fund shortfalls resulting from unrelated tax cuts. Each state on the list has a substantial rural component to their transportation system which leads to a larger number of smaller yet important bridges often which are the responsibility of entities below the state level. This has complicated funding for upkeep and replacement.

From our standpoint, it reinforces our view of the importance of infrastructure maintenance as Congress debates not only funding but project priority. Maintenance clashes with the well-known administration preference for new, big, and shiny projects. The empirical evidence would seem to lean in favor of restoration over new construction, especially in rural areas where commercial activities rely on a strong local transportation system to facilitate the movement of goods to market.

CALIFORNIA PROJECT CAUGHT IN THE CROSSHAIRS

Many infrastructure proponents are looking to see whether Transportation Secretary Elaine Chao reconsiders her decision as to whether or not to allow federal funding at this time for a project in northern California. Caltrain formally petitioned the administration to reverse course on its recent decision to halt $647 million worth of grant money for the transit agency until the start of the federal fiscal year in October. Caltrain commuter rail that runs between San Francisco and San Jose. The rub is that the project would also eventually benefit the state’s high-speed rail project.

The electrification project is scheduled to begin on March 1. It is probably the best example of “shovel ready” around. The existing commuter rail line has experienced significant ridership increases and few doubt the need to increase capacity on that line. The work would most likely be needed regardless of its ability to facilitate the high speed rail project.

Based on that reality, the decision not to fund at this time is seen as politically motivated. Regardless of the ultimate outcome, it illustrates the difficulty in managing the politics and execution of any large scale infrastructure plan. Just in the case of rail expansion, major projects requiring significant funding are awaiting execution and funding decisions in Democratic strongholds including RTA updates in Chicago, a new trans-Hudson rail tunnel between New York and New Jersey and, the MBTA in Boston to name a few. Should political considerations become a prime funding consideration all of these projects could be at risk. In Chicago and Boston, negative decisions would be seen as having potentially negative impacts on the underlying credits sponsoring those projects.

LOCAL JAILS COULD BENEFIT FROM IMMIGRATION CRACKDOWN

The plans announced this week to ramp up efforts by the Trump administration to deport larger numbers of undocumented aliens may have resulted in an unintended benefit for investors in high yield local detention facility bonds. The sector had been under pressure as the result of announcement by the DOJ under the Obama administration to significantly curtail the use of these facilities for a variety of reasons. There was also concern that policies that deemphasized deportations would reduce demand for cells by the Immigration, Customs, and Enforcement Service which used these facilities to hold potential deportees while they awaited final adjudication of their cases.

Under the plans announced this week, a much higher level of apprehension and detention of the undocumented would result. This would create a much higher level of demand for cells, thereby reducing the short-term financial risk associated with these projects. This change in policy should create – at least as long as it remains in effect – an opportunity for investors in this sector.

The whole turn of events does highlight the long term political risk of investment in this class of bonds. It renders individual project economics less relevant to investors. It also shows how quickly the outlook for these credits to change. We are always less comfortable when the foundation for a credit is not fundamental economic viability so we still believe that it is a class of bonds that individual investors should curb their enthusiasm for.

WEST VIRGINIA DOWNGRADE

In our last issue, we outlined the Governor’s proposal for a fiscal year 2018 budget. Before the budget process was allowed to play out, Moody’s announced that it has downgraded the State of West Virginia’s general obligation debt to Aa2 from Aa1, affecting approximately $393.6 million in debt outstanding. The state’s lease appropriation and moral obligation debt has been downgraded one notch to Aa3 and A1, reflecting the ties to the general obligation rating.

Moody’s said that “the downgrade of the general obligation and related lease ratings expenditures and available resources, which is generally inconsistent with a Aa1 rating. While the state has used a mixture of revenue enhancements, expenditure reductions and reserves to close budget gaps, revenues continue to lag budgeted estimates and the structural imbalance is likely to continue at least through 2018. Additionally, while the economy has begun to stabilize some, the demographic profile remains weak. Pension liabilities remain above average and the state’s debt burden could increase under the Governor’s new infrastructure proposal.”

At the same time, Moody’s expressed its view that the economy is stabilizing and liquidity remains healthy, allowing the state financial flexibility to weather a slower rebound. Additionally, it expects the state to continue with what it called its prudent management practices, managing through what will likely be a longer term but more moderate revenue decline.

LEX CLAIMS CASE GETS MORE COMPLEX

We recently discussed ongoing litigation over the rights of general obligation versus those of COFINA bondholders to revenues legislatively dedicated to outstanding COFINA debt. Since then there have been new developments. The COFINA Senior Bondholders, the Puerto Rico Funds, and the Major COFINA Bondholders, all own COFINA bonds in differing amounts. If no federal statute grants an unconditional right to intervene, the Court is nonetheless required to grant a party’s motion to intervene if that party has “demonstrate[d] that: (1) its motion is timely; (2) it has an interest relating to the property or transaction that forms the foundation of the ongoing action; (3) the disposition of the action threatens to impair or impede its ability to protect this interest; and (4) no existing party adequately represents its interest”.

The Puerto Rico Funds and the Major COFINA Bondholders’ made respective motions to intervene which raise similar arguments as to why each should be permitted to intervene as of right. Specifically, both the Puerto Rico Funds and the Major COFINA Bondholders argued that they have an interest in the revenues that back the COFINA bonds which they hold. The Puerto Rico Funds and the Major COFINA Bondholders asserted that no existing party to this action can adequately represent their respective interests.

The COFINA Senior Bondholders’ motion to intervene was denied in light of the Court’s conclusion that the PROMESA counts are not stayed. The Court is satisfied that the Puerto Rico Funds and the Major COFINA Bondholders have met their modest burden of showing that there is a possibility that no named defendant may adequately represent their interests. That rests on the somewhat technical issue that BNYM Trustee — the named defendant the GO Bondholders allege adequately represents the interests of the Puerto Rico Funds and the Major COFINA Bondholders—has moved to dismiss the second amended complaint in this case on grounds that could result in BNYM Trustee being dismissed as a defendant. Should BNYM Trustee prevail on its motion to dismiss, no COFINA Bondholder representative would remain as a litigant in this case unless the Court permits intervention.

The Court denied the Commonwealth Defendants’ motion to stay, and the COFINA Senior Bondholders motion to intervene . The Court granted the motions to intervene of the Oversight Board, Ambac, the Puerto Rico Funds, and the Major COFINA Bondholders. So it would seem that opposing interests have been aligned with each other making for a much more difficult process of speculating as to how this is all going to turn out. We are comfortable with saying that a final resolution is a long way off and that we are glad to be in the position of spectator rather than speculator with anything at risk.

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.

Muni Credit News February 21, 2017

Joseph Krist

joseph.krist@municreditnews.com

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THE HEADLINES…

WEST VIRGINIA BUDGET

ATLANTIC CITY SETTLES BORGATA TAX APPEAL

PUERTO RICO GO SUIT ADVANCES

HOUSE VERSION OF ACA REFORM EMERGES

PORTS IN A TRADE WAR

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WEST VIRGINIA BUDGET

Classroom teachers would receive a 2-percent pay raise, highway projects including Interstate 70 in Ohio County would be finished, and motorists would pay 10 cents more per gallon of gasoline if Gov. Jim Justice’s proposed budget is enacted by the West Virginia Legislature.

The Governor calls his proposal West Virginia’s “Save Our State Budget”. The plan combines spending cuts, tax increases and fee increases and a $123 million withdrawal from the state’s Rainy Day Fund to fund an estimated $500 million shortfall for fiscal year 2018. Justice’s relies on $450.15 million raised through a half-percent increase in the sales tax to 6.5 percent; eliminating tax exemptions for professional services and advertising and raising the gasoline excise tax by 10 cents a gallon from the current 20.5 cents to 30.5 cents. The proposed general fund budget would increase to about $4.8 billion, with total spending, including federal and other funds, at $12.9 billion.

During his State of the State speech, Justice dramatically advocated for the proposed tax increases. “I truly, from the bottom of my heart, hate tax increases,” he said, adding it’s “the most painless way I think you can get out of this mess. If you don’t do this, you’re dead. You’re dead beyond belief.” All of the proposed tax increases wouldn’t be permanent. After three years, he proposes eliminating the sales tax as well as a proposed 0.2-percent commercial activities tax he wants businesses to pay. Justice’s proposal emphasizes a “bold and aggressive” $1.4 billion road program that shows Justice’s commitment to long-term economic growth according to state budget officials. In addition, Justice proposes a $105 million Save Our State Fund, to be used for economic development and infrastructure investment.

The roads program “will invest heavily in roads and bridges,” and is expected to create up to 25,000 new jobs throughout the state, including temporary jobs, according to the administration. Among the projects listed in the $1.4 billion Phase I of the program — the phase that lists projects that have passed most requirements and are ready to go — is the $135 million I-70 bridge rehabilitation and replacement project in Ohio County. The $1.5 billion Phase II includes W.Va. 2 widening projects in Hancock, Marshall and Wetzel counties. Those include a $10.5 million Hancock County project that widens it through New Cumberland; an $80 million project in Wetzel County from Proctor to Kent; and creates four lanes through Marshall County.

Justice called his plan for $26.6 million in cuts as “responsible cuts,” stating alternatives could cost the state 3,000 jobs, in addition to cuts that could have eliminated all state parks and shut down dog and horse tracks, and veterans’ services. The planned cuts include eliminating the eight, regional education service agencies (RSEA) that provide services to public schools and cost the state more than $3.5 million per year. The services RESAs provide include training bus drivers, and hiring special needs teachers, and managing substitute teacher schedules.

ATLANTIC CITY SETTLES BORGATA TAX APPEAL

The City of Atlantic City has settled a long standing major tax-appeal debt owed to the Borgata Hotel, Casino & Spa. The state says the city agreed to accept less than half of the $165 million owed it. The settlement was reached by overseers appointed by Gov. Christie under a law that placed control of Atlantic City under the oversight of the state Department of Community Affairs. The announcement came from the state, which headlined its release, “Christie Administration and Borgata Reach Settlement Agreement.”

The state said Borgata agreed to accept $72 million to cover all judgments and claims for 2009 to 2015. The settlement precludes Borgata from pursuing tax appeals for 2013 to 2015. Borgata also agreed to make payments under the Payment in Lieu of Taxes program that applies to the city’s casinos beginning this year, the statement said. Previous efforts overseen by state monitors, an Atlantic County Superior Court judge, and the city itself had failed to resolve the debt.

The latest negotiations were conducted with the involvement of the state’s new overseer. Christie had made settlement of the Borgata deal a priority of past emergency managers appointed by the state, but blamed the city for the lack of a settlement before now. “This settlement has been one of my administration’s priorities since Atlantic City’s fiscal crisis forced us to assume control of operations there in November,” Christie said in a statement. “The city administration, despite all the time and opportunity given to them, failed to accomplish the goal, as they have with so many others.” Christie noted that the $72 million was $30 million less than what the city had proposed in its own five-year recovery plan, which was rejected by the state.

Changes in the ownership of the Borgata may have been as much of a factor in the settlement as anything else. Borgata is run by MGM Resorts International, which took sole control of the property from its partner Boyd Gaming last August. MGM paid up for full control — $900 million for half of the property — even as the judgment from the tax appeals had reduced Borgata’s total assessed value to about $800 million. MGM is seen as wanting to pursue further development in Atlantic City or North Jersey.

It is not clear how the city would finance the $72 million. Other tax settlements with casinos were funded through bond payments. The city had proposed selling its municipal airstrip, Bader Field, to its Municipal Water Authority to help pay off debts, but that plan was rejected by the state.

PUERTO RICO GO SUIT ADVANCES

A U.S. District Court Judge denied the commonwealth’s motion to stay a lawsuit filed by general obligation (GO) bondholders and a motion to intervene presented by senior Sales Tax Financing Corp. (Cofina) bondholders. Motions were granted allowing intervention by the Financial Oversight and Management Board; Ambac Assurance Corp., which insures $800 million in Cofina funds; the Puerto Rico Funds and by major Cofina bondholders.

The judge said that “this is not an action to recover a liability claim against the government of Puerto Rico that arose before the enactment of Promesa because the GO Bondholders seek only declaratory and injunctive relief.” The ruling was made as part of the Lex Claims case, a lawsuit filed by GO bondholders against the island’s governor, Treasury secretary and director of the Office of Management Budget, as well as the Bank of New York Mellon Corp. That suit was amended to include Cofina and its executive director.

The GO bondholders are hoping to stop the government from diverting the sales and use tax to pay Cofina bondholders. The GO creditors say their bonds are guaranteed by the commonwealth’s full faith and credit and taxing power and have payment priority over Cofina. This would be based on their belief that the constitutional clawback that supports GO debt supersedes legislative dedication of sales tax revenues to the COFINA debt.

The judge ruled on six motions: (1) the Commonwealth and Cofina defendants’ motion to stay the action in its entirety pursuant to section 405 of Promesa; (2) the fiscal oversight board’s motion to intervene pursuant to Promesa; (3) Ambac Assurance’s motion to intervene as a defendant pursuant and to stay the action pursuant to Promesa; (4) the Cofina senior bondholders motion to intervene; the Puerto Rico-based funds’ motion to intervene; and (6) the major Cofina bondholders’ motion to intervene.

The GO bondholders’ complaint challenged the government’s moratorium order that diverted funds to pay services, the commonwealth’s failure to allocate funds for future GO obligations, and legislation diverting funds to the Government Development Bank. The complaint alleges the commonwealth and Cofina defendants have deprived them “of rights, privileges, and immunities secured by the laws of the United States.”

The judge’s decision to allow the fiscal board, Ambac, Puerto Rico Funds and major Cofina bondholders to intervene because “the Court is required to grant a party’s motion to intervene if that party has demonstrated that: (1) its motion is timely; (2) it has an interest relating to the property or transaction that forms the foundation of the ongoing action; (3) the disposition of the action threatens to impair or impede its ability to protect this interest; and that (4) no existing party adequately represents its interest.”

HOUSE VERSION OF ACA REFORM EMERGES

House Republican leaders presented their rank-and-file members with the outlines of their plan to replace the Affordable Care Act, leaning heavily on tax credits to finance individual insurance purchases and sharply reducing federal payments to the 31 states that have expanded Medicaid eligibility. The talking points they provided did not say how the legislation would be paid for, essentially laying out the benefits without the more controversial costs. It also included no estimates of the number of people who would gain or lose insurance under the plan, nor did it include comparisons with the Affordable Care Act, which has extended coverage to 20 million people.

It purports to lower costs, expands access, improves quality, and puts patients and families in charge of their care, while protecting patients with pre-existing conditions and ensuring dependents up to age 26 can stay on their parents’ insurance. To lower the cost of healthcare, Republicans would eliminate all the Obamacare tax increases, including: The tax on health insurance premiums; The medicine cabinet tax; The tax on prescription drugs; The tax on medical devices; the increased expense threshold for deducting medical expenses. It would provide additional assistance for younger Americans and reduce the over-subsidization older Americans are receiving.

The legislation creates a new code section – 36C— to do this. The credit is: Under current law, in 2017, the maximum amount that can be contributed (both employer and individual contributions) to an HSA is $3,400 for self and $6,750 for a family. H.R. 1270 (114th Congress) and A Better Way significantly increase the contribution limits by allowing contributions to an HSA to equal the maximum out of pocket amounts allowed by law. For 2017, those amounts are $6,550 for self-only coverage and $13,100 for family coverage.

H.R. 1270 and A Better Way provide that if both spouses of a married couple are eligible for catch-up contributions and either has family coverage, the annual contribution limit that can be divided between them includes both catch-up contribution amounts. Thus, for example, they can agree that their combined catch-up contribution amount is allocated to one spouse to be contributed to that spouse’s HSA. In other cases, as under present law, a spouse’s catch-up contribution amount is not eligible for division between the spouses; the catch-up contribution must be made to the HSA of that spouse.

H.R. 1270 and A Better Way provide that, if an HSA is established during the 60-day period beginning on the date that an individual’s coverage under a high deductible health plan begins, then the HSA is treated as having been established on the date that such coverage begins for purposes of determining if an expense incurred is a qualified medical expense. Thus, if a taxpayer establishes an HSA within 60 days of the date that the taxpayer’s coverage under a high deductible health plan begins, any distribution from an HSA used as a payment for a medical expense incurred during that 60-day period after the high deductible health plan coverage began is excludible from gross income as a payment used for a qualified medical expense even though the expense was incurred before the date that the HSA was established.

Here is the bad news for state credits and for hospitals. Obamacare’s Medicaid expansion for able-bodied adults enrollees would be repealed in its current form. States that chose to expand their Medicaid programs under Obamacare could continue to receive enhanced federal payments for currently enrolled beneficiaries for a limited period of time. However, after a date certain, if states choose to keep their Medicaid programs open to new enrollees in the expansion population, states would be reimbursed at their traditional match rates for these beneficiaries.

States would also have the choice to receive federal Medicaid funding in the form of a block grant or global waiver. Block grant funding would be determined using a base year and would assume that states transition individuals currently enrolled in the Medicaid expansion out of the expansion population into other coverage. States would have flexibility in how Medicaid funds are spent, but would be required to provide required services to the most vulnerable elderly and disabled individuals who are mandatory populations under current law. Block grants are intended to provide less money. The rest of the discussion about flexibility etc. is just cover for lower funding.

The plan relies on “high risk pools”. Before Obamacare, 34 states had high risk pools. Building on the idea of high risk pools, A Better Way envisions new and innovative State Innovation Grants. But instead of being tied to a separate pooling mechanism, these resources would give states sole flexibility to help lower the cost of care for some of their most vulnerable patients. Some may suggest State Innovation Grants would lead to enrollment caps or waiting lists – like certain high risk pools functioned prior to Obamacare. There is a reason they were eliminated under the ACA as well as its progenitor in Massachusetts under then Gov. Mitt Romney.

What is most notable about this set of talking points is an almost complete absence of any discussion of how the federal government would pay for this. Like many of Paul Ryan’s efforts over the years, the plan seems to be detailed and thought out but in reality is full of platitudes and short on operational substance. This is what should be of concern to state governments, consumers, providers, and investors.

PORTS IN A TRADE WAR

Recently we were interviewed by the Daily Bond Buyer on the issue of the potential impact of a trade war on municipal credits. The primary items of concern were the major West Coast ports and municipalities on the border with Mexico. The issue comes up as the result of comments made over the course of the campaign and since by President Trump. Here is what we said.

We said that we view a potential trade war with China as more of an economic event than a credit event, but acknowledged that the impact on West Coast ports could be notable. I mentioned the Alameda Corridor Transportation Authority, which operates a bond-financed rail line from the ports of Long Beach and Los Angeles 20 miles north to downtown Los Angeles, carrying containers from dockside to the yards of the freight railroads that send them onwards.

“Obviously they have grown and benefited from trade with China as you go up and down the West Coast,” we said of the ports. “There would be kind of the obvious ramifications for those ports, in terms of lower volumes and lower revenues.” Its revenues are volume-dependent as are some small tax-allocated land deals for warehouse facilities that could be vulnerable to an extended trade slowdown.

We mentioned that “Seattle and Oakland both benefit from the mitigating factor that they also include airports that account for major chunks of their revenue. This somewhat insulates them from the risks associated with a decline in container volume.”

The border cities would be impacted by the impact on property values, employment, and incomes because so much economic activity revolves around warehousing activity associated with NAFTA. The mayor of Nogales, AZ has worried that the impact could be to the tune of a 50% decline in those items should tariffs be imposed sufficient to adversely affect trade.

In southern California, the LAEDC estimates that 1 out of 15 jobs is related to trade coming through the Ports of Long Beach and Los Angeles. That is one example of why the overall economic impact could be greater than the direct credit impact. Either way the impact of a trade war would be negative. Even if our trade strategy is based on a border adjustment tax, there are many scenarios where the impact would not be as neutral as its proponents believes, the. In those instances the net impact on economic activity in terms of the movement of goods would be negative for the American side of the equation.

Muni Credit News February 9, 2017

Joseph Krist

joseph.krist@municreditnews.com

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THE HEADLINES…

IMPACT OF FOREIGN STUDENTS ON U.S. UNIVERSITIES

NYS COMMON RETIREMENT FUND ANNOUNCES EARNINGS

HOSPITALS IN LEGISLATIVE WAITING ROOM

PENNSYLVANIA BUDGET PROPOSAL

CONNECTICUT BUDGET PLAN ANNOUNCED

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IMPACT OF FOREIGN STUDENTS ON U.S. UNIVERSITIES

Much of the recent debate about the executive order limiting immigration has revolved around the potential effect on the U.S. economy and businesses. While it is clear that certain industries such as technology and research and development feel vulnerable, there has been less focus on its potential impact on the demand for and economics of U.S. institutions of higher education. This is especially true for public universities.

Over the last several years, states have been reducing their contributions to general state universities as they face increasing budget demands and demands for lower taxes. At the same time, the impact of student debt as an economic drag has increased pressure to slow the rate of tuition growth to in-state residents. One way to do this has been to increase the admittance of foreign students to these institutions.

The “flagship” campuses of state universities lead this trend. Illinois, Indiana, Iowa and University of California campuses in Berkeley and Los Angeles all had at least 10 percent foreign freshmen this academic year, more than twice that of five years ago. The University of Washington’s 2016 freshman class comprised 18% foreign students. Some charge international students additional fees besides tuition: at Purdue University, it was $1,000 this year and will double next year; engineering undergraduates at the University of Illinois at Urbana-Champaign had to pay a $2,500 surcharge this year.

Financially, the logic is compelling. Each seat occupied by a foreign “full fare” student lessens the revenue per seat required from in-state students either in the form of lower tuition or lower general revenue transfers from the respective states. In addition, these students (and relatives) spend what are effectively outside dollars in the local economies in the college towns.

The Institute of International Education, Inc. has assembled estimates of the economic impact from international students. For example, using the institutions referenced above, international economic impact was estimated at: Washington $825.5 million; Illinois $1.57 billion; Iowa $365.8 million; Indiana $956.5 million; California $5.2 billion. This includes tuition and fees, living expenses, and real estate investment by parents of these students (especially from China) who choose to either buy housing for their students or to live here while their students attend U.S. colleges.

For investors, the actual makeup of the student body at a given school should only be of concern as it pertains to the ability of a given institution to maintain a strong financial profile over a sustained period of time. The “moral”, political, and other social issues that arise from these enrollment trends are secondary from a pure investor point of view. That is not to say that they are not something to be monitored. If public low cost universities are not sufficiently available to the children of in-state taxpayers, political support for continued expenditure tax dollars will be further strained. And should stringent immigration limitations become so tight as to greatly limit the admission of international students, then there will be financial implications. But current trends in this area do not seem to be impacting credits supported by these institutions.

NYS COMMON RETIREMENT FUND ANNOUNCES EARNINGS

The New York State Common Retirement Fund’s (CRF) overall return in the third quarter of state fiscal year 2016-2017 was 1.11 percent for the three-month period ending Dec. 31, 2016, with an estimated value of $186 billion, according to New York State Comptroller Thomas P. DiNapoli. “The state pension fund enjoyed a solid third quarter and, barring a significant downturn, is headed for a successful year. We continue to focus on prudent, long-term management of investments to make sure our assets match our liabilities,” DiNapoli said. “Not long after I became Comptroller, the global financial crisis reduced our pension fund’s value to $108.9 billion. Despite volatility in the markets, my staff and I have rebuilt and strengthened the state pension fund to what it is today – a highly diversified fund with its highest ever estimated value.”

The CRF’s estimated value reflects benefits paid out during the quarter. The CRF ended its first quarter on June 30, 2016 with an overall return of 2 percent for the three-month period and an estimated value of $181 billion. Its second quarter closed on Sept. 30, 2016 with an overall return of 3.51 percent and an estimated value of $184.5 billion, the investments. The CRF’s audited value was $178.6 billion as of March 31, 2016, which is the end of the state fiscal year. That would translate to an increase of 4.4%. While this is below benchmarks for observes like the Boston College Center for Retirement Research which would use 6% growth as a target, it is better than many major pension funds have achieved.

As of Dec. 31, 2016, the CRF has 38.5 percent of its assets invested in publicly traded domestic equities and 15.6 percent in international public equities. The remaining Fund assets by allocation are invested in cash, bonds and mortgages (26.8 percent), private equity (7.7 percent), real estate (6.8 percent), absolute return strategies (3.2 percent) and opportunistic and real assets (1.4 percent).

HOSPITALS IN LEGISLATIVE WAITING ROOM

We’ve all had to sit endlessly in a doctor’s office or emergency room waiting area worrying about a diagnosis or outcome wondering if the cure will be worse than the disease. Well now hospital financial managers are getting to have a similar experience courtesy of the new administration. President Trump said in an interview that aired during the Super Bowl pre-game that a replacement health care law was not likely to be ready until either the end of this year or in 2018. “Maybe it’ll take till sometime into next year, but we’re certainly going to be in the process.”

This represents a major shift from promises by both him and Republican leaders to repeal and replace the law as soon as possible. “It statutorily takes awhile to get,” Mr. Trump said. “We’re going to be putting it in fairly soon, I think that, yes, I would like to say by the end of the year at least the rudiments but we should have something within the year and the following year.” Yes it may even be until 2018 until a replacement is enacted. Mr. Trump acknowledged that replacing the Affordable Care Act is complicated, though he reiterated his confidence that his administration could devise a plan that would work better than the law — despite having provided few details of how such a plan would work.

Asked about Trump’s comments, Sen. John Cornyn (R-Texas), the Senate’s No. 2 Republican emphasized that the initial repeal bill under reconciliation is just the beginning of the process, and that a series of smaller bills will follow. “We’ve said all along we’re going to start the process using budget reconciliation, but it’s not going to be all in one piece of legislation, they’ll be multiple steps,” Cornyn said. “You’ll have to ask him what he meant, but I think it’s going to take — it’s not going to be instantaneous, because there is going to need to be a transition period.”

Speaker Paul D. Ryan has vowed to move legislation for a replacement for the Affordable Care Act by the end of March. But some Republicans are worried about a political backlash if they repeal the law without an adequate replacement — potentially throwing millions of people off their insurance . One Republican congressman from California had to be escorted out of a town hall meeting on health reform by local police to ensure his safety.

Mr. Trump said that he wanted to present a replacement soon after the Senate confirmed his nominee for secretary of health and human services, Representative Tom Price, Republican of Georgia. The Senate is scheduled to vote on Mr. Price’s confirmation this week. “We’re going to be submitting, as soon as our secretary is approved, almost simultaneously, shortly thereafter, a plan,” Mr. Trump said in January. Senator Lamar Alexander of Tennessee, a Republican who is the chairman of the Senate Committee on Health, Education, Labor and Pensions, recently proposed repairing parts of the health care law ahead of scrapping the whole package.

Congressional Republicans have said they could include elements of a replacement plan in the repeal bill. Yet they note that full replacement cannot pass under the fast-track rules of reconciliation that allow a measure to avoid a filibuster. So far, the only action to repeal the ACA was last month when the president signed an executive order to begin unwinding the Affordable Care Act. It gave the Department of Health and Human Services the authority to ease what it called “unwarranted economic and regulatory burdens” from the existing law.

In the midst of this discussion, a consulting firm said that a Republican proposal to fund Medicaid could save up to $150billion over five years. The analysis from healthcare firm Avalere Health shows that if Medicaid were funded through block grants instead of through the open-ended commitment the program receives now, the federal government would save $150 billion by 2022. Savings from a shift to per capita caps, in which states would receive a set amount of money per beneficiary, would save $110 billion over five years. According to the study, only one state – North Dakota — would see increased funding under the block grant model. Through per capita funding, 26 states and D.C. would see decreases in federal funding while 24 would get an increase.

In the meantime, that isn’t much to go on for hospital managements looking at a June 30 FY end to embark on a serious planning process.

PENNSYLVANIA BUDGET PROPOSAL

Gov. Tom Wolf proposed a budget for fiscal 2018 in which there are no broad-based tax increases. It purports to set the Commonwealth on a sustainable fiscal course that will grow its rainy day fund from $245,000 today to almost $500 million by 2022. According to the Governor, this budget proposes reforms that, altogether, will save taxpayers more than $2 billion. The plan calls for an additional $125 million for K through 12 classrooms, $75 million to expand high-quality early childhood education, and $8.9 million for our state system of higher education.

The General Fund budget would be $32.3 billion, an increase of 1.8%. Motor license revenues are projected to increase by 3% but only account for $82 million. Tax revenue in the General Fund constitutes more than 97 percent of annual General Fund revenue. Four taxes account for the vast majority of General Fund tax revenue. The Personal Income Tax, the Sales and Use Tax, the Corporate Net Income Tax and the Gross Receipts Tax together provide approximately 86 percent of annual General Fund revenue. For non-tax revenue, the largest sources of revenue are typically from profit transfers from the Pennsylvania Liquor Control Board, licenses and fees, and the escheats or “unclaimed property” program.

For the five fiscal years ending with 2015-16, total General Fund revenue increased by 11.6 percent, an annual rate of increase of approximately 2.8 percent. The rate of growth for revenue during the period has been affected by the recent recovery from the economic recession and the increased economic growth during the post-recessionary period. Without adjusting for tax rate and base changes, the major tax revenue sources experiencing the largest growth during this period were the Realty Transfer Tax, the Personal Income Tax, and the Inheritance Tax. Five-year total increases for these tax types were 64.8 percent, 15.8 percent and 16.2 percent, respectively. Revenue from some tax sources declined or was flat over the period. Receipts from the Gross Receipt and Cigarette taxes decreased over this period. Non-tax revenue sources increased over this five-year period.

The Budget Stabilization Reserve Fund is to receive an annual transfer of 25 percent of the General Fund’s fiscal year ending balance. The transfer requirement is reduced to 10 percent of the General Fund’s ending balance if the balance of the Budget Stabilization Reserve Fund equals or exceeds 6 percent of actual General Fund revenues received for the fiscal year. Appropriations out of the Budget Stabilization Reserve Fund require approval by two-thirds of the members of each house of the General Assembly.

This budget proposes an overall decrease in the commonwealth’s current authorized salaried complement level in 2017-18 of 3,442 positions, from 81,036 to 77,594 positions. Pension and health benefit funding is projected at $6.9 billion, up from $6.7 billion in FY 2017. These expenses are projected to increase annually to $7.5 billion in period.

The projected growth in spending for reserves and employee pension and healthcare costs would be $1.3 billion by FY 2022. This growth assumes favorable economic and investment conditions through the period. The budget will be subject to a high level of risk as the Commonwealth is only a recent participant in Medicaid expansion under the Affordable Care Act. It would likely face significant pressure to cut expenses under either a block grant or per capita aid scenario. This will increase the pressure to address pensions and healthcare benefits for state retirees which have already weakened the Commonwealth’s ratings.

We expect another difficult and contentious budget approval process like those which have occurred during the first two years of the Wolf administration. We see no respite from the pressure on the Commonwealth’s ratings going forward.

CONNECTICUT BUDGET PLAN ANNOUNCED

The budget contains a total of $18 billion in General Fund spending. The expense increase is within the state spending cap and is at a pace well below inflation. It makes required increased contributions to the pension systems of more than $357 million in the first year. The Governor states that the plan contains $1.36 billion in new spending reductions. The budget assumes approximately $700 million in state employee labor savings. They would have to be achieved through negotiation.

At more than $5 billion, municipal aid accounts for our single largest state expenditure. And addressing town aid also means addressing educational aid, which amounts to $4.1 billion – or 81 percent – of all municipal funding from the state. The budget changes the educational cost sharing formula, or ECS. For the first time in more than a decade, the formula counts current enrollment. It is intended to stop reimbursing communities for students that they no longer have.

By recognizing shifting demographics in small towns and growing cities, state funding can change with time to reflect changing communities. The new formula also uses a different measure of wealth by using the equalized net grand list as well as a new measure of student poverty. In the proposed budget, Special Education is now a separate formula grant from ECS, and Special Education funding is increased by $10 million. School systems will also be required to seek Medicaid reimbursement where available, ensuring that no community leaves federal dollars on the table.

This year, state government is set to pay $1.2 billion for a system that supports 86,000 active and retired teachers and administrators. The Governor not proposing that teachers’ benefits be limited or cut back. The budget asks the towns and cities – all of them – to contribute one-third of the cost toward their teacher pensions. This would begin to match state pension policies for policemen, or firemen, or other municipal employees. While pressure on local budgets would be raised under this budget, it will create a Municipal Accountability Review Board, chaired by the State Treasurer and the Secretary of OPM.

This will be the most controversial part of the budget process. we would anticipate that there will be great resistance to the concept of localities assuming one-third of the teacher’s pension costs. we would not be surprised to see the entire process crater over this proposal. In combination with the reliance on negotiations to achieve other labor cost savings, we see the budget proposal as being of high risk to the State’s credit. We would expect the existing downward pressure on the ratings to exist, not only for the State, but also for many of its localities.

The Governor knows this and explicitly addressed it in his budget presentation. “My budget leaves $75 million in year one and $85 million the following year in local aid unallocated. This is my way of saying to you – the legislature – that I am ready to negotiate.” Those negotiations will occur and will be quite difficult. In the meantime the pressure on state and local finances will continue.

Muni Credit News February 7, 2017

Joseph Krist

Municipal Credit Consultant

THE HEADLINES…

RATING AGENCY FACEOFF OVER CHICAGO PUBLIC SCHOOLS

WAYNE COUNTY MICHIGAN UPGRADE

CONNECTICUT PENSION LEGISLATION

ATLANTIC CITY LAYOFFS DELAYED

TENNESSEE BUDGET PLAN INCLUDES GAS TAX INCREASE

FINRA ACTS AGAINST AN UNDERWRITER

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RATING AGENCY FACEOFF OVER CHICAGO PUBLIC SCHOOLS

It isn’t often that the rating agencies overtly disagree with each other. There are clear cases where they issue disparate ratings on the same credit, but they rarely issue a report which clearly highlights the disagreement. That changed last week when Fitch Ratings in a report openly criticized Moody’s Investors Services’ recent assessment of Chicago Public Schools’ new credit structure and the legal options available to ease its distress. The report’s title “Fitch Disagrees With Moody’s Legal Analysis On Chicago Public Schools” couldn’t be clearer.

Moody’s published special credit profile reports on Jan. 12 about the city and CPS. Moody’s had not been asked to rate new deals by either issuer, but maintains junk ratings on their older debt. Fitch is pretty clear about the disagreement being more than just a difference in opinion. “We read it and we didn’t feel all the information was correct and felt it would helpful to the market if we posed our reasons as to why we disagreed,” said the report’s co-author, Amy Laskey, a Fitch managing director.

“Our goal is to clearly articulate an opinion, and often that means openly disagreeing with other market participants. We may publish those comments if there is strong investor interest, or if we feel our view is meaningfully different from another,” said Fitch’s global head of corporate communications.

Fitch assigned an A rating based on confidence in the issue’s bankruptcy-remote structure. Fitch’s ‘A’ rating on the dedicated CIT bonds is based on a dedicated tax analysis without regard to the board’s financial operations. Fitch has been provided with legal opinions by board counsel that provide a reasonable basis for concluding that the tax revenues levied to repay the bonds would be considered ‘pledged special revenues’ under Section 902(2)(e) of the U.S. Bankruptcy Code in the event of a board bankruptcy.

At the time of the sale of bonds under this security in December, there was widespread disagreement in the market as to whether or not the pledged revenues constituted special revenues in a bankruptcy. The distinction is important as special revenue secured debt is usually paid in a Chapter 9 where general tax backed debt may not be paid.

Moody’s argument is based on its belief that the most likely scenario for CPS is that the district will levy for debt service on GO alternate revenue bonds in order to free up state aid for operations.” Moody’s suggests that triggering the ad valorem tax pledge used on most of its $6 billion of debt offered one option for CPS to free up revenue for operations.

The belief stems from structural features such as the fact that the bonds are payable solely from segregated CIT revenues that can be used only for capital projects or CIT bond repayment and not for operations. Moody’s report suggests that the district could elect to use unrestricted general state aid for operations instead of debt service on its alternate bonds issued under the Illinois Local Government Debt Reform Act. Under the state’s alternate revenue structure, an ad valorem tax levy is imposed to repay bonds but it is typically abated as the “alternate” revenues are tapped. About $373 million in CPS state aid will go to such bond repayments this year.

Fitch takes the view that to apply alternate revenues to operations would draw a successful challenge in litigation opposing an attempt to levy taxes while alternate revenues were available for debt service.” Fitch argues that the act establishing the revenues “clearly” indicates that CPS must apply available alternate revenues to debt service. “Fitch also does not agree that the CIT bonds are secured by a statutory lien.”

Under the flow of funds, the CIT revenues are collected by the county collectors of Cook and DuPage Counties. The board has directed the collectors to transmit the CIT revenues directly to an escrow agent. The escrow agent transfers revenues needed for payment of debt service to the bond trustee daily. Revenues in excess of those required to meet annual debt service may be available to reimburse CPS for authorized capital expenditures.

The board covenants not to revoke the direction to the county collectors as long as the bonds are outstanding. Based upon review of bond counsel opinions Fitch believes that any future attempt to revoke the direction to the county collectors would be contrary to state statute. This creates an effective “lockbox” structure to protect the revenues. Moody’s had written that features like a “lockbox” on revenues helped “lessen but do not eliminate the risk of bondholder impairment in a future bankruptcy.”

Fitch does not agree that the CIT bonds are secured by a statutory lien. Fitch’s belief that the bonds would be protected in Chapter 9 stems from opinions that they meet the bankruptcy code’s designation of “pledged special revenues” which offers some insulation from impairment. The belief stems from structural features such as the fact that the bonds are payable solely from segregated CIT revenues that can be used only for capital projects or CIT bond repayment and not for operations.

CPS asked only Fitch and Kroll Bond Rating Agency to review the bonds backed by the distinct property taxes pledged. Kroll assigned its BBB rating in line with its GO ratings of BBB and BBB-minus. Fitch rates CPS GO debt B-plus, with a stable outlook. The other two rating agencies also rate CPS GOs at junk. Our experience teaches that reliance on opinion of counsel rather than established court precedent through either outstanding litigation or a record established through a bond validation proceeding should be of little comfort. Under those circumstances, the most conservative view of the credit should prevail.

WAYNE COUNTY MICHIGAN UPGRADE

With so much focus on the City of Detroit and its efforts at recovery from bankruptcy, it is easy to overlook developments in surrounding Wayne County. So we draw attention to the news that Moody’s Investors Service has upgraded the rating of Wayne County, MI’s outstanding general obligation limited tax (GOLT) bonds to Ba1 from Ba2. The Ba1 rating is the same as Moody’s internal assessment of Wayne County’s hypothetical general obligation unlimited tax rating. The lack of notching reflects the full faith and credit nature of the county’s GOLT pledge and the availability of all general operating revenue to pay debt service. Moody’s has also upgraded to Ba1 from Ba2 the rating on outstanding lease revenue bonds issued by the Wayne County Building Authority. The county is the ultimate obligor of outstanding building authority bonds, with repayment similarly secured by the county’s full faith and credit pledge and not subject to annual appropriation.

Wayne County’s GOLT bonds are secured by its pledge and authority to levy property taxes within statutory and constitutional limitations to pay debt service. Debt service is not secured by a dedicated tax levy. Bonds issued by the Wayne County Building Authority are secured by lease payments made to the authority by the county. The lease payments are secured by the county’s full faith and credit pledge, equivalent to its pledge on GOLT bonds, and are not subject to appropriation.

The stable outlook reflects the likelihood of credit stability given an improved balance sheet and financial position that mitigate challenges associated with a weak economic profile, negative demographic trends and outstanding borrowing needs.

CONNECTICUT PENSION LEGISLATION

It’s the kind of move that makes one wonder if legislators understand the seriousness of the pension funding crisis. In a strict party-line vote, the Connecticut General Assembly approved a pension refinancing that was negotiated by Governor Dannel Malloy’s administration last year. House Democrats narrowly approved it, and then, for the first time in 2017, Lieutenant Governor Nancy Wyman broke a 17-17 tie between Democrats and Republicans in the State Senate.

Earlier in the day, Republicans seriously considered derailing the pension agreement, due to their objections that the refinancing plan wasn’t comprehensive enough. The agreement had been announced on Dec. 9, 2016. It took the prudent step to lower expected investment returns for state employees and reduced annual state payments to the fund. It also aimed to restructure a projected $6 billion balloon payment in 2032, that state analysts have described as a kind of fiscal cliff for Connecticut.

The level of debate is concerning and illustrates why the market is concerned about the State’s long term credit. The Republican President Pro Tem asked, “What’s the rush? This bill hits in 2032.” We can take time, look at different ways.” He was looking for additional union concessions paired with refinancing . He claimed not to have received information regarding the agreement until last week (yes, the deal announced two months ago), as the deal passed a committee with Republican and Democrat votes.

Fasano said if the main goal was to free up money with reduced pension payments in order to the balance the budget, then that was an irresponsible choice. “I don’t think that’s a good plan for the state. I don’t think it’s a good plan for the union employees because that money should go into the union. That money should go into the coffers and grow.” So if it shouldn’t balance the budget and improve the likelihood of pensions being paid, it’s a bad idea?

We are not holding our breath for an upgrade.

ATLANTIC CITY LAYOFFS DELAYED

And so it goes in the effort by the state to manage the city’s finances. An Atlantic County Superior Court Judge issued a restraining order against the state after International Association of Fire Fighters Local 198 re-filed a lawsuit last week to avoid layoffs, a new work schedule and deep cuts to benefits. The state’s attorney said in a letter that layoffs wouldn’t be implemented until September, when a federal grant covering 85 firefighters expires. The order also temporarily blocks state officials from taking any unilateral actions against the union under the so-called takeover law.

The state planned to implement changes to the union’s contract Feb. 19, including new salary guides, elimination of education and terminal leave pay, and establishment of a new work schedule under which all firefighters would work one 24-hour shift followed by two days off. State officials claim the judge’s decision doesn’t change the state’s timeline to implement the contract changes. “We decided to delay implementing the proposed contract reforms until Feb. 19 as a good faith gesture to give the fire department more time to prepare,” said the Department of Community Affairs.

“So, the TRO, in effect, is restraining us until Feb. 13 from implementing any changes, which we already stated we won’t start implementing until Feb. 19,” Ryan said. The union lawsuit claims the state takeover law is unconstitutional since it impairs the contract rights of the union, among other reasons. It ultimately seeks a permanent injunction prohibiting the state from using its takeover powers against the firefighters.

A hearing was scheduled at Atlantic County Civil Court in Atlantic City. But the case has since been removed to federal court, Ryan said. The union wanted to keep the case in state court in the belief the contract clause of the state constitution is stronger than that of the federal constitution. The union withdrew its initial lawsuit Wednesday after the state postponed contract changes for two weeks.

The city has a $100 million budget gap. The state’s proposed Fire Department changes would save the city less than $8 million annually, according to the union’s suit. The fire union argues that proposed cuts would make the city unsafe. And it says fire department costs make up just 7 percent of the city’s $240 million budget. The potential 100 layoffs would cut nearly half of the department’s 225 firefighters. “The 44 percent (staff) reduction could lead either to understaffed responses to high rise fires, or inadequate responses to other smaller fires while high rise fires are being fought,” the union’s suit said.

TENNESSEE BUDGET PLAN INCLUDES GAS TAX INCREASE

Tennessee Gov. Bill Haslam unveiled a $37 billion annual spending plan, urging lawmakers to adopt his recommended gas tax increases to pay for better roads and reject temptations to dodge it by turning to burgeoning revenues in other non-transportation areas to fund it instead. He proposed a 7-cent-per-gallon increase in gas and 12-cent boost on diesel. If adopted, the governor’s recommendations would include Tennessee’s first fuel tax increases in nearly 28 years. Lawmakers, he warned, shouldn’t be tempted to use one-time money on road funding.

“I have never thought that it was a good plan to pay for a long-term need like $10.5 billion in approved and needed road projects with a short-term surplus,” Haslam said of his plan to address a nearly 1,000-project backlog. “Third, and the most fundamental, in my proposal — an estimated half or more of the increased revenue — would come from non-Tennesseans and trucking companies” under his gas tax increase plan. his $278.5 million tax increase plan, which would also increase fees for vehicle registration, implement the first time indexing fuel prices once every year with caps to inflation and other measures.

Offsets to the fuel tax increases include cutting the 5 percent sales tax on groceries by a half percentage point, or $55 million, a $113 million cut in business franchise taxes for manufacturers whose operations generate well-paying jobs, and accelerating the current phase-out of an income tax on individuals’ investments, which will cost the state $102 million annually.

FINRA ACTS AGAINST AN UNDERWRITER

The Financial Industry Regulatory Authority (FINRA) announced today that it has expelled Phoenix-based Lawson Financial Corporation, Inc. (LFC) from FINRA membership, and has barred LFC’s CEO and President Robert Lawson from the securities industry for committing securities fraud when they sold millions of dollars of municipal revenue bonds to LFC customers.

The bonds at issue were underwritten by LFC and related to an Arizona charter school and two assisted living facilities in Alabama (which were the borrowers on the bonds). FINRA found that Robert Lawson and LFC were aware that each borrower faced financial difficulties, and Lawson transferred millions of dollars to the borrowers and associated parties from a deceased customer’s trust account, in order to hide the borrowers’ financial condition and to hide the risks associated with the bonds. FINRA determined that when LFC customers purchased the bonds, LFC and Lawson hid the material fact that Lawson was improperly transferring millions of dollars from the trust account to various parties when the borrowers were not able to pay their operating expenses or required interest payments on the bonds.

FINRA found that Lawson and his wife, Pamela Lawson (LFC’s Chief Operating Officer), who were co-trustees of the trust account, violated FINRA rules by breaching their fiduciary duties as trustees and engaging in self-dealing with the trust account. FINRA also determined that Robert Lawson misused customer funds. In addition to expelling LFC and barring Robert Lawson, FINRA suspended Pamela Lawson from associating with any FINRA member firm for two years and fined her $30,000 to be paid prior to her return to the securities industry. This disciplinary action settles a May 2016 complaint filed against LFC, Robert Lawson, and Pamela Lawson.

In settling this matter, LFC, Robert Lawson and Pamela Lawson neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Muni Credit News February 2, 2017

Joseph Krist

Municipal Credit Consultant

THE HEADLINES…

DESIGN BUILD FOR NYC

WHY INFRASTRUCTURE IS SO HARD

MUST BE NICE TO HAVE A SURPLUS

CIVIC FEDERATION WEIGHS IN ON ILLINOIS CASH BORROWING

RAIDERS OF THE LOST STADIUM DEAL

FLORIDA BUDGET SUBMITTED BY GOVERNOR

—————————————————————————————————————–

DESIGN BUILD FOR NYC

In his latest budget proposal, Governor Andrew Cuomo granted design-build authority to all state agencies, but that did not include New York City agencies—leaving the city at a disadvantage when it undertakes capital projects. Currently, there are three major projects using the concept in the NYC metropolitan area. They are the Tappan Zee and Goethals Bridge replacements and the LaGuardia airport rebuild project.

Mayor Bill DeBlasio recently sought the support of the influential New York Building Congress in his fight to get Albany to extend so-called “design-build authority”—believed to expedite the construction process while decreasing costs—to New York City instead of just reserving it for state infrastructure projects. The situation results from the City’s home rule status which gives the State approval rights over many city policies.

There has not been significant opposition to the use of design build on the three projects. They have created jobs and that has been enough to tamp down union opposition to changes in funding rules which might be perceived as threatening to job levels. This has always been a central problem in efforts to reform and streamline the execution of major capital projects in the city and state. Adoption of the proposal would be seen as credit positive for the city as it would be a useful tool in reducing some of the City’s risks in capital project delivery and reducing costs and capital requirements through efficiencies.

WHY INFRASTRUCTURE IS SO HARD

In our last issue, we highlighted a list of 50 high priority infrastructure projects – public, private, and P3 – submitted by the nation’s governors in response to a request from the Trump transition team. Among them were two privately sponsored and financed power projects. One would transmit renewable energy from a power generation complex in Wyoming for sale into the California, Arizona, and Nevada power markets. The second project is the generation facility itself – a wind powered complex. The two projects are estimated to produce 4,000 direct jobs and 4,000 indirect jobs reflecting an investment of some $8 billion of private capital. Both projects are fully engineered and 95% permitted. Sounds like a Trumpian dream?

Well one man’s dream is another man’s nightmare apparently. A bill filed in the Wyoming legislature would require utility companies within the state to provide electricity to their customers that comes from “eligible resources.” These would include coal, hydroelectric, natural gas, nuclear, and oil. Electricity from renewable energy sources like rooftop solar or backyard wind projects would also be permitted. The bill would require 95% of all electricity in the state to be derived from “qualified resources” by 2018 and 100% by 2019.

It is billed as a renewable energy law. Any utility company who violates the proposed new renewable energy law would be fined $10 for every megawatt of non-conforming electricity provided to Wyoming residents. Now Wyoming is a large exporter of energy. It is the nation’s largest producer of coal, fourth largest natural gas producer, and eighth among US states in crude oil production. It also one of the consistently windiest states and as such is rated highly as a source of wind power. In fact, several large wind energy installations are in existence in the state or are under construction, but all of their output is scheduled to go to customers in other states. Under the proposed legislation the sale of electricity from wind or solar farms to Wyoming residents would be illegal.

The bill’s principal sponsor bases it on the following: “Wyoming is a great wind state and we produce a lot of wind energy. We also produce a lot of conventional energy, many times our needs. The electricity generated by coal is amongst the least expensive in the country. We want Wyoming residences to benefit from this inexpensive electrical generation. We do not want to be averaged into the other states that require a certain [percentage] of more expensive renewable energy.”

In truth, the effort is one of job preservation in the coal industry. A co-sponsor of the bill says “The controversy of climate change affects our families in Campbell County. Coal = Jobs. The fact of the matter is that man-made climate change is not settled science. Instead, it is hotly disputed by reputable and educated men and women….” Wyoming is also considering taxing in-state wind farms that export electricity to other states. So don’t be surprised if these two projects become casualties rather than candidates under any proposed infrastructure bill.

The situation serves to highlight to complexities which be devil any attempt to undertake a large scale infrastructure program in the current environment. Big plans and projects require big thinking and big thinking clashes with the parochial interests and views of the many constituencies impacted by such a program. This is especially true in areas the likes of which provided the President with his base of support. So try as he might, it might be harder for him to follow through on his goals than he thought since the same people he is trying to please are sometimes his greatest opposition.

MUST BE NICE TO HAVE A SURPLUS

While it is the case in most states that the challenges of sluggish fourth quarter growth and its effect on revenues are the primary concern of state budget makers, Minnesota Gov. Mark Dayton’s final two-year spending plan for the state is an exception. At $45.8 billion, the proposed 2018-19 budget amounts to a 10 percent increase from the current budget of $41.8 billion. The governor has had some clear priorities for his tenure. They include a gas tax to pay for work on roads and bridges, and money to help more students attend prekindergarten programs. His proposal includes a new strategy for stabilizing health care costs: expanding the state’s MinnesotaCare health insurance program to provide a public option for more people.

Additional bigger ticket items include an additional $371 million added to Minnesota’s per-pupil funding formula, which would amount to a 2 percent increase in state spending on each public school student in each of the next two years. Under the proposal, $75 million in new money would be used to expand prekindergarten options in public schools. Dayton said, “It would deliver excellent educations for all our students, support job creation across our state, and create cleaner, healthier futures for all Minnesotans.” After seeking $312 million in rebates for health insurance customers facing premium spikes, Dayton also wants $12 million to expand the MinnesotaCare public insurance program to more people.

About 450,000 Minnesotans would see some kind of tax relief under Dayton’s proposal including farmers, parents paying for child care and charities. The plan calls for $318 million in new money for public colleges and universities, including money for student financial aid, to help homeless students and efforts to reduce campus sexual assault. Not waiting for a federal plan, Dayton renewed his call for a 6.5 percent gas tax increase to finance the rapidly escalating need to repair, replace and expand Minnesota roads, bridges and transit systems.

Much of the spending in the governor’s plan draws from the $1.4 billion surplus expected to be left over at the end of the state’s current fiscal year. That surplus and some control on spending helped Minnesota obtain an upgrade in 2016. The spending blueprint was seen as facing an uphill battle with a GOP-controlled Legislature. Republican lawmakers confirmed that by saying they agreed with many of the governor’s priorities but not with how much he wants to spend.

The debate is a nice one to be able to have and would seem to place the state’s credit in a small group that sees its finances showing positive trends. It also shows that divided state government need not be a basis for stalemate and declining ratings.

CIVIC FEDERATION WEIGHS IN ON ILLINOIS CASH BORROWING

As part of its compromise budget package, the Illinois Senate has proposed to borrow $7 billion to pay off a large portion of the existing backlog. Senate Bill 4 would raise the total borrowing limit by $7 billion, provide for the bonds to be issued in early FY2018 and calls for level debt service payments over seven years (as opposed to the State’s usual practice of level principal).The proceeds of the sale would be deposited into the General Revenue Fund, but the statute restricts their use to paying off the backlog and instructs the Comptroller and the Treasurer to make payments “as soon as practical.” Implementation of this bill is contingent on passage of the other bills in the Senate package which provide for increased revenue, reforms to workers’ compensation and procurement, a two-year property tax freeze and appropriations to finish FY2017.

The Federation made a few arguments in favor of borrowing. In its view, the first and most compelling is that for a considerable portion of the backlog the state could save on interest cost. It cites the State Prompt Payment Act, which establishes that most bills that are more than 90 days old accrue interest at 1% per month, or more than 12% annually. Bills from healthcare providers accrue 9% after 30 days, as specified by the Illinois Insurance Code. The federation was unable to determine the percentage of bills that bear interest at each rate, and interest is only paid when the bill is finally paid. That made it hard to calculate the actual total interest cost on the bill backlog. It was able to calculate interest payments in past years. Even with a smaller backlog interest peaked at $318 million in FY2013. Interest payments have been lower in FY2016 and FY2017 only because the lack of a full-year budget has delayed the payment of bills. The Comptroller’s Office estimates that accrued but unpaid interest penalties in FY2017 were in the hundreds of millions of dollars. Even if there is a substantial increase in interest rates, the total borrowing cost of the bonds would still be lower than the 9% to 12% the state currently pays.

The Civic Federation did offer some suggested concepts which it feels should guide any plan for borrowing to pay off the backlog: The borrowing must be paired with a comprehensive, credible plan to balance the budget in FY2018 and match expenditures to revenues for the foreseeable future; the borrowing should be as short as possible in duration to minimize the burden on future fiscal years; the proceeds should be strictly limited to repaying existing, overdue bills; and the State should identify revenues for debt service not otherwise needed to balance the budget.

RAIDERS OF THE LOST STADIUM DEAL

This week’s news that the existing financing plan for a stadium in Las Vegas for the Oakland Raiders to move into had collapsed was not a complete shock. The family of Las Vegas Sands Corp. Chairman and CEO Sheldon Adelson has withdrawn as investors in a proposed $1.9 billion, 65,000-seat domed football stadium. Adelson said he was surprised by the Raiders’ submission of a proposed lease agreement to the Las Vegas Stadium Authority. Raiders representatives told the Stadium Authority board that construction would be financed by Goldman Sachs — with or without the Adelsons as partners.

Under the Southern Nevada Tourism Improvements Act, the Stadium Authority would still have until mid-2018 to attract an NFL team to the planned stadium. If an NFL team is not secured by mid-2018, the Stadium Authority would be dissolved and UNLV officials would be required to deliver notice to the governor of their intent to build a smaller collegiate stadium for the Rebel football team. UNLV officials would have two years to raise $200 million toward the project, and tax revenue generated by the increased hotel tax would be dedicated to that stadium effort instead.

In light of the Adelson’s announcement, Goldman Sachs pulled away from the project Tuesday. Apparently, Goldman’s other relationships with the Adelsons might have been jeopardized if it proceeded on the stadium without them. Goldman has many complicated relationships with NFL teams as one of the leading bankers in the stadium finance sector. They are also banker to the San Diego now Los Angeles Chargers outside of stadium financing.

So where do the Raiders turn to now? They could recruit another big-money Las Vegas investor such as another casino owner, consider a move to San Diego, try to share Levi Stadium in Santa Clara (which Goldman financed for the 49ers), or try to get a new or refurbished home in Oakland. Possible providers of public financing will now have additional leverage and the scenario in Las Vegas which left local politicians feeling hosed to a great extent will not help to generate public support for tax dollars to be used on a facility. An investment group backed by Fortress Investments including former 49ers and Raiders star Ronnie Lott has proposed to build a $1.25 billion, 55,000-seat stadium at the present site.

38 STUDIOS LITIGATION REACHES FINAL SETTLEMENT

The last defendant in a civil suit by the State of Rhode Island, Hilltop (nee First Southwest) Securities has agreed to pay the State $16 million to settle the litigation regarding the State’s issuance of $75 million of debt to finance a failed video game venture founded by former Major League pitcher Curt Schilling. Now that the litigation is settled, Governor Gina Raimondo said: “I am pleased with the proposed settlement of $16 million from First Southwest. But we cannot rest on monetary recovery alone. If the Court approves this settlement, the civil case will end and I will immediately petition the Court for the release of all materials associated with the grand jury investigation of 38 Studios. Rhode Islanders deserve to have access to all of the information that is known. Complete transparency is the best way to ensure that such a disastrous deal never happens again.”

Ever since 38 Studios went bankrupt, the State under its moral obligation pledge has had to make semiannual interest and annual principal payments on the bonds. This latest settlement would bring to $61 million the amount recovered by the state from a string of defendants. The Corporation previously settled claims against Curt Schilling, three codefendants and their insurer for $2.5 million in September 2016; Wells Fargo Securities, LLC and Barclays Capital Inc. for $25.625 million in August 2016; one law firm for $4.4 million in June 2014; and another law firm for $12.5 million in August, 2015.

The transaction and ensuing litigation highlights the risks inherent in the use of public issuers and funds to finance speculative private ventures. The pursuit of jobs and economic development is a legitimate role for public entities but it must be done cautiously and thoughtfully lest the potential financial risk threaten the creditworthiness of the public entities involved.

FLORIDA BUDGET SUBMITTED BY GOVERNOR

Governor Rick Scott has submitted his proposed fiscal 2018 budget to the Florida legislature. The budget calls for spending of $83.474 billion, an increase of 1.45% above FY 2017 levels. Over 60% of state spending will be for health and education. Billed as the “Fighting for Florida’s Future” budget it proposes to cut taxes by more than $618 million including decreasing the tax on business rents, providing a one-year sales tax exemption on college textbooks, cutting the business tax, exempting school book fairs from the sales tax and implementing a 10-day back-to-school sales tax holiday, nine-day disaster preparedness sales tax holiday, three-day veteran’s sales tax holiday and one-day camping and fishing sales tax holiday.

The plan is represented a producing nearly $21 billion in state and local funding through the Florida Educational Finance Program (FEFP) for Florida’s K-12 public schools which equates to $7,421 per student. This is the highest total funding, state funding and per-student funding for K-12 in Florida’s history. The budget anticipates a 3.3% increase in revenues primarily from increased sales tax revenues. The General Fund relies upon sales taxes for just under 80% of its projected revenues.