Joseph Krist

Municipal Credit Consultant

TO OUR READERS

Hopefully you’ve noticed a change in our format. We plan to highlight new issues that feature some unique component or represent sectors or issuers of interest.

Next week we are taking our first vacation in nearly two years. We hope that the change of scenery and the new format keep the Muni Credit News fresh and on point. So look for our next edition on Tuesday May 2.

STATE OF CALIFORNIA

$1,248,070,000 FEDERALLY TAXABLE GENERAL OBLIGATION

HIGH-SPEED PASSENGER TRAIN BONDS

Moody’s: Aa3; S&P: AA-; Fitch: AA-

California is marketing these taxable bonds to investors both domestic and international.

The State is taking advantage of its size (its economy is bigger than that of most countries), name recognition, and the world’s familiarity with the concept of high speed rail. With rates still low, especially in Europe, the bonds are likely to have appeal to large institutional investors overseas. The issue will include traditional fixed rate bonds, mandatory put bonds, and index rate floaters.

The general obligation bonds benefit from the State’s recent sequence of more successful budget operations after the effects of the financial crisis. The State of California has a population of 39.4 million and a gross state product of $2.5 trillion. It has a large and diverse economy, and relatively high wealth. Relative to recent years, the state has a relatively stable financial position, high but declining debt metrics, adjusted net pension liability ratios that are close to the 50-state median, and strong liquidity.

Geisinger Health System

$850,000,000 Fixed Rate and Indexed Floating Rate Bonds

Moody’s: Aa2  Standard and Poor’s : AA

The bonds are secured by a general unsecured obligation of Geisinger Health System Foundation (GHSF) as the only legal obligor. The inpatient operating divisions and the Geisinger Health Plan (the Health Plan) are not members of the obligated group, but designated affiliates. The designated affiliates, which are required to upstream funds to GHSF for debt service obligations, can be de-designated at any time. Under the designated affiliate structure, the potential for future subordination of the bonds is possible.

Geisinger Health System is a vertically integrated, physician-led health system which has as its main components: a range of health services providers, including seven acute care hospitals with multiple campuses; a multi-specialty physician group practice of approximately 1,653 physicians practicing at 216 primary and specialty clinics; and Geisinger Health Plans (‘GHPs’), comprised of Geisinger Health Plan (‘GHP’), Geisinger Indemnity Insurance Company (‘GIIC’) and Geisinger Quality Options, Inc. (‘GQO’). Geisinger operates in 45 of Pennsylvania’s 67 counties, with a significant presence in central, south-central and northeastern Pennsylvania, and in 7 counties in southern New Jersey.

In spite of an excellent reputation and strong service area position, Moody’s has assigned a negative outlook to its rating. The negative rating outlook reflects several financial and strategic challenges including material operating losses related to the health plan’s exchange product, underperformance of a clinical provider and our expectation of still weak consolidated financial performance through FY 2017, relative to peer group medians. As the System digests and continues to pursue acquisitive growth, failure to demonstrate meaningful margin improvement in FY 2018 will result in a downgrade.

Moody’s states that the Aa2 rating acknowledges multiple key strengths including the organization’s large size and leading market position in Central Pennsylvania, its exceptional clinical and research reputation, management’s historic ability to execute strategy, very strong balance sheet resources, moderate leverage and effective management of debt structure risks. Credit concerns include multiple years of very modest consolidated financial performance compared to national Aa2 medians and peer organizations, challenges at the health plan which represents a sizable portion of the enterprise, underperformance of a clinical provider, an increasingly fluid and consolidating competitive landscape and the execution of multiple growth strategies simultaneously.

NYU Hospitals Center

$600,000,000 Taxable Bonds

Moody’s : A3

Yet another significant hospital provider is taking advantage of a favorable rate environment to issue taxable municipal debt to refinance existing debt and bank borrowings. NYUHC is a tertiary care teaching hospital with campuses located in midtown Manhattan and Brooklyn. NYUHC owns three inpatient acute care facilities in Manhattan and Brooklyn: (1) Tisch Hospital, located in Manhattan on the campus shared with NYU School of Medicine; (2) NYU Hospital for Joint Diseases Orthopaedic Institute, an orthopaedic, neurologic and rheumatologic specialty hospital located in Manhattan, which also houses the Rusk Institute of Rehabilitation Medicine; and (3) NYU Lutheran, located in Brooklyn. NYUHC also operates over thirty ambulatory facilities in Manhattan, Brooklyn, Queens and Long Island.

After recovering from damage due to Hurricane Sandy, NYUHC has embarked on an extensive program of affiliations with a number of NY metropolitan area providers. This has created some risk related to executing the new affiliation strategies and absorbing incremental debt, which challenge NYUHC to meaningfully reduce balance sheet leverage in the near term. These pressures constrain the rating.

The rating was accompanied by a change in the outlook to positive. The outlook  assumes no further affiliations or additional leverage at this time. Growth of unrestricted cash and investments translating to evidence of sustained reduction of leverage, maintenance of strong operating performance, smooth absorption of newly affiliated entities, and continued progress in completing campus redevelopment on time and on budget would be the grounds for an upgrade.

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ANOTHER SPIN FOR MASS TRANSIT IN LAS VEGAS

For some two decades, Las Vegas has pursued a dream of a mass transit option which would link McCarran Airport to the Las Vegas Strip. The well documented failure of the Las Vegas Monorail was the latest ill fated attempt at such a plan. Consistent with the city’s ethos and history of constant reinvention, efforts are underway to try again. This week, Nevada senators took the first step to move a bill that would provide the permission necessary to build high-capacity systems of transportation in Las Vegas. “High-capacity transit” means a system of  transportation services which uses and occupies a separate right-  of-way or rails exclusively for public transportation that may  provide a substantially higher level of passenger capacity by  increasing, without limitation, the number of vehicles utilized by  the system, the size of the vehicles, the frequency of vehicle rides, travel speed or any combination thereof. The term includes, without limitation, rapid bus transit, fixed guideway, light rail  transit, community rail, streetcar and heavy rail.

Senate Bill 149 would lay the groundwork to implement a multi-billion-dollar light rail plan being considered to link McCarran International Airport with the Las Vegas Strip.

For two years, members of the Regional Transportation Commission of Southern Nevada have been drawing blueprints for the light rail as well as makeovers for pedestrian walkways. They’re also considering transit options to connect residential neighborhoods, college campuses, Sunrise Hospital and shopping hubs.

The bill authorizes a regional transportation commission to  construct, develop and operate a high-capacity transit system, as well as enter into  contracts with other local governments to share the costs related to transportation  projects. If a regional transportation commission enters into such a cost-sharing  agreement, the bill requires appropriated by the commission or a local  government in accordance with the cost-sharing agreement. The bill  authorizes a regional transportation commission to use a turnkey procurement process or competitive negotiation process in connection with a high capacity  transit project. The bill would give local officials new authority to seek tax hikes or federal grants to finance developments and explore the use of self-driving cars.

If a majority of the voters approve  the imposition of an additional property tax, the additional rate is exempt from the  partial abatement of property taxes on certain property and the requirement that  taxes ad valorem not exceed $3.64 on each $100 of assessed valuation.

GAS TAXES AT CENTER IN MANY BUDGET DEBATES

California raised its gas tax, Louisiana has proposed an increase, and debates continue in the Southeast over fuel taxes. A bill that includes a plan to raise the gas tax for the first time in 30 years is headed to the South Carolina Senate this week. The latest bill passed the House with a 97-18 vote last month. The bill calls for a $.02 increase on the gas tax each year for the next five years. Only oil-producing Alaska has a lower gas tax than the Palmetto State.

In Tennessee, the governor’s proposal, known as the IMPROVE Act, seeks to raise the tax on gasoline and diesel fuel by 6 and 10 cents, respectively, while also calling for a variety of tax cuts. One state legislator is proposing a substitute in the form of a tax collected from the sale of new and used vehicles. The proposal would use 90 percent of the taxes collected through vehicle sales in Tennessee and distribute the money between the state’s highway fund and local governments. Sixty-four percent of the revenue collected would be distributed to the state’s highway fund, while 24 and 12 percent would be provided to counties and local municipalities, respectively. That would generate $215 million for the state, $80 million for counties and $40 million for cities to be used for transportation needs.

In Massachusetts, a proposed bill would allow cities and towns to establish their own payroll, sales, property or vehicle taxes to fund transportation projects. Under the proposal, these local taxes would expire after 30 years. Voters in the city or town would need to approve them. The bill would also establish a maximum amount that new taxes could be raised and mandate that the revenue from them be only spent on transportation. According to polls, between 70% and 80% of Massachusetts residents supported this idea.

TAMPA AIRPORT EXPANSION TO BE BOND FUNDED

The Hillsborough County Aviation Authority is the owner, operator, and financier of the Tampa International Airport. This week, the Authority unveiled the $543 million second phase of its massive expansion project that includes express curbside drop-off for passengers without checked bags and the commercial development of 17 acres of airport property. It is all part of roughly a $2.3 billion, long-term renovation and expansion that will transform the passenger experience over the next decade and allow the airport to eventually double its passenger traffic to 34 million. This will be the first major renovation to the airport since the terminal was built in 1971. The first phase of the project includes a new 2.6 million-square-foot rental car facility and a new people mover train, which will connect passengers from the rental car area and economy parking garage to the main terminal.

That part of the expansion is expected to be completed next year. Of import to existing bondholders of the Authority’s airport revenue bonds is the fact that the authority hopes to issue bonds in late 2018 to finance the project. A favorable interest rate environment for a refinance of existing bonds plus the authority’s efforts to improve its financial bottom line in recent years in anticipation of this project are relied upon to support financing for the project.

The per-passenger cost charged to the airlines, in the form of landing fees, will increase from the current $5.37, climbing steadily until reaching $8.24 in 2025. A $798 million Phase III is tentatively scheduled to begin in 2023 and includes a new airside D with 16 gates capable of handling both domestic and international flights. That phase would finish in 2026.

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

joseph krist

joseph.krist@municreditnews.com

UAB Medicine Finance Authority

Moody’s: A1

The Authority will sell $52,880,000 of revenue bonds on April 18.

The bonds are joint and several obligations of the obligated group members secured by the Pledged Revenues, as defined in the bond documents. Pledged Revenues in general means the gross revenues derived from the operation of the Obligated Group’s facilities. It does not include State appropriations, or donor directed gifts. Members of the UAB Medicine obligated group are the University of Alabama Hospital at Birmingham, University of Alabama Health Services Foundation, P.C., Callahan Eye Hospital Health Care Authority, and UAB Health System.

UAB Medicine Finance Authority is a public corporation organized by the University of Alabama System to serve as the bond issuer for the obligated group. UA Hospital is a 1,157-bed facility located in Birmingham, AL and owned by the Board of Trustees of the University of Alabama. The hospital is the primary teaching site of the University of Alabama School of Medicine. University of Alabama Health Services Foundation, P.C. is the faculty physician plan. Callahan Eye Hospital provides specialty ophthalmology services and UAB Health System is a coordinating body for the other entities.

The A1 rating is based on multiple factors including UAB Medicine’s good market share in Birmingham and throughout the state for high acuity services, UAB Medicine’s affiliations and strong strategic ties with the University of Alabama School of Medicine, the University of Alabama at Birmingham, and the University of Alabama System, as well as UAB Medicine’s own strong core financial performance. These strengths are balanced against the need to make large annual transfers to the school of medicine to support research and teaching that have significantly reduced margins in recent years. Organizational and operational changes implemented over the last two years have significantly increased cash flow, net of transfers to the university.

The rating is based on multiple factors including UAB Medicine’s good market share in Birmingham and throughout the state for high acuity services, UAB Medicine’s affiliations and strong strategic ties with the University of Alabama School of Medicine, the University of Alabama at Birmingham, and the University of Alabama System, as well as UAB Medicine’s own strong core financial performance. These strengths are balanced against the need to make large annual transfers to the school of medicine to support research and teaching that have significantly reduced margins in recent years. Organizational and operational changes implemented over the last two years have significantly increased cash flow, net of transfers to the university.

The rating is also supported by a positive outlook. The outlook  reflects expectations that UAB Medicine will maintain stronger cash flow over the next several years.

SCHOOL DISTRICT OF MIAMI-DADE COUNTY, FLORIDA

The District will sell $250,000,000 of general obligation bonds.

Moody’s: “Aa3”

The bonds present one of the stronger tax backed credits funded from an economic area that has seen its share of well documented weak credits and shady credit, accounting, and management practices among other jurisdictions.

The G.O. bonds are secured by the district’s general obligation, unlimited taxing authority. The district, which is coterminous with Miami-Dade County is the fourth largest in the nation by enrollment. At the close of fiscal 2016, there were 467 schools, approximately 356,480 students, and 38,324 full and part time employees (including 20,016 full-time instructional staff). The district’s credit reflects a substantial property tax base that continues to strengthen, narrowed financial position with modest contingency reserves and cash, and an ongoing substantial capital program, funded in part with a sizable $1.2 billion voter-approved general obligation bond authorization.

The credit has been assigned a stable outlook based on the likelihood that the district will maintain its narrow reserve position in the near- to mid-term. The outlook also reflects the improving local economy and property values that are seen as ultimately  helping the district improve its reserve position.

KAISER PERMANENTE

The California Health Facilities Financing Authority is planning the sale of five series of tax exempt bonds and one series of taxable debt.

Fitch: “A+” (stable outlook)  Standard & Poor’s: “AA-” (stable outlook)

Bond proceeds will be used to reimburse Kaiser for approximately $760 million of prior capital projects; provide $2.2 million of liquidity for general corporate purposes including capital projects; refund $517 million of FRN, fixed rate, and put bonds; and refinance $900 million of existing CP debt.

Debt service is an unsecured general obligation of Kaiser Foundation Hospitals (KFH). KFH’s obligations under the loan agreement are guaranteed by Kaiser Foundation Health Plan, Inc. (KFHP), Kaiser Hospital Asset Management, Inc., and Kaiser Health Plan Asset Management, Inc., which along with KFH comprise the Credit Group. Kaiser Permanente is a unique, vertically integrated, closed health maintenance organization (HMO). Based on revenue, Kaiser is by far the largest nonprofit healthcare system in the U.S. Kaiser’s total adjusted revenues in fiscal 2016 (Dec. 31 year end; audited) were $64.1 billion.

Kaiser is diversified and operates in multiple regions across the country, including the west coast (California, Hawaii, Oregon, and Washington), central mountains (Colorado), southeast (Georgia), and mid-Atlantic (Maryland, Virginia, and D.C.). With the February 2017 acquisition of Group Health Cooperative in Washington State, Kaiser is up to 11.7 million members and growing, however, over 70% of Kaiser’s members are located in California.

In fiscal 2016, Kaiser’s adjusted operating margin measured 2.7% and operating EBITDA margin measured 6.5%. Total pro forma debt outstanding is $10.4 billion. Actual MADS is $2.2 billion, but this includes a bullet payment due in 2047. MADS coverage is 8.6x after adjustment for this bullet payment. At fiscal year-end 2016, pensions were 63% funded relative to a PBO of $18.6 billion. This $6.8 billion underfunded status is 30% greater than the value of Kaiser’s pro forma total direct debt outstanding. This the primary negative factor weighing on this credit.

LOCAL INITIATIVES SUPPORT CORPORATION

$100,000,000 Taxable Bonds, Series 2017A (Sustainability Bonds)

Standard & Poor’s “AA”

Today’s modern investors are often looking not only for opportunities to earn a return of their investments but to also “do good” with their investments. There have been “socially” responsible mutual funds available for some time. Opportunities to apply the same value driven approach to fixed income investing has often been more limited. Recently, the municipal market has been more of an incubator for these investments through the advent of “green bonds” and their increased acceptance by not only investors but participants like rating agencies.

This month another opportunity to achieve social investment goals is scheduled to come to market. In a first-ever move of its kind, the Local Initiatives Support Corporation (LISC) is issuing $100 million in general obligation bonds to help accelerate its work around economic opportunity and drive investment capital into distressed urban and rural communities across the country. LISC is a national nonprofit and one of the nation’s largest community development intermediaries, having invested more than $17 billion to build up the economic infrastructure of disinvested places.

The offering represents the first time a Community Development Financial Institution (CDFI)—a designation for specialized lenders focused on the needs of low-income people and places—has tapped the bond market for growth capital. LISC is headquartered in New York but is locally focused, operating through 31 urban programs and a rural development effort that touches more than 2,000 counties. It combines corporate, government and philanthropic resources. Since 1980, LISC has invested $17.3 billion to build or rehab 366,000 affordable homes and apartments and develop 61 million square feet of retail, community and educational space. S&P Global Ratings has assigned a ‘AA’ credit rating to the bonds. LISC has posted record results in the last two years, including investing more than $1.3 billion in grants, loans and equity in 2016 to support economic development, affordable housing, health care, community safety, education, family financial stability and employment. It was assigned a stable outlook reflecting LISC’s growing assets base and consistent profitability as well as its high-performing loans.  S&P  cited the organization’s proven capacity to weather economic and real estate crises. S&P said LISC’s loan loss exposure is minimal, finding that it “has more than sufficient equity to cover potential losses.”

CHICAGO PUBLIC SCHOOLS LITIGATION DECISION LOOMS

A Cook County judge is expected to rule this week on a pair of motions in the district’s ongoing suit against Gov. Bruce Rauner. CPS is seeking injunctive relief to order the state to help fund its existing budget shortfall, while Rauner’s attorneys have sought to dismiss the case entirely. If the district’s motion fails, it could mean nearly three weeks will be trimmed from the end of the current school year – forcing classes to end as early as June 1 instead of the scheduled date of June 20.

The judge will decide whether CPS will be “irreparably harmed” if its motion is not granted and whether pension funding is included in the state’s education funding requirements. CPS contends that despite carrying nearly 20 percent of the state’s student population, CPS receives just 15 percent of its education funding. The state argues that a shortened school year is not yet a certainty and claim CPS can borrow more money to prevent that outcome. On the pension question, CPS is the only school district in Illinois required to help cover its teacher pension cost. This year, its portion of that payment will exceed $720 million.

More debt for operations would clearly be a credit negative option for CPS. As is the case with the State budget, the Governor continues to use the fiscal process in an attempt to achieve policy goals which often do not have popular support. Rauner previously vetoed $215 million in state funding that CPS had counted on in its fiscal year 2017 budget, saying that money was tied to sweeping pension reforms at the state level that haven’t been achieved.

So CPS finds itself in the middle of an ideological and political battle over which it has limited influence. So long as this remains the case it is difficult to see how CPS’ already weak credit standing can be improved.

BUDGET PROCESS IN NEW HAMPSHIRE UNRAVELS

For the first time in modern memory the New Hampshire House failed to pass a state budget, effectively removing the 400 legislators from the process for now and erasing the work of their Finance Committee over the past several months. The budget developed by Gov. Chris Sununu will now go directly for consideration by the Senate, with none of the House changes on the table when the House and Senate meet in conference in June.

This is the first time since records started being kept in the 1960s that the House failed to adopt the budget proposed by its Finance Committee. As in the U.S. Congress, a 32 member Freedom Caucus is credited with blocking House action. Members of the Freedom Caucus wanted growth in state spending held closer to the rate of inflation, somewhere between 3 and 4.5 percent. The budget will eventually come back to the House after the Senate version of a revenue and spending bill clears a Senate-House committee of conference in June.  Other stumbling blocks included the views of  the majority of Democrats, unhappy with the level of funding for drug and alcohol abuse, the absence of full-day kindergarten and changes in benefits for retired state employees (among other things), voted “no.”

Freedom Caucus leaders wanted up to $200 million in additional cuts but offered no specific recommendations except to eliminate a plan to send $50 million to cities and towns over the next two years for property-tax relief.

CITIZENS PROPERTY INSURANCE REPORTS A LOSS; BLAMES CONTRACTORS

Citizens Property Insurance Corporation it announced recently that will post a net loss for 2016, its first loss in more than a decade, as water loss claims, assignment of benefit (AOB) abuse and litigation costs increasingly impact the company’s bottom line. The Citizens Board of Governors was told Wednesday the state’s insurer of last resort will post a $27.1 million net loss for 2016, its first since 2005. The loss comes despite minimal damage from Hurricane Matthew, the first major hurricane to impact Florida in 11 years. Without significant statutory reforms, Citizens will be forced to pass those higher costs on to its customers in the form of higher rates for the foreseeable future, said Citizens Board of Governors Chairman Chris Gardner.

“Every year, we rely on standardized, accepted actuarial principles to set our rates,” Gardner said “Last year, the same principles that provided rate decreases to our customers in recent years translated into hikes for 84 percent of our policyholders. Without legislative changes, that trend will continue.” The percentage of non weather-related water claims – burst pipes, sudden dishwasher leaks, etc. – that move to litigation has skyrocketed. Each litigated claim raises the average claim cost by $20,000 or more. These costs must be passed on to Citizens policyholders.

Another factor driving rate increases is assignment of benefits, in which policyholders sign over policy rights to a third party, such as a repair company, who then controls their claim and deals directly with Citizens. These contractors assume all the benefits afforded the policyholders but bear few of the responsibilities, including cooperating with Citizens adjusters and reporting losses before repairs are made. The Office of Insurance Regulation has indicated that private insurance companies are facing similar trends.

Citizens is supporting bills which the Florida Legislature currently is considering that address the AOB issue as part of the 2017 Legislative Session. These include SB 1038 and HB 1421, which would bolster consumer protections and clarify attorney fee provisions. The 2017 Legislative Session ends May 5, 2017.

 

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

Joseph Krist

joseph.krist@municreditnews.com

State of California

Moody’s: Aa3  S&P: AA-  Fitch: AA-

California will sell $635,590,000 of General Obligation Bonds this week.

California revenues of $7.63 billion for March beat projections in the governor’s proposed 2017‑18 budget by $1.73 billion, or 29.2 percent, State Controller Betty T. Yee reported.  March revenues were just $56.5 million above estimates in the 2016-17 Budget Act signed last summer. For the first nine months of the 2016-17 fiscal year that began in July, total revenues of $80.91 billion are $607.3 million below last summer’s budget estimates, but $837.1 million ahead of January’s revised fiscal year-to-date predictions.

March personal income tax (PIT) receipts of $3.93 billion topped projections in the governor’s proposed budget by nearly $1.09 billion, or 38.2 percent.  In the current fiscal year, California has collected total PIT receipts of $54.90 billion, or 1.1 percent more than January’s revised estimate. Corporation tax receipts of $1.37 billion for March were 29.1 percent higher than assumptions in the proposed 2017-18 budget.  Fiscal year-to-date corporation tax receipts of $5.19 billion are 9.0 percent above projections in the proposed budget.

March sales tax receipts of almost $2.00 billion exceeded expectations in the governor’s proposed 2017-18 budget by $266.8 million, or 15.4 percent.  For the fiscal year to date, sales tax receipts of $18.29 billion are $346.7 million below the revised estimates released in January—the only one of the “big three” General Fund revenue sources to miss the mark.

SSM Health Care Corporation

Fitch: AA-  S&P: A+

The Corporation will negotiate $500,000,00 of taxable revenue bonds.

SSM comes to market with a negative rating outlook from Fitch. The Negative Rating Outlook reflects SSM’s compressed operating profitability in the second half of 2016, with operating EBITDA margin decreasing to 6.3% at year end from 7.9% during the first half of the year. The bonds are general, unsecured obligations of SSM. Proceeds will be used for the pay down of approximately $200 million of outstanding commercial paper as part of the Corporation’s effort to reduce its interest rate exposure. The remaining proceeds will bolster the Corporation’s liquidity. Ongoing capital spending has resulted in a decline in pro forma liquidity metrics including 159.3 days cash on hand, 19.5x cushion ratio and 108.5 cash to debt at Dec. 31, 2016.

The SSM system consists of  20 owned hospitals, a large multi-specialty physician practice, a managed care organization and a pharmacy benefits management company. It is headquartered in St. Louis, MO, with operations in Missouri, Illinois, Wisconsin and Oklahoma. SSM acquired Saint Louis University Hospital (SLUH) in September 2015. SSM and University of Oklahoma Medicine announced their intent to affiliate in October 2016, but the two entities subsequently announced their mutual decision not to affiliate in March 2017.

Total operating revenue increased 123% from $2.7 billion in fiscal 2009 to $6.1 billion in fiscal 2016. Operating EBITDA margin decreased to 6.3% in fiscal 2016 primarily due to increased labor and supplies expenses. Management is in the process of implementing over $200 million of operating improvement initiatives, including both revenue enhancement and cost management initiatives. Pro forma MADS coverage by EBITDA decreased to 3.5x in fiscal 2016 from 5.3x in fiscal 2015.

Metropolitan Atlanta Rapid Transit Authority (Georgia)

Standard & Poor’s “AA+”  Moody’s Investors Service, Inc. “Aa2”

MARTA will sell $99,165,000 of Sales Tax Revenue Bonds (Third Indenture Series). MARTA’s sales tax revenue bonds are secured by various liens on sales taxes levied in three Georgia counties and the City of Atlanta. The voter-approved sales taxes are collected by the State of Georgia and remitted directly to the trustee for the bonds. MARTA provides mass transit services in the Atlanta metropolitan area. The authority operates 338 rail cars with 38 train stations, and 565 buses operating running on 101 routes. Average weekday ridership is 424,000 trips.

The authority funds its roughly $580 million operating budget (operating and maintenance expenditures plus debt service) primarily from two sources: fare revenues (24% of 2016 O&M plus debt service) and the pledged sales taxes (70% of 2016 O&M plus debt service). Following several years of improving financial operations and sales tax growth, MARTA is in a surplus position. As a result of these surpluses, MARTA’s reserve balance has accumulated to $246 million in 2016.

The liens of the first and second resolution bonds are closed. Those liens benefit from  abundant coverage of debt service by pledged tax revenues which are generated by a growing regional economy.

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SUNY Free Tuition Agreement

The 2018 New York State Budget agreement approved last week provides for SUNY and CUNY colleges to be tuition free for qualifying families. The program provides free tuition to families making up to $125,000 per year, and nearly 940,000 New York families are eligible for the program. The new initiative will be phased in over three years, beginning for New Yorkers making up to $100,000 annually in the fall of 2017, increasing to $110,000 in 2018, and reaching $125,000 in 2019.

To qualify, New Yorkers must be enrolled in college full-time, averaging 30 credits per year and completing their degree on-time. The program includes built in flexibility, allowing students to pause and restart the program, due to a hardship, or take fewer credits one semester than another. Students must also maintain a grade point average necessary for the successful completion of their coursework.

The agreement requires those who receive free tuition to live and work in the state for the same number of years that they receive the awards. If they do not, the scholarships would convert to student loans. The requirement may be deferred if recipients leave the state to complete their undergraduate education, to enroll in graduate school or because of “extreme hardship.”

The agreement was not universally praised. Unsurprisingly, opposition was centered primarily in the private college sector. A new grant program will be created for students who attend private colleges in the state, with a maximum award of $3,000. However, private colleges would be required to match the grants, and to freeze tuition for the duration of a student’s grant. The president of the Commission on Independent Colleges and Universities in New York. said she wasn’t sure that many institutions would find the program viable. She said the requirement that colleges freeze tuition for students when they first receive the aid would appear to mean colleges would end up with different tuition rates for students in different classes, and would have to track the students. “This would be bureaucratically difficult,” she said. “Colleges would have to ask if it was worth it.”

The budget also provides an increase in Education Aid of $1.1 billion, bringing the new Education Aid total to $25.8 billion. It also allows ride sharing services to operate in upstate New York. These items, along with changes to the juvenile justice system in the state, were the primary items which had to be worked out in order to facilitate  the agreement to provide for the free tuition program.

NYC Capital Borrowing Takes Shape

The announcement by New York City of a planned issuance of $1 billion of Transitional Financing Authority bonds focuses attention on the City’s ambitious borrowing plans. The Mayor’s Office of Management and Budget (OMB) projects that the city will issue $5.5 billion in new debt in 2017, a 50 percent. increase over the $3.7 billion issued in 2016. New debt issuance is planned to grow in each of the subsequent years peaking in 2020 at $8.7 billion. In previous years, the city assigned state building aid revenue to the TFA, which is authorized to issue Building Aid Revenue Bonds (BARBs) to finance a portion of the city’s school construction needs. Because the TFA is nearing the limit of $9.2 billion in BARBs that can be outstanding, the city will use GO bonds for some projects that would have been financed using BARBs if the limit on outstanding BARB debt had not come into play. From 2013 through 2016, the city issued an average of $775 million in BARBs annually. Over the next four years, however, the city projects it will only issue an average of $248 million a year in BARBs in order to stay under the $9.2 billion cap.

The January plan includes $6.5 billion for debt service costs adjusted for prepayments and defeasances—the use of current surplus funds to prepay future interest and principal on existing debt—in 2017. After adjusting, this is a 7.6 percent increase over the debt service the city paid in 2016. The $6.5 billion in debt service forecast for 2017 in the January plan is 1.3 percent ($85 million) less than forecast in the November 2016 Financial Plan and a total of 3.5 percent ($235 million) less than forecast in the adopted budget released last June. While some debt service savings were recognized in the January financial plan for 2018 and subsequent years, OMB still projects that annual debt service costs (adjusted for prepayments) will rise over the next few years, from $6.5 billion in 2017 to nearly $8.4 billion in 2021. While variable interest rate assumptions for 2017 have been lowered, they still remain at 4.25 percent for tax-exempt debt and 6.0 percent for taxable debt in 2018 through 2021.

Debt service as a percent of tax revenue is projected to total 11.9 percent in 2017, up from 11.3 percent in 2016. Debt service as a share of city-funded expenditures is forecast to total 10.6 percent, slightly higher than 10.2 percent last year. These ratios are both projected to grow through 2021, to 12.8 percent and 11.6 percent, respectively.

Houston Pension Legislation

The Texas Senate State Affairs Committee voted to send the Houston Pension Solution to the full senate for approval.  With one exception, the measure passed out of committee is the same reform package supported by a 16-1 vote of City Council and forwarded to Austin by the City of Houston.

“This is a historic day,” said Houston Mayor Turner.  “With today’s vote, the state affairs committee joins the growing list of supporters for the Houston Pension Solution.   Our plan eliminates $8.1 billion in unfunded liability, caps future costs, does not require a tax increase and is budget neutral.  There is no other plan that achieves these goals and has the same consensus of support.” Mayor Sylvester Turner’s proposal recalculates the city’s pension payments, using lower investment return assumptions and aiming to retire the debt in 30 years, both of which would increase the city’s annual costs. To bring that cost back down, the plan would cut workers’ benefits, and includes a mechanism to cap the city’s future costs even if the market tanks.

The state affairs committee measure includes a provision requiring a vote by the citizens of Houston for the issuance of Pension Obligation Bonds (POBs).  The agreement between the City and the Houston Police Officers Pension System (HPOPS) as well as the Houston Municipal Employees Pension System (HMEPS) includes the issuance of $1 billion in pension bonds to replace existing debt the city already owes HPOPS and HMEPS.  They will not, it is believed under state law result in pension bonds being considered a new borrowing.

“We oppose the inclusion of this provision and will continue to fight for its removal,” said Turner.  “As my father taught me, a deal is a deal.  We have kept our word to the police and municipal employee pension systems.  Now I am asking the Texas Legislature to do the same.” Conservatives contend the only path to true reform would be to move new hires into defined contribution plans similar to 401(k)s, which the bill does not do.

The mayor is again calling on the Houston Firefighter Relief and Retirement Fund (HFRRF) to provide data on the true costs of providing firefighter pension benefits.  He was joined in that call by Texas Senator Joan Huffman who is sponsoring the Houston Pension Solution in the Texas Senate.  Both the mayor and Huffman indicated willingness to revisit the proposed changes in firefighter pension benefits if HFRRF will provide the cost analysis it has, so far, refused to release.  Fire leaders say an ongoing lawsuit prevents them from complying.

Mayor Turner will again testify before the Texas House Committee on Pensions.  The house version of the bill does not include the requirement of a vote for POBs.

San Diego Moves On From The Chargers

San Diego City Council is being asked to consider a special election in November for a hotel-room tax increase measure to fund an expansion of the convention center, homeless services and roads. The increase to the hotel-room tax would be 1 percent for the City of San Diego, another 1 percent for hotels south of state Route 56 and north of state Route 54 and another 1 percent for hotels downtown. That increase would be on top of the city`s 10.5 percent hotel-room tax and the 2 percent tourism marketing levy.

According to the Mayor, the proposed Phase III Contiguous Convention Center Expansion will:  add another 400,000 square feet of rentable exhibit, ballroom and meeting space to the existing facility (the total current space is 816,091 square feet);  allow the Convention Center to retain large conventions – the Center’s top five largest conventions have a regional economic impact of approximately $397 million annually;  allow the Convention Center to attract approximately 50 more annual events and 334,000 attendees, bringing the average total attendance to over 1.1.

It is estimated to generate $509 million in direct spending at local businesses, and have a regional impact of $860 million; generate over 380,000 new hotel room nights annually for the San Diego market from convention attendees, providing approximately $15 million annually in additional TOT to the City’s General Fund for critical public benefits and core city services like public safety, parks and libraries;  generate thousands of construction jobs and nearly 7,000 permanent jobs; and provide numerous public benefit features including a sustainably designed 5-acre rooftop public park with views of the City and Bay, increased public access to the waterfront, and the rerouting of truck traffic away from pedestrians and visitor vehicles along the waterfront.

If the ballot measure (a special tax) is approved by two-thirds of the voters in November of 2017, the TOT increase would be levied and funds would be collected for homelessness, road repair and the Convention Center project beginning in the second half of FY 2018. Based on this preliminary timeline, short term notes would be issued in FY 2019 to begin project work for the Phase III Expansion, and bonds would be issued in FY 2020. Construction is anticipated to begin in July of 2019 and last approximately 44 months.

California Drought Emergency Ends

Good news for California water credits came when Gov. Jerry Brown declared an end to the drought emergency in the State. This will allow water agencies to replenish supplies and be able to see revenues grow through increased usage rather than through higher pricing associated with conservation procedures.

Precipitation in water year 2017 has filled the majority of California’s major reservoirs to above-historic average levels. Likewise, as the USGS streamgage network shows, flows in the majority of the streams have been at or above average for most of the last 4 months. This indicates that most of California’s rivers, creeks, lakes and reservoirs are in good condition. On average, the Sierra Nevada snowpack supplies about 30 percent of California’s water needs as it melts in the spring and summer. A series of back-to-back atmospheric river storms blanketed the Sierra Nevada in January and February 2017. As of April 1, 2017, statewide snow accumulation data indicate that snowpack in the Northern, Central, and Southern Sierra is 164 percent of normal for this date.

Recovery of supplies will be uneven depending upon whether a suppliers water supply is groundwater based. Groundwater aquifers recover much more slowly than surface water and are limited, among other things, by how much and how fast water can recharge. Unlike surface water, which can recover during a few days of heavy precipitation, groundwater aquifer recovery often takes years or decades. Groundwater systems are also relied upon more heavily during times of drought.

In addition, in many areas of the state, groundwater systems have been depleted for long periods – even between droughts – that they have not recovered from. Excessive, long-term groundwater over-use resulting in groundwater depletion can cause subsidence and permanent loss of groundwater storage as well as water quality degradation and seawater intrusion. These long-term impacts on groundwater have not been remedied by the recent weather. If recovery is possible, it will likely take several to many years to accomplish.

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

 

Joseph Krist

joseph.krist@municreditnews.com

THE HEADLINES…

NEW YORK STATE BUDGET

STATE TAX OUTLOOK

CALIFORNIA REVENUE TRENDS

PUERTO RICO NEGOTIATIONS

NYC CAPITAL BORROWING TAKES SHAPE

ANOTHER BAD STADIUM DEAL

SAN DIEGO MOVES ON FROM THE CHARGERS

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NEW YORK STATE BUDGET

New York State began operating in fiscal 2018 under  emergency legislation to keep the state government in operation after efforts to pass a state budget for the 2017-18 fiscal year faltered during weekend-long talks. The fiscal year began at midnight on Friday with no deal in place. The irony is that the dispute is not over monetary issues but rather about policy issues.

The extender would have a punitive side effect for the legislators, who would not be paid during its duration. And the governor’s submitting an extender that would last until the end of May — when the federal budget would come into focus — could mean a prolonged stretch without paychecks for lawmakers.

As we go to press, the Senate passed four budget bills — with more legislative action expected after midnight. The Democrat-led New York State Assembly came to terms on a bill that would raise the age of criminal responsibility in the state to 18, an issue that had been a major stumbling block in the state budget negotiations.

New York is one of two states, along with North Carolina, that treat 16- and 17-year-old defendants as adults. According to a summary of the legislation, all misdemeanor charges faced by 16- and 17-year-olds would be dealt with in Family Court. Nonviolent felony charges would be dealt with in a new youth section of Criminal Court, with many of those cases eventually being sent to Family Court, excluding cases in which a district attorney can prove “extraordinary circumstances.” Beginning in late 2018, juveniles would not be kept with adults in county jails.

Violent felony cases would remain in Criminal Court but would be subject to a three-part test: whether a “deadly weapon” was used, whether the victim sustained “significant physical injury,” and whether the perpetrator engaged in criminal sexual conduct. Barring one of those factors, violent felony cases could also be moved to Family Court.

Other issues include including a renewal for 421-a, a lapsed tax-cut program for developers that was meant to produce low income housing; support for charter schools; changes to the workers’ compensation system; and education aid. The extender did include infrastructure funds, such as a major clean water initiative, and some lesser policy proposals, like a plan to cap and manage the cost of prescription drugs under Medicaid. But many of the deals that seemingly had been settled — such as allowing ride-hailing apps to be used upstate — were not included. Lawmakers have already passed a portion of the budget approving debt payments.

STATE TAX OUTLOOK

Now that the initial effort to repeal and replace the ACA has failed, the next focus for the municipal bond market is the potential impact of tax reform. Three potential impacts on state credits are apparent: the impact on the economy; the direct impact of tax reform on state government tax bases in cases where states conform to federal tax law; and  indirect impacts on state tax revenue as taxpayers change their behavior in anticipation of, and in response to, federal tax reform. Two of these are forward concerns but it appears that the third may already be having a dampening impact on tax revenues.

The likelihood of lower tax rates in 2017 likely created a large incentive for high income taxpayers to push income from wages, interest, and other sources out of 2016 into 2017, and to accelerate deductions into 2016, depressing taxable income in 2016. A proposed increase in the standard deduction created a modest incentive for middle-income taxpayers to accelerate itemized deductions into 2016. Initial data suggests a slowing of state revenue growth. Fourteen states reported declines in total tax revenue for the third quarter of 2016, with two states reporting double-digit declines. Total state government tax revenue grew 1.2 percent in the third quarter of 2016 relative to the prior year. All major tax revenue sources grew, except the corporate income tax, which declined 10.4 percent. Individual income tax collections grew 2.7 percent, while sales tax and motor fuel tax collections grew 2.0 and 1.1 percent.

It is difficult to make a blanket statement about states given the importance of energy based revenues and economic activity. The steep oil price declines throughout 2015 and early 2016 led to declines in severance tax collections and depressed economic activity. Total tax collections also declined in the other oil and mineral-dependent states, including New Mexico, Oklahoma, Texas, West Virginia, North Dakota and Wyoming. Fourteen states reported declines in personal income tax collections, with three reporting double-digit declines. Some of that was related to a depressed energy sector.

We have always used sales taxes as a good proxy for near term trends. Among individual states, thirty-three states reported growth in sales tax collections in the third quarter of 2016, with twelve states reporting declines. Six of those are oil- and mineral dependent states. For analysts such as ourselves, the usefulness of sales tax as an indicator has been diminished in recent years by the demise of brick and mortar retailing. This trend has only been partially mitigated In calendar year 2017 in that eleven states have joined other states that already collect taxes on sales by Amazon.com LLC or its subsidiaries, raising the number to forty-two out of forty-five states that impose a general sales tax. The problem is that while the dominant online retailer, state efforts alone have had limited effectiveness. Federal legislation may be the only way to fully capture retail sales activity into state tax bases.

Unfortunately, the state budget process will likely outpace the speed at which final federal tax reform can be undertaken. Thus the states will be operating in a somewhat opaque environment as they attempt to estimate revenues for the upcoming fiscal year.

CALIFORNIA REVENUE TRENDS

California revenues of $6.52 billion for February fell short of projections in the governor’s proposed 2017-18 budget by $772.7 million, or 10.6 percent. Personal income taxes (PIT), corporation taxes, and retail sales and use taxes all fell short of January’s revised budget estimates for February, and only corporation taxes—the smallest of the three—topped fiscal year-to-date projections in the governor’s proposed 2017-2018 budget. For the 2016-17 fiscal year that began in July, total revenues of $73.28 billion are $663.9 million below last summer’s budget estimates, and $888.1 million short of January’s revised fiscal year-to date predictions.

In the current fiscal year, California has collected total PIT receipts of $50.97 billion, or 0.9 percent less than January’s revised estimate. Corporation tax receipts of $168.2 million for February were 35.0 percent short of assumptions in the proposed 2017-18 budget. Fiscal year-to-date corporation tax receipts of $3.82 billion are 3.3 percent above projections in the proposed budget. February sales tax receipts of $3.06 billion missed expectations in the governor’s proposed 2017-18 budget by $710.2 million, or 18.8 percent. For the fiscal year to date, sales tax receipts of $16.29 billion are $613.5 million below the revised estimates released in January, or 3.6 percent.

PUERTO RICO NEGOTIATIONS

The Puerto Rico government and some of its creditor groups have signed confidentiality agreements—a first step toward negotiations that could begin as soon as or this week—the island’s Financial Advisory & Fiscal Agency Authority (FAFAA) confirmed Monday. The identity of creditor groups was not revealed. Advisers for the commonwealth government and Promesa’s fiscal control board hope to kick off mediation talks as soon as next week in New York City. The goal is to solve the controversy between general obligation (GOs) and Sales Tax Financing Corp. (COFINA) bondholders. A letter states that the private mediation process will not prevent “other mediations/negotiations between the same parties or others regarding these or other disputes.”

The letter outlines other details of the framework for the negotiations, which include making public any government offer made to creditors during mediation 48 hours after it ends, or April 21—whichever occurs first. Subsequent proposals from the government would need to be disclosed no later than each Friday after April 21.

Former judge Allan Gropper is listed as mediator in the process. Several creditor groups opposed the board’s plans for mediation, arguing there should be initial talks before a mediation process, which would take a long time to kick off. The group included the GO ad hoc group; OppenheimerFunds, Franklin, Goldman Sachs, UBS and Santander; and monoline insurers  Assured, FGIC, Syncora and National. The government and the board are said to be open to receive restructuring proposals from creditor groups that refuse to enter the mediation process. Yet any such offer would be subject to Gropper’s input and be shared and discussed with creditors participating in the mediation.

In the meantime, the U.S. First Circuit Court of Appeals reversed a ruling by U.S. District Court Judge Francisco Besosa that has the effect of staying the entire Lex Claims case, in which general obligation (GO) bondholders challenged the constitutionality of the Sales Tax Financing Corp.’s (Cofina) structure. “The district court’s holding that the PROMESA stay did not apply to the plaintiffs’ first, second, third, and 12th causes of action is reversed, and the matter is COFINA bondholders’ motion to intervene solely for the purposes of addressing the issue is therefore moot,” the Appeals Court ruled.

NYC CAPITAL BORROWING TAKES SHAPE

The announcement by New York City of a planned issuance of $1 billion of Transitional Financing Authority bonds focuses attention on the City’s ambitious borrowing plans. The Mayor’s Office of Management and Budget (OMB) projects that the city will issue $5.5 billion in new debt in 2017, a 50 percent. increase over the $3.7 billion issued in 2016. New debt issuance is planned to grow in each of the subsequent years peaking in 2020 at $8.7 billion. In previous years, the city assigned state building aid revenue to the TFA, which is authorized to issue Building Aid Revenue Bonds (BARBs) to finance a portion of the city’s school construction needs. Because the TFA is nearing the limit of $9.2 billion in BARBs that can be outstanding, the city will use GO bonds for some projects that would have been financed using BARBs if the limit on outstanding BARB debt had not come into play. From 2013 through 2016, the city issued an average of $775 million in BARBs annually. Over the next four years, however, the city projects it will only issue an average of $248 million a year in BARBs in order to stay under the $9.2 billion cap.

The January plan includes $6.5 billion for debt service costs adjusted for prepayments and defeasances—the use of current surplus funds to prepay future interest and principal on existing debt—in 2017. After adjusting, this is a 7.6 percent increase over the debt service the city paid in 2016. The $6.5 billion in debt service forecast for 2017 in the January plan is 1.3 percent ($85 million) less than forecast in the November 2016 Financial Plan and a total of 3.5 percent ($235 million) less than forecast in the adopted budget released last June. While some debt service savings were recognized in the January financial plan for 2018 and subsequent years, OMB still projects that annual debt service costs (adjusted for prepayments) will rise over the next few years, from $6.5 billion in 2017 to nearly $8.4 billion in 2021. While variable interest rate assumptions for 2017 have been lowered, they still remain at 4.25 percent for tax-exempt debt and 6.0 percent for taxable debt in 2018 through 2021.

Debt service as a percent of tax revenue is projected to total 11.9 percent in 2017, up from 11.3 percent in 2016. Debt service as a share of city-funded expenditures is forecast to total 10.6 percent, slightly higher than 10.2 percent last year. These ratios are both projected to grow through 2021, to 12.8 percent and 11.6 percent, respectively.

ANOTHER BAD STADIUM DEAL

In 2005,  the Village of Bridgeview, IL issued $135 million of general obligation (GO) bonds for a stadium that it owns and manages. The stadium serves as the home field for the Chicago Fire of Major League Soccer. Like many of the league’s franchises, it chose to pursue its own facility with a smaller capacity rather than play in an existing football stadium located in the center of a metropolitan area. The idea was to produce a venue with the atmosphere of a European ” “football” venue and take advantage of what is seen as a high level of interest among suburban residents who are seen as primary customers for the sport in the US.

With seating for as many as 28,000, Toyota Park, which opened in 2006, hosts soccer games, concerts and other events. The motivation for the Village was to create a facility which would act as a catalyst for economic activity around the games trying to capture the pre and postgame atmosphere that one often finds with European venues. Alas, the level of economic activity generated by the existence of the stadium has, not surprisingly, fallen short of expectations.

The Village has persistent weak liquidity and weak management conditions. Multiple debt restructurings as a result of management’s decision to construct and finance an underperforming stadium and declines in the tax base have led to a high debt burden. For an entity of its size its $234 million general obligation tax burden is significant. The Village has attempted to manage this debt through tax increases, asset sales, refinancing, and the use of variable rate debt. Bridgeview, which has used restructurings in the past to ease debt service payments and minimize property tax hikes, to continue the practice, possibly pushing bond maturities out to years beyond the useful life of the stadium. The most recent proposal the Village was considering to restructure $24.5 million of variable-rate bonds to a fixed-rate mode with a 2047 maturity.

The whole stadium saga has now culminated in the Village’s bond rating being lowered to BB- by S&P. S&P is concerned that the Village faces reduced market access and weakened liquidity  as well as acute business, financial, and economic uncertainties related to its debt burden, particularly the debt issued for its Toyota Park stadium.

So add Bridgeview, IL to the list of cautionary tales regarding public financing for professional sports facilities. And sadly, it was an “own goal” on the part of the Village.

SAN DIEGO MOVES ON FROM THE CHARGERS

San Diego City Council is being asked to consider a special election in November for a hotel-room tax increase measure to fund an expansion of the convention center, homeless services and roads. The increase to the hotel-room tax would be 1 percent for the City of San Diego, another 1 percent for hotels south of state Route 56 and north of state Route 54 and another 1 percent for hotels downtown. That increase would be on top of the city`s 10.5 percent hotel-room tax and the 2 percent tourism marketing levy.

According to the Mayor, the proposed Phase III Contiguous Convention Center Expansion will:  add another 400,000 square feet of rentable exhibit, ballroom and meeting space to the existing facility (the total current space is 816,091 square feet);  allow the Convention Center to retain large conventions – the Center’s top five largest conventions have a regional economic impact of approximately $397 million annually;  allow the Convention Center to attract approximately 50 more annual events and 334,000 attendees, bringing the average total attendance to over 1.1 million;  generate $509 million in direct spending at local businesses, and have a regional impact of $860 million; generate over 380,000 new hotel room nights annually for the San Diego market from convention attendees, providing approximately $15 million annually in additional TOT to the City’s General Fund for critical public benefits and core city services like public safety, parks and libraries;  generate thousands of construction jobs and nearly 7,000 permanent jobs; and provide numerous public benefit features including a sustainably designed 5-acre rooftop public park with views of the City and Bay, increased public access to the waterfront, and the rerouting of truck traffic away from pedestrians and visitor vehicles along the waterfront.

If the ballot measure (a special tax) is approved by two-thirds of the voters in November of 2017, the TOT increase would be levied and funds would be collected for homelessness, road repair and the Convention Center project beginning in the second half of FY 2018. Based on this preliminary timeline, short term notes would be issued in FY 2019 to begin project work for the Phase III Expansion, and bonds would be issued in FY 2020. Construction is anticipated to begin in July of 2019 and last approximately 44 months.

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

Joseph Krist

Municipal Credit Consultant

______________________________________________________________________

THE HEADLINES…

HOUSTON PENSION LEGISLATION

WEST VIRGINIA PARKWAYS

BRIGHTLINER CONTINUES TO EVOLVE

MEDICAID DSH PAYMENT CLARIFICATION DISMAYS HOSPITALS

HOW A GUTTED EPA WOULD IMPACT SMALL CREDIT FINANCES

JEA COMES FULL CIRCLE

______________________________________________________________________________

HOUSTON PENSION LEGISLATION

After hearing testimony from Mayor Sylvester Turner among many others last week, the Texas Senate State Affairs Committee voted to send the Houston Pension Solution to the full senate for approval.  With one exception, the measure passed out of committee is the same reform package supported by a 16-1 vote of City Council and forwarded to Austin by the City of Houston.

“This is a historic day,” said Mayor Turner.  “With today’s vote, the state affairs committee joins the growing list of supporters for the Houston Pension Solution.   Our plan eliminates $8.1 billion in unfunded liability, caps future costs, does not require a tax increase and is budget neutral.  There is no other plan that achieves these goals and has the same consensus of support.” Mayor Sylvester Turner’s proposal recalculates the city’s pension payments, using lower investment return assumptions and aiming to retire the debt in 30 years, both of which would increase the city’s annual costs. To bring that cost back down, the plan would cut workers’ benefits, and includes a mechanism to cap the city’s future costs even if the market tanks.

The state affairs committee measure includes a provision requiring a vote by the citizens of Houston for the issuance of Pension Obligation Bonds (POBs).  The agreement between the City and the Houston Police Officers Pension System (HPOPS) as well as the Houston Municipal Employees Pension System (HMEPS) includes the issuance of $1 billion in pension bonds to replace existing debt the city already owes HPOPS and HMEPS.  They will not, it is believed under state law result in pension bonds being considered a new borrowing.

“We oppose the inclusion of this provision and will continue to fight for its removal,” said Turner.  “As my father taught me, a deal is a deal.  We have kept our word to the police and municipal employee pension systems.  Now I am asking the Texas Legislature to do the same.” Conservatives contend the only path to true reform would be to move new hires into defined contribution plans similar to 401(k)s, which the bill does not do.

The mayor is again calling on the Houston Firefighter Relief and Retirement Fund (HFRRF) to provide data on the true costs of providing firefighter pension benefits.  He was joined in that call by Texas Senator Joan Huffman who is sponsoring the Houston Pension Solution in the Texas Senate.  Both the mayor and Huffman indicated willingness to revisit the proposed changes in firefighter pension benefits if HFRRF will provide the cost analysis it has, so far, refused to release.  Fire leaders say an ongoing lawsuit prevents them from complying.

Mayor Turner will again testify before the Texas House Committee on Pensions.  The house version of the bill does not include the requirement of a vote for POBs.

WEST VIRGINIA PARKWAYS

West Virginia has taken one of the legislative steps needed to help to implement its own infrastructure expansion as articulated by its Governor earlier this year. A bill giving give the West Virginia Parkways Authority new financing  abilities is moving to the House after it passed the Senate. Senate Bill 482 would give the agency the authority to study, investigate, evaluate and, if feasible, develop a single fee program and impose a flat fee in connection with motor vehicle registration and renewal by the Department of Motor Vehicles.

The bill allows the authority to establish a program where drivers would pay a flat fee to travel the authority’s roads rather than pay individual toll fees. It also authorizes the agency to have reciprocal tolling with other states and would allow it issue revenue bonds. To aid the process, another provision of the bill would allow people to get an EZPass from the DMV instead of only from Parkways.

The bill creates and designs a special revenue account within the State Road Fund known as the State Road Construction Account and would expand the authority of the Parkways Authority to issue revenue bonds or refunding revenue bonds for parkways’ projects and for the West Virginia . It would define a  “Parkway project” as any expressway, turnpike, bridge, tunnel, trunkline, feeder road, state local service road or park and forest road, or any portion or portions of any expressway, turnpike, trunkline, feeder road, state local service road or park and forest road, whether contiguous or noncontiguous to the West Virginia Turnpike which the Parkways Authority or the Department of Transportation may acquire, construct, reconstruct, maintain, operate, improve, repair or finance . It specifically provides for the Authority to issue parkway revenue bonds of the State of West Virginia, payable solely from toll revenues, for the purpose of paying all or any part of the cost of any one or more parkway projects.

BRIGHTLINER CONTINUES TO EVOLVE

For a project that has not been able to access the municipal bond market, we admit that we have spent a lot of time on it. It remains of interest as one of the more interesting transportation stories we have seen in some time. The latest turn in the saga was the announcement that Grupo Mexico Transportes — which owns Mexico’s largest railroad network and rail in Texas — is to acquire 100 percent of Florida East Coast Railway’s shares and assume its debt, pending approval of the deal by regulatory authorities. All Aboard Florida has based its business model on using the existing Florida East Coast Railway tracks. The company has said that taking advantage of existing infrastructure — All Aboard is improving existing track between Miami and Cocoa and building new track between Cocoa and Orlando — will help make the $3.1 billion railroad profitable.

Fortress — parent company of both Brightline and Florida East Coast Railway — was itself purchased in February by Japanese conglomerate SoftBank. Brightline contends it will be unaffected by the sale, that Brightline is a “separate company” that has “the right to operate passenger service,”. “We have all shared operations-related agreements in place with the Florida East Coast Railway for us to fully build out and implement our passenger rail system.”

At the same time, a controversial proposal intended to slow the planned Brightline service might have been derailed in the Florida House. The Transportation & Infrastructure Subcommittee on Tuesday declined to hear the proposal (HB 269), which in part sought to give the Florida Department of Transportation oversight of issues not preempted by federal law. The measure also sought to require private passenger-rail operations to cover the costs of installing and maintaining safety technology at crossings unless contracts are reached with local governments.

It was seen as aiding the efforts of Martin and Indian Counties in opposition to the project. Among key requirements of the Florida High Speed Passenger Rail Safety bill, were ones to build fencing around Brightline’s tracks.

MEDICAID DSH PAYMENT CLARIFICATION DISMAYS HOSPITALS

Earlier this year we discussed the appointment of Seema Verma as Administrator for Centers for Medicare & Medicaid Services. At the time we highlighted her background as an advocate for reducing Medicaid spending especially during her tenure in Indiana under governor Mike Pence. It did not take long for Ms. Verma to place her stamp on Medicaid funding practices. On March 30, the Centers for Medicare & Medicaid Services (CMS), issued a  final rule addressing the hospital-specific limitation on Medicaid disproportionate share hospital (DSH) payments under section 1923(g)(1)(A) of the Social Security Act (Act. It clarified that the hospital-specific DSH limit is based only on uncompensated care costs. Specifically, this rule makes explicit in the text of the regulation, an existing interpretation that uncompensated care costs include only those costs for Medicaid eligible individuals that remain after accounting for payments made to hospitals by or on behalf of Medicaid eligible individuals, including Medicare and other third party payments that compensate the hospitals for care furnished to such individuals.

As a result, the hospital specific limit calculation will reflect only the costs for Medicaid eligible individuals for which the hospital has not received payment from any source. These regulations are effective on June 2, 2017. Hospitals had previously been able to claim reimbursement of full costs of Medicaid patient services even if a portion of those costs had been payable by private insurance which those patients might have had. One can qualify for Medicaid and still have some level of private insurance.

Many commenters suggested that the regulation will impose a great burden on all involved, which outweighs any incremental benefit in transparency and accountability, and diverts scarce financial and human resources away from providing and paying for care to beneficiaries. The CMS position is that this policy ensures that limited DSH resources are allocated to hospitals that have a net financial shortfall in serving Medicaid patients. Either way it represents a decline in the amount of revenues available to hospitals which provide significant levels of services to Medicaid populations.

HOW A GUTTED EPA WOULD IMPACT SMALL CREDIT FINANCES

When most people think of the EPA they think in terms of big concepts and big projects. Scrubbers on large power generators, huge wastewater and water treatment projects in support of large metropolitan service areas, air and water quality standards. They tend not to think of the many smaller components that comprise the effort to achieve clean air, water, and waste disposal practices. But it is at this micro level, that the greatest impact of the proposed reductions to the EPA budget on tap from the Trump administration might be to projects in medium to small size communities.

EPA funding often provides the financing catalyst for expansions or upgrades to small town water systems through replacement or expansion of piping for water delivery. EPA funding supports upgrades or retrofits of local treatment facilities. It stimulate spending for rural water reclamation projects which support agriculture reducing competition for new water supplies. EPA’s diesel emissions reduction program has covered costs for replacement or retrofitting of school buses. These programs usually benefit rural areas where lower property values impact local revenue raising activities. What local rural school district would want to bear the costs of more efficient school bus systems solely out of their own budgets?

In those areas where the manufacturing industry has passed them by where old plant sites need help to remediate the impacts of mining, metal, and chemical production, EPA brownfield programs help recovering communities. These programs provide funding and expertise to small communities looking to repurpose old industrial sites in support of new local economic development efforts.

At least in the areas of water and wastewater project finance, state revolving funds are an established source of lower cost funding for smaller municipalities. These funds will be forced to fill in more and more of the gap, as regardless of politics, water and wastewater infrastructure has come to be a necessity in the toolkit of smaller town and rural economic development.

JEA COMES FULL CIRCLE

JEA is a municipal utility based in Jacksonville, Florida, and its service territory covers Jacksonville, and parts of three adjacent counties. In the late 1970’s, the utility came under pressure due to its reliance on oil as its primary fuel used at its electric generating plants. The rises in prices and interruptions in supplies that were characteristic of the time led the Authority to embark on an effort to replace oil with more economic and stable sources of fuel for a new generation of plants using coal. The result was the construction of the St. Johns River Power Park (SJRPP), a 1,252-megawatt, coal fired electric plant jointly owned by JEA (80%) and FPL (20%).

On 17 March, JEA (Aa2 stable) announced that it had reached an agreement with Florida Power & Light Company (FPL, A1 stable) to decommission the 30-year old SJRPP . The decision reflects the changing economic and environmental realities facing large users of coal as a generating fuel. The decision is seen as credit positive because it is likely to produce material net cost savings for JEA to adequately address any remaining debt associated with SJRPP. Additionally, the agreement mitigates the potential for future costs to comply with environmental regulations relating to carbon emitting resources and helps keep customers’ rates stable and competitive versus peers in Florida.

Decommissioning SJRPP will further increase JEA’s reliance on natural gas, exposing the utility and its customers to sudden shifts in fuel prices. However, we believe that natural gas prices will remain at levels that approximate recent historically low prices for the next several years. Since JEA currently has excess capacity of about 15% and projects modest demand growth of 0.7%, replacing the estimated lost capacity from decommissioning SJRPP is not pressing and will moderate JEA’s current excess capacity position.

Subject to JEA and FPL signing definitive agreements and obtaining requisite regulatory approvals relating to plant closure, decommissioning SJRPP would commence in early 2018 and FPL would pay JEA for the costs to terminate the power purchase agreement, including employee-related expenses. In addition, FPL would share proportionately in shutdown costs and environmental remediation. As of fiscal 2016 (which ended 30 September 2016), there was approximately $494 million of long-term debt associated with the SJRPP assets, split between $210 million of Issue Two debt under the first bond resolution. Terms of the agreement between JEA and FPL appear to enable the utilizing of available funds in the debt service reserve fund for the Issue Two debt together with additional cash payments to be provided by both utilities to defease the full amount of the Issue Two debt at closing (principal amount expected to be $128 million).

Cash flow erosion associated with continuing to pay debt service on the estimated $281 million of Issue Three debt that will remain outstanding with no hard assets will be addressed through annual operations and maintenance, fuel and other cost savings. We project those savings will more than offset the $24 million of annual debt service requirements, including amortization, on the Issue Three debt, which has a final maturity of 2039. Moody’s is on record as projecting that JEA will maintain its debt service coverage metrics in line with historic levels of 2.0x or better for its electric system, without needing a further increase to its base rate beyond the 4.4% increase that became effective on 1 December 2016.

SJRPP’s capacity factors have steadily declined since 2014 owing to low natural gas prices. Decommissioning SJRPP will further increase JEA’s reliance on natural gas, exposing the utility and its customers to sudden shifts in fuel prices. However, we believe that natural gas prices will remain at levels that approximate recent historically low prices for the next several years. Since JEA currently has excess capacity of about 15% and projects modest demand growth of 0.7%, replacing the estimated lost capacity from decommissioning SJRPP is not pressing and will moderate JEA’s current excess capacity position.

In the end it is yet another example of a market driven decision against coal that ideology and political policy cannot overcome.

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